CORPORATE OFFICE PERSPECTIVES | FEBRUARY 1, 2019
In the last issue, December 2018, I stated that the commercial real estate market in most areas and product types has peaked. I’ve asked a number of commercial real estate brokers from all types of companies (being a SIOR member has value) and everyone has agreed. Yes, San Francisco, the Peninsula and Santa Clara will still going strong, and between Facebook, Google, Salesforce, and other tech giants there are another 50,000+ high-tech jobs coming just due to the major leases and purchases these heavies have signed. Yet, between the tariffs, the political drama, interest rates increasing eight times since 2015, the increasing exodus of long-term Californians leaving for Oregon, Washington, Colorado, Utah and Texas, more and more bets are being placed on an upcoming recession. Looking backwards, it is always much easier to pinpoint when the downward curve began, but much more challenging predicting. When unemployment is at historic lows, interest rates are still low relative to the past 40 years, there are few market areas where there is overbuilding, and even though the stock market has had wild gyrations, it hasn’t tanked. In summary, a very positive prognosis, lots of sunshine but serious clouds off on the horizon.
According to the San Francisco Business Times, Facebook “controls enough space to grow from under 4 million square of space in the Bay Area in 2017 to 9 million square feet in 2020.” At a 5/1000 ratio this size increase represents a potential hiring binge of 25,000 new Facebook employees!
Employees value building sustainability and wellness … 79% of workers said they would choose a job in a LEED-certified building over a non-LEED building. 93% of those who work in LEED-certified green buildings say they are satisfied on the job. 85% of respondents in LEED-certified buildings say their access to quality outdoor views and natural sunlight boosts their overall productivity and happiness. (U.S. Green Building Council)
Big Brother comes to the office … VergeSense is a sensor-as-a-system platform that tracks office usage to equip companies with real time knowledge about how their offices are used … The massive shift is underway in corporate and commercial real estate. As the next generation of workers come into the workforce, people are demanding a completely different type of workplace experience focused on agility and collaboration … “Our machine-learning modules work alongside our computer vision technology to process real-time workspace utilization data that recommends to building managers savings opportunities, better ways to allocate space and personnel within offices, and empowers a more enjoyable user experience.” (The Registry, November 26, 2018)
“Ken Rosen’s Fall Forecast Sees Economy at a Peak … Rosen believes we have 12-18 more months of runway before a possible recession”, rising interest rates will cause cap rates to rise and values to fall, especially in the retail sector. He believes that we are likely to experience a recession sometime in 2020. (The Registry, November 26, 2018)
The trade war with China may also be impacting the commercial real estate market. “Chinese investors are pulling their money out of the US and Europe … During the third quarter, Chinese conglomerates sold off more than $1 billion worth of commercial real estate in the United States, while purchasing only $231 million, according to the Wall Street Journal … experts predict the trend will continue in 2019.” (The Real Deal, January 2, 2019)
Deals and Rumors: Oakland had a great past couple of months, with Square leasing the entire 356,000 at 1955 Broadway building that Uber had once controlled, The Department of Insurance is taking 47,000 sf at 1901 Harrison St., WeWork is rumored to be leasing 100,000 sf at 601 City Center, and LendUp will be relocating its 10,000 sf at San Francisco headquarters to 1750 Broadway. In Newark, Facebook continued its office-leasing frenzy with a 226,000 sf lease at Morton Commercial Center. Facebook also inked a 803,000 sf office lease at Burlingame Point in Burlingame. In San Ramon, Tri Point Homes leased 18,000 sf at 2600 Camino Ramon and Mason-McDuffie took 17,000 sf at Bishop Ranch 6. In Mountain View, Google will be paying 1 billion dollars to buy 800,000 sf Shoreline Technology Center, currently 92% occupied by Google. In San Francisco, Getaround leased 55,000 sf at 55 Green St., Salesforce, the largest San Francisco employer with 8,400 employees, signed for 325,000 sf at 550 Howard St, and Google leased 190,000 sf at One Maritime Plaza. LinkedIn just leased 410,000 sf at 445-465 N. Mary Ave. in Sunnyvale.
The last mile for industrial space is adding a premium to properties located in this coveted market segment, and Class B office buildings and abandoned strip centers are being converted to fulfillment centers. Repurposed fast food restaurants and bank branch buildings are being used as grocery pick-up locations. (NREI, November 28, 2018)
Highly walkable suburban locations are seeing record high prices, as compared with somewhat walkable and car-dependent locations, said Jim Costello, senior vice president at Real Capital Analytics. “The further out you go into more car culture areas, you’re getting a higher cap rate.” (NREI, November 28, 2018)
Seven Property Management Tech Trends For 2019: 1. Machine Learning, which will optimize building performance, reduce costs. 2. Drones – inspections, security surveillance. 3. Augmented Reality – will aid HVAC elevator and other technicians with visual directions for repairs, and planned developments can be visualized before actual construction. 4. Blockchain – streamlining real estate investments. 5. Localized Energy Sources – incentivize owners for solar, windmills and other renewables. 6. Robotics – commercial construction (but property manager and leasing agents are still safe for a while …) 7. Autonomous Vehicles – real estate will have to adjust, reuse of garages and parking lots. (Propmodo.com, January 2, 2019)
In my historical August 1, 1998 newsletter I mentioned a few of the office sale comps around the Bay Area. San Francisco Class A: $250-300/sf: Oakland $145/sf; Walnut Creek $215/sf; Pleasanton $145-180/sf. Today multiply these prices by 200 – 400%, which over 20 years is to be expected. Of course, if you had just bought Apple stock back then …
California factoids: Population: 39,536,653. GDP all industries: $2.7 trillion. Economic Incentives for companies to relocate here: California Competes Tax Credit, (Partial) Sales and Use Tax Exemption, Sales and Use Tax Exclusion, Now Employment Hiring Tax Credit, California Capital Access Program, Jump Start Loan Program. If California were a country, it would be the 5th largest economy in the world.
Big Tech expansions outside the Bay Area. Apple just announced it will build a 1-billion-dollar office campus in Austin, Texas, to house 15,000 employees, and Google said they will build 1.7 million square feet of office space in Lower Manhattan, New York, nicknamed Google Madison Square.
The December 2018 holidays were far too short. Jordan, who is in his last year at Cal Poly, was able to fly up to Bend, Oregon and get several days of great skiing in at Mt. Bachelor with his girlfriend who lives up there. Back home, lots of family dinners with all four kids (two of mine, two of Launa’s) and celebrations. It’s kinda cool that we have kids going to the same high school, and we each have a 21-year old in college. Our house in Alamo seemed to be the gathering place for both: Jordan’s college buddies as well as Madison’s high school friends. Both kids are solidly back in school, and my focus is now on my upcoming wedding to Launa (who has had a very positive impact not just on myself but my entire family) coming up on June 23rd. We selected a very romantic winery in Napa County for a small intimate gathering with just our immediate family.
Stay warm and dry during these winter months, keep positive in spite of everything swirling around us, and, of course, please continue calling me with all your real estate needs!
Sincerely,
Jeffrey Weil, MCR.h, SIOR, CCIM
Executive Vice President
Colliers International
