CORPORATE OFFICE PERSPECTIVES | AUGUST 1, 2019
All around the San Francisco Bay Area office vacancy rates are extremely low, except along the I-680 Corridor and the Tri-Valley, where vacancy rates are still double digits. Tons of sublease space – do you want 200,000 square foot, Class A long-term leasehold remaining, for $30/rsf per annum with $150/rsf tenant improvements in place? Call me. You want 7,000 rsf Class A brand new space for $24/rsf per annum full-service – call me! Plug & play, 30-50% below market and space available in just about every city and size range up and down the I-680.
Governor Gavin Newsom – “recently criticized Tennessee, which is an increasingly popular destination for Bay Area businesses and residents. “I see that we’re CEO Magazine’s ‘worst place in America to do business’ and yet our GDP growth outperforms every one of those other states they highlight,” Newsom said, citing California’s strong economic growth averaging 3.8% in the last five years.”- San Francisco Business Times June 28, 2019.
Since February 2010, California has added more than 3.13 million jobs! Please don’t get me wrong, Tennessee is on fire, strong economics and a median house price in Nashville of only $245,000!
Commercial building rooftops – Meet The Jetsons! Most of you may be too young to remember the cartoon show back in 1962/1963 where everyone was getting to places in their personal flying cars. Now Uber Elevate is planning a flying car business to use rooftop skyports to pick up and drop off passengers. With a 2023 launch date, think of the potential transformation of the retail industry, with rooftop restaurants and retail development to take advantage of this new industry. On the other hand, think of the potential congestion in the sky – right now just in San Francisco, there are 45,000 Uber and Lyft drivers!
By 2020, there will be 25 billion connected devices, and office and commercial buildings are becoming more and more connected – HVAC, elevators, tenant connections, security. A new law passed in California effective January 1, 2020 may expose those who manufacture or design these connections to liability. It is unclear to what exposure commercial landlords may have. The article on this is “Connected Buildings, Connected Things and Security Concerns,” by Scott Wornow.
If you are an office user evaluating different office buildings and want a quick way to see how the building is maintained, check out the restrooms and stairwells in smaller Class A and all sizes in Class B office buildings as this is where spider webs, dirty floors, and lack of dusting can show up. Another method is checking with various tenant receptionists who are often the gatekeepers for building maintenance issues.
Deals and Rumors: San Francisco had another busy 60 days with Discord leasing 70,000 sf at 444 De Haro St.; Google is rumored to be taking 40,000 sf at The Ferry Building; KeepTruckin may be subleasing 51,000 sf at 55 Hawthorn St.; IDEO leased 120,000 sf at 2525 16th St.; Glassdoor will be taking 112,000 sf at 50 Beale St. where Instacard is taking 30,000 sf in the same building; WeWork leased space at both 550 Kearney as well as 28 2nd St. First Republic expanded by 265,000 sf at One Front St.; Juul Labs purchased the 123 Mission building with 349,000 sf for $400 million; and Play Station leased 130,000 sf at 303 Second St.; Over in Pleasanton Venturex took 13,000 sf at 4125 Hopyard Rd; and in Oakland, Kaiser Permanente announced it will be building a 1.6 million-square-foot headquarters at 2100 Telegraph Ave., Charles River Associates leased 27,000 sf and Interpublic Corp. 13,000 sf, both leases at 601 City Center.
Yes, the Bay Area has a severe housing shortage. Here is an example of why: “Almost 400 projects in the city (San Francisco) comprising 36,909 units have been approved for over two years but haven’t started construction, according to the planning department. Of those, 6,095 are affordable. Developers point fingers directly at local impact fees and the construction labor shortage…construction costs and fees have become insurmountable for developers.” San Francisco Business Times June 28, 2019
The first inside page of the May/June 2019 Business Facilities magazine was an ad for Michigan Economic, “The startup culture in Michigan is like no other.” For sure, if you want very affordable housing, which according to Zillow, the median rent price is $850 and median home sales is $350,000. Here in the overpriced and over-congested San Francisco Bay Area, just in May 2019 we added 11,300 new jobs and over the past year California gained 282,700 new jobs. According to the Mercury News, our median home price is $935,000 and the average apartment rents from $2,000 to $4,000/month.
A recent article in the May 31, 2019 San Francisco Business Times reports that three years ago, 34% of those surveyed said they may leave the Bay Area in a few years, the following year that figure increased to 46% and now 49% feel that way. However, 74% said the Bay Area is a good place to live, 57% said there is no other place on the planet they’d like to live, and you can count me in as part of this group. A few weeks ago, I went to the Alameda County Fair, one of the best fairs in the entire country, and then the next day went to San Luis Obispo and Pismo Beach…paradise!
