CORPORATE OFFICE PERSPECTIVES | OCTOBER 1, 2019
So many major economic and political variables facing us in today’s most divided world. Tariffs, Iran, North Korea, the Middle East, the dysfunctional Washington D.C. …no matter what side you are on, has made economic predicting even more challenging than the near-impossible task it’s historically been. Interest rates are low, the economy is humming, but wait, our inverted yield curve just popped up, the stock market hits all-time highs and then can drop 800 points in a day. Commercial real estate investors across the country are hitting home runs by the bucketload and even retail developers are finding very profitable niches and redevelopments to overcome the e-commerce impact on brick and mortar. The answer to the question, do you think we will have a recession in 2020 or will we maintain our economic stability …is yes!
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/sf is required just to move a few walls, life-safety, Title 24 and minor work. A new 10’x 12’ private office that in 2014 cost $7-8,000 to build now costs $12-15,000! In the latest SIOR magazine “The Effect of Rising Construction Prices,” this same big cost spike in office TI’s is repeated all across the United States; for example, in Dallas, Houston, North Carolina, Salt Lake City. What are companies doing? Longer leases to amortize the costs, as well as tenants contributing to the TI expense.
Is the economic downturn on its way? In the National Real Estate Investor, July, 2019, there were a number of different articles written by different authors but all pointing in the same direction for 2020 – down… Elaine Misonzhnik started it off on page 6, discussing industrial real estate “…while e-commerce growth will continue to drive the need for warehouse and distribution space over the next five years, the heavy construction pipeline combined with a potential economic slowdown will result in demand growth that will likely fall below 1% annually.” On page 8 regarding commercial bank loans, “there could be greater risk exposure emerging among some banks that has the potential to snowball into bigger problems in the event of a downturn.” Even the hotel sector may be affected. On page 12, “The hotel sector will experience a decline in demand in 2020 and 2021 marking a delayed mimicking of the anticipated deceleration of the national economy.”
The largest city in the Bay Area is San Jose, with more than 1 million residents. The biggest development in San Jose will be the 60+ acres of downtown properties Google has acquired, proposing 3-5,000 residential units, 5.5 million square feet of office space, 15 acres of open space and 500,000 square feet of retail, cultural, arts, hotel and other uses.
Just received a June 2019 Residential Real Estate Market report from Engel & Volkers for San Francisco. Not sure how accurate, but they report the median sales price was up 8.3% to $1,760,000 for a single-family home and 11.1% to $1,300,000 for condo/tenants in common properties. You have got to be kidding me! For that kind of money in some cities around the United States you can buy an entire neighborhood!
Deals and Rumors: Let’s start in Oakland, where VISCO took down 75,000 sf at 1500 Broadway; Launch Darkley leased 22,000 sf at 1999 Harrison St.; Credit Karma expanded by 54,000 sf at 1100 Broadway, and BART is purchasing the 244,000 sf office building at 2150 Webster St. In Livermore, Lam Research is doing a 372,000 sf build to-suit at 1201 Voyager St., and in San Ramon, Striking Distance Studios leased 25,000 sf at Bishop Ranch. First Republic Bank took 20,000 sf at 1626 N. California in Walnut Creek. Down the Peninsula, Tpalti expanded to 19,000 sf at 1810 Gateway Dr. in San Mateo. Further North in South San Francisco, Cytokinetics leased 235,000 sf at Kilroy Oyster Point. San Francisco saw WPP take 115,000 sf at 360 Third St.; WeWork purchased 600,000 sf at 600 California St.; PWC signed for 200,000 sf at 405 Howard St.; and at 300 Mission St., Autodesk leased 117,000 sf, Glassdoor 117,000 sf, and Mapbear 28,000 sf.
A huge change is coming to San Ramon’s Bishop Ranch: massive housing development instead of more office development. If my memory is correct, way back in I believe the late 1970’s or early 1980s Sunset Development Company originally purchased the 600 acre property with the objective of building housing, but the city turned them down so they went to office and R+D instead. UPS, Toyota, and a bio company were the first owner/users, then Chevron and Pacific Bell were the monster buyers. Now full circle, Sunset is planning for 4,500 multifamily homes. With 30,000 office employees at Bishop Ranch and the new City Center shopping Center, and an excellent transit system, you can live, work and shop and not even need a car!
I’m giving full credit to my competitor, CBRE, for this information. The San Francisco Bay Area, already the largest and number one ranked tech talent market in North America, is poised for growth spurt. “The top five markets for tech talent in 2019 were the San Francisco Bay Area, Seattle, Toronto, Washington, D.C. and New York. In the last five years, the Bay Area experienced a “brain gain” an inflow of 55,000 more tech jobs than tech graduates in the region, the highest in the US. Scoring: #1 SF Bay Area 84.79; #2 Seattle 73.82; #3 Toronto 69.88; #4 Washington, DC 69.83; #5 New York City 65.12; #6 Houston 62.10; #7 Boston 64.25; #8 Denver 59.43; #9 Atlanta 58.08; #10 Raleigh-Durham 57.68. SF Registry August 26, 2019
In National Real Estate Investor, July 12019, there was a report on the biggest flex office space markets in the country, with Regus and WeWork dominating. Manhattan reported 13.5 million square feet with 30% annual growth, Los Angeles, 4.2 million with 15% annual growth, and in 6th place, San Francisco with 2.8 million feet and 37% annual growth.
Jordan, who just went through graduation in June at Cal Poly in San Luis Obispo, is finishing a few remaining courses and still loving work, 60 hours a week at Inspired Flight in charge of manufacturing high-end industrial drones. His younger 17 year-old sister Madison is really enjoying her Junior year at San Ramon Valley High School. A month ago, we did some terrific Class 3 and 4 whitewater rafting down the middle fork of the American River, spectacular! Then a few weeks ago, my fiancée Launa and I visited her folks who live on Lake Tahoe, and again, spectacular! There are so many other States with the incredible beauty to visit and I wish I had enough time and $ to see them all!
For those of you wondering how my father Arthur is doing, after breaking his hip four months ago, undergoing surgery at age 93, being in multiple hospitals for weeks at a time, having double pneumonia and surviving, he is now back in his apartment at St. Paul Towers, back to enjoying life, just had his 94th birthday last month and is actually planning on going out to concerts and theater in the near future. One tough guy!
If you are a user of an office, industrial or retail space contemplating purchasing your own building, there has just about never been a better time to do this with SBA 90% financing including tenant improvements at incredibly low-fixed-rate interest rates. Please call me for details. If you are an office tenant with the lease expiring within the next 24 months, call me as now is when you should be positioning your renewal strategy. Thanks and I hope your Fall is a great one!
