CORPORATE OFFICE PERSPECTIVES | DECEMBER 1, 2018
First time since the Great Recession that I’ve heard multiple commercial real estate brokers broach the possibility of an upcoming real estate “crash”. In my opinion, crash is too harsh, but with rising interest rates, cap rates (price divided by net income) will also go up, resulting in property values going down. This won’t happen across the board as many sub-regions will still experience significant leasing and sale activity. However, as I write this, there appears to be a slowdown in the leasing activity in parts of the East Bay, and my friends in the residential arena in a number of different areas report a definite slowdown in prospective buyer tours and submitted offers. A number of brokers feel we are at the peak, and if you have any thoughts of selling in the next few years, do so now before we slide down the other side of the curve. I could be wrong, but over the past 38 years writing this newsletter I have made similar predictions that turned out to come true, so we shall see…
In my opinion, over time there will be a greater rent spread between newer, smarter office buildings as compared with class B and C “dumber” buildings. There will be a number of reasons for this increasingly larger rent differential. Modern Class A office buildings with state-of-the-art building systems can run much more efficiently. Computerized HVAC and lighting systems versus old packaged rooftop units which might be on Class B and Class C buildings will sense where and when spaces are occupied, and adjust temperatures and lighting accordingly. “Smart buildings collect data from occupants and adjust systems in real time to enhance comfort and efficiency. The Comfy app allows occupants to vote on temperature and lighting levels with their smartphones.” Happy employees are more productive employees and companies will be more willing to spend on higher rent in smarter office buildings as this goes right back to their bottom line. (The Registry, October 8, 2018)
Silicon Valley, like San Francisco, has robust office leasing activity. Between January and September 2018, more than 11.6 million feet of office space was leased. (Bay Area News Group, October 18, 2018)
Class A office building amenities today … in the past, a building gym was a popular tenant amenity. “In the 2018 Work Environment Survey conducted by Capital One … when office professionals were asked which aspects or “perks” would be most likely to make them stay if they were considering whether to stay or leave a company, nearly 40 percent said health amenities.” (Buildings, September 12, 2018)
Fleeing California. Baby boomers near retirement are cashing in on their home equity and moving to Las Vegas, Phoenix, Austin, Portland, Seattle, and Florida. In 2018, 29% of California home sellers bought their next home out of state. “In surveying San Francisco millennials, Bank of America said this week that almost half of the prospective home buyers planned to purchase a home outside the Bay Area.” (SF Business Times, October 12, 2018)
Commercial real estate financing experts report today’s 10-year financing at 4.75%, with expectations this will rise to 5.75% by this time next year.
Lucky for us that 130,000 more residents left California last year than came here, mostly due to our high cost of housing. California’s population has continued to grow in spite of this due to more births than deaths (220,000 more) and more immigration from abroad (185,000 folks). Otherwise, our terrible housing shortage would be even worse! See, a silver lining … (East Bay Times, November 5, 2018)
Deals and Rumors: Starting in Emeryville for a change, Catalent leased 20,000 sf, Profusa – 18,000 sf and Dynavax Technologies – 75,000 sf, all at EmeryStation West, and WeWork took 76,000 sf at 1900 Powell St.; PowerBar expanded to 38,000 sf at 1451 66th St. In Berkeley, WeWork took six floors at 2120 Berkeley Way, and also leased 68,000 sf at 2201 Broadway. In San Ramon, Valent leased 96,000 sf at 4600 Norris Canyon Rd. In Milpitas, Apple leased 314,000 sf at McCarthy Creekside. Nokia took 231,000 sf at 520 Almanor Ave. in Sunnyvale. In South San Francisco, AbleVIEW leased 479,000 sf at Gateway of Pacific and Global Blood Therapeutics took 164,000 sf at 181 Oyster Point Blvd. San Francisco remained red-hot, with Salesforce leasing 357,000 sf at 546 Howard St., Cooley LLP is looking at up to 165,000 sf at 3 Embarcadero where PwC will be vacating in 2020, Twilio sublet 260,000 sf at 101 Spear St.; Mindspace leased 36,000 sf at 575 Market St., Getaround took 55,000 sf at 55 Green St.; WeWork leased 103,000 sf at 1 Post St.; and Rhythm Pharmaceuticals signed for 120,000 sf at 650 Townsend. Whew!