San Francisco may begin to run out of office space as there are more than 8.1 million square feet of office space being proposed, but with the office cap on new construction of 2.1 million square feet, there finally may be an exodus to the East Bay! Along the I-680 and Tri-Valley we have 5.3 million feet sitting vacant, and if you want 500,000 square feet, no problem (just call me!).
Lisa Picard, CEO of EQ Office, describes co-working spaces as “the three F’s…fast, flexible and fun.” WeWork has introduced WeLive, a co-living concept with existing facilities. RISE by We, a gym and super-spa concept, and WeGrow, a kindergarten program for children ages two through five at $36,000 annually, per child. (Ouch!) “New co-working operators tend to take small spaces but with realization of many possibilities for driving revenue 24-7 they may take 20,000 sf or more and look for features like access to a rooftop or outdoor terraces, free or low-cost parking, transportation hubs and walkability. Eventually, co-working operators will begin taking spaces in retail centers, which would resolve challenges such as expensive parking in central business districts, provide attractive rents due to the demise of some big-box retailers; and expand opportunities for new revenue streams.”
In an article titled “Wealthy Millennials are leaving these states – and moving to these instead,” I had fully expected to see California at the top of the list of states folks were fleeing but was surprised! Based on data provided by the IRS from the 2015 to 2016 tax year, a June 2019 SmartAsset study listed New York as the top state rich Millennials are fleeing. “Wealthy” or “rich” Millennials are defined as those younger than 35 with a gross annual income of $100,000 or more. Other states wealthy Millennials are leaving included Illinois, Virginia, Massachusetts, and Pennsylvania, respectively. And where are they heading instead? California topped the list. They’re also moving to Washington State, Texas, Colorado, and Florida.
“LED’s are one of the fastest ways to reduce energy consumed by buildings…The study notes that adding networked lighting controls to LED installation boosts energy savings by an average of 47% beyond savings from LED’s alone.” Buildings June 2019.
According to a new 2019 National Office Absorption report just out by CoStar, net absorption is down 26% in the Midwest, 18% in the South, and 9% in the West, but up 2% in the Northeast. No reasons for this given perhaps continued increases in productivity, corporate downsizing and offshoring/outsourcing? Here in the Bay Area, especially, San Francisco companies are leasing 200 to 500,000-square-foot blocks of space in proposed office buildings, some not only not built but not yet even approved – that’s how frothy this submarket is!
In the San Francisco Bay Area office tenant improvement costs have gone through the roof. A few years ago new carpeting and paint was $6-8/sf, now $12-15/sf. Second generation space could be remodeled for $20-25/rsf just five years ago but now $50-60/rsf is required just to move a few walls, life-safety, Title 24 and minor work. A new 10’X12’ private office that in 2014 cost $7 to 8,000 to build now costs $12 to15,000! In the latest SIOR magazine “The Effect of Rising Construction Prices,” this same big cost spike in office TI’s is reported all across the United States. Dallas, Houston, North Carolina, Salt Lake City. What are folks doing? Longer leases to amortize the costs as well as tenants contributing to the TI expense.
My almost 17-year-old daughter Madison (her birthday is August 23rd) works at Five Guys Hamburger & Fries making hamburgers, hotdogs, milk shakes and working the cash register. She loves the job and reminds me of when I was her age working at A&W Root Beer on East 14th Street in Oakland. Back then starting wages were $1.35/hour, but I eventually received a raise to $1.65/hour. Hamburgers were 19 cents, fries were 14 cents, and I remember one day being on the grill when a customer pulled up in a cab and ordered 100 hamburgers and kept yelling at me to go faster as his cab meter was rising…oh, those were the days! Madison starts school in two weeks as a junior at San Ramon Valley High.
Jordan, 22, went through graduation ceremonies in June at Cal Poly, although he still has a few courses to complete. My fiancée, Launa and I were scheduled to be married at the beginning of summer, but my 93-year-old father played ping pong, broke his hip, then contracted double pneumonia in the hospital and is now in rehab, which caused the wedding to be pushed back into 2020. Arthur is recovering slowly, but we took away his ping pong paddle for good!
This is the 39th year I have written and published Corporate Office Perspectives and thank you so much for taking the time to read it! Summer is rushing past us, for many, school is about to commence once more and for others, the best summer trips are about to commence. Have a wonderful, safe summer, please don’t hesitate to contact me regarding just about anything, and whether you are religious or not, we are all so blessed!
Sincerely,
Jeffrey S. Weil, MCR.h, CCIM, SIOR
Executive Vice President
CA License No. 00786195
925 279 5590
jeff.weil@colliers.com
www.officetimes.com