In issue #82 of my December 1, 1993 newsletter of 25 years ago, I discussed outsourcing to India, whereby a corporation instead of spending $30,000 to $40,000 a year here on salaries (remember those days?) could hire English-fluent workers at $3,000 a year. My, how things have changed! In another past newsletter back in February 1, 1985 “current vacancy rate along the I-680 corridor currently at 30%.”
Our subdivision brokerage group reports new home sales from June 2017 to June 2018 is down around 30% for the San Francisco Bay Area, and the pace of sales over the past two to three months has slowed considerably. Factors behind this might be higher interest rates and prices financially reaching the threshold of viability, i.e., there actually may be a limit. The trade war tariffs are having an impact on the cost of a new home. In January, Canadian lumber had a 15% tariff and prices immediately went up 15 to 20%.
The value of time is becoming increasingly important to consumers as well as retailers. It wasn’t too many years ago when getting a package delivered three to five days after you ordered it was acceptable, but now one to two days is the norm. Amazon is leading the pack with other major retailers challenged to catch up. At a recent presentation by Prologis, one of a world’s leading industrial warehouse developers, Amazon wants a distribution facility close to population centers, the new ceiling height norm for Amazon might be 42′clear (32′was the warehouse previous standard) and in a recent Bisnow article, Amazon is reportedly looking at building four-story distribution centers with 2.5 million square feet of space in each. When is a consumer like a five-year old? Yup, when they both “want it now”! (Bisnow, September 18, 2018)
The San Francisco region created six times as many jobs as housing units from 2010 to 2015, and probably 20 times more than the infrastructure (freeways, BART, Muni, Caltrain) needed to accommodate all these folks. In 2018, 8.2 million feet of new office space will be completed. (Bay Area News Group, October 22, 2018)
I sometimes think San Francisco does more office leasing in a single month than the entire I-680 Corridor and Tri-Valley combined in a week. It’s not that the East Bay office market isn’t great – it is, but with almost 6 million square feet of vacant office space, a 12% vacancy factor, and other than two office towers under construction in Oakland, no new buildings are expected now or in the near future. We have so much Class A office space at $3/rsf ($36 annually) that needs to get to $6 to 7/rsf before new buildings begin to make sense. All in all, we have a nice balanced office market with not too much activity … darn!
Google has plans to build 5,000 homes on its Mountain View property and 9,850 housing units at its future North Bayshore property … “Live, work, play and stay”. Bishop Ranch plans to build 478 apartments within its business park. Facebook plans to build 1,500 housing units at its Willow Campus in Menlo Park. (The Registry, Q2 2018)
The Internet of Things will become increasingly important in the operations of commercial buildings, keeping operating costs down, increasing building efficiencies, and improving employee satisfaction with their work environment. As one small example, if air conditioning repairs can be made before the unit breaks due to sensors and new technology, this can save money. If costs can be reduced by not lighting or conditioning unoccupied office space, this will be another benefit. Security can be enhanced with IoT. Systems can be programed for ideal occupant temperatures. Even sensors that let janitorial know when paper towels need to be replenished can save money and reduce inconvenience. “According to Pruitt, commercial buildings are much more connected today than we think they are. Quoting a study from Memoori on Smart Buildings, he says there were roughly 1 billion connected devices in 2017; by 2019, the number will jump to 2.2 billion; and by 2021, there will be 3.9 billion connected devices.” (SIOR Report, Fall 2018)
In addition to being a full-time senior majoring in Industrial Technology in the School of Business at Cal Poly in San Luis Obispo, Jordan is a Production Manager at Inspired Flight, an industrial drone manufacturer (www.inspiredflight.com) that develops and manufactures hardware and middleware for commercial drone users. He is passionate about their products and, as a parent, it is so much fun to watch your children mature and develop. Madison, a sophomore at San Ramon Valley High, loves school, but can’t wait for the upcoming winter holidays. My fiancée Launa and I cooked a huge 24-pound turkey (she makes the world’s best stuffing) and had a wonderful family Thanksgiving.
My heart goes out to those families affected by the tragic California fires; those who lost loved ones, friends, and the 14,000 who lost their homes. With the Houston flood and Florida hurricanes, Mother Nature and her power can be a most devastating and traumatic. Take nothing for granted, but so easy to say and so hard to do! The unexpected becomes the new norm. Life does go on, no matter what we think or do, so we might as well keep our sense of humor, our integrity, and our love for family, country and faith to keep us going. Have a great Holiday Season, and please call me even if just to say Happy Holidays!
Sincerely,
Jeffrey Weil, MCR.h, SIOR, CCIM
Executive Vice President
Colliers International
