CORPORATE OFFICE PERSPECTIVES | DECEMBER 1, 2019
December 1, 2019
Issue: 237
I am writing this at a Black Bear Diner in Vacaville, waiting for my daughter Madison to complete a refresher driver’s training course before she takes her driving test next week. The place is packed, and in the Bay Area, many of the restaurants I’ve frequented have been similarly so.
Up in Tahoe last weekend, in between summer and winter seasons with no snow in sight, my fiancée Launa and I were the sole customers at a 150-seat restaurant in Kings Beach, but with live music, we had the dance floor to ourselves. San Francisco, the Peninsula, San Jose and Oakland restaurants are packed, and there are millions and millions of square feet of new office projects under construction with millions more in the pipeline. With no new office construction in the Tri-Valley and up and down the I-680, and very few large office users out looking for space, our East Bay region feels like a Tahoe off-season, but hopefully this will change?
“The U.S. office market bounced back in the second quarter, after a subdued start to the year. Net absorption almost tripled and occupancy remains at a record high. Rents are holding firm, with record highs being set in some markets, and there was a healthy uptick in sales volumes. Occupancy gains remains largely dominated by tech and co-working firms, who continue to expand. “ U.S. Research Report Q2019, Colliers
The San Francisco Business Times (August 16, 2019) reported that Knotel, a flexible space operator, now has 500,000 square feet of office space in San Francisco and plans to reach 1 million feet by the end of this year. “Our product is flexibility,” said Eugene Lee, chief investment officer for Knotel.
Not to be a naysayer, but after surviving a number of major office downturns … when the recession finally hits, the companies with short-term leases may be the first ones to shed space … we shall see!
I recently attended a presentation on Smart Buildings and I was blown away by the many potential benefits (and one major concern) in this emerging industry. The experts giving the presentation included Siemens, a cybersecurity expert and Robert Granadino, chief operating officer with InteliGlas, a company which connects the software to the sensors on the hardware. They said this technology was not possible three to five years ago, but costs have come down to the point where for a mid-1970s suburban 85,000-square-foot office building, the $65,000 to $125,000 to install and setup fee had a paycheck of just six months. Sensors on the HVAC system packages, the lighting, mechanical, irrigation, building security, etc. The software in the cloud is Artificial intelligence, and learns as it goes. It checks in regularly, automatically, with NOAA to find out when it will be cloudy or raining days before and programs the sprinklers and HVAC accordingly. When equipment has an irregular sound or vibration, the service person can check it out before the system breaks down totally, such as HVAC systems seem to be in the middle of a super-hot summer, to potentially limit system downtime. The cybersecurity element was especially important as there have been cases of buildings held up for ransom, and proper security measures can prevent this. Occupancy can be “sensorized” so the building HVAC and lighting can adjust for when and where employees are. Building expense reduction, increased equipment efficiencies, reduced downtime, happier employees and a system better for the environment at a fairly reasonable payback period. Comments?
A new startup called MainStreet entices employees frustrated by the high costs of the Bay Area by paying them $10,000 to relocate to a less expensive locale like Salt Lake City or Sacramento. They keep their tech jobs and work remotely from a co-working locations where 20 people from seven or eight different companies may be working. “To head off workers’ concerns about moving to a locale without attractive job opportunities to fall back on in case something goes wrong, MainStreet will offer workers who do lose their jobs a stipend of up to $5,000 a month for up to three months and health care benefits for the whole family, along with help finding a new remote job.” East Bay Times 11/12/19
Then the same day, same publication, Report Finds Oakland, San Jose Renters Among Nation’s Happiest … Miami took the top spot, Oakland came in second and San Jose fourth… “It seems once a renter finds an apartment in the Bay Area that he or she is satisfied with” as the report puts it, “it’s tough to leave”. East Bay Times 11/12/19
Deal & Rumors: San Francisco continues to amaze even with Uber’s recent announcement of 730,000 sf coming on the sublease market. Visa will be taking 300,000 sf at Mission Rock in San Francisco, Databricks is looking for 100,000 sf, Paramount Group leased 26,000 sf at 300 Mission St., and Canopy leased 10,000 sf at 353 Kearny St. In South San Francisco, Stripe signed for 421,000 sf at Oyster Point. Down in Menlo Park Softbank leased 143,000 sf (rumored at $120/sf!), at 500 El Camino Real and across the Bay in Emeryville, Symergen will be taking 300,000 sf of the former Chiron facilities at 5300 Chiron Way. In Oakland, WeWork leased 37,000 sf at the Leamington Building at 390 19th Street.
“The open office concept has been touted as the answer (to attracting and retaining the right talent), with claims that is provides collaborative, amenity-rich workspaces that young workers prefer. But studies indicate that open office space reduces face-to-face interactions, productivity and work quality, causes workers to wear noise-cancelling earphones, induces high stress levels, and high blood pressure, and increases sick days and employee turnover.” National Real Estate Investor, October 2019. What’s the answer? Different work environments, access to private offices, shared offices, quiet zones, workout facilities, the ability to work from home and realize we are individuals with different needs and one size does not fit all.
WeWork may have been pulled back from the edge of insolvency by its biggest investor, but many of its landlords are still preparing for a worst-case scenario … Multiple potential WeWork lease deals in New York City are said to be canceled or halted, and scores of possible deals in London are now in jeopardy as WeWork reviews its expansions there, Bloomberg reports. Kilroy Chief Financial Officer, Tyler Rose, said “if WeWork starts handing back any locations, the space will be in hot demand.”
Bisnow November 4, 2019
The San Francisco Business Times got my attention on October 25, 2019 with this: “By 2040, the entire Bay Area is expected to add an additional 2.1 million people to the region, but building additional housing remains a tough sell.” Housing is a critical element, but what about two more Bart tubes under the Bay, new freeways, and other infrastructure upgrades to accommodate this 20% increase in population? Yup, I looked it up and we already have 9.67 million people, fifth largest in the United States, and 14 states have a total population of less than 2 million as it is …
Having been through a number of economic booms and then downturns, I like to be alert to early warning signs of an impending office slowdown in one of the hottest office markets in the US, San Francisco. We don’t have to worry about a suburban slowdown as Contra Costa and the Tri-Valley never took off after the Great Recession, with no new construction, almost no tech, and few and far between major office leases. However, San Francisco has been on fire, with millions of feet of new Class A office space with rents at $85 to 100/rsf per annum and a fear the City wouldn’t have enough vacant space to fill demand. Now, with the possibility of WeWork slowing or reversing their huge space appetite, and the announcement today that Uber wants to sublease 730,000 square feet in downtown San Francisco, is this even a hint that the tide may be changing? Stay tuned!
Just when the I-680 Corridor and Tri-Valley thought they would be the only office space game in town, with 5 million feet of low cost vacant office space, the headline in the San Francisco Business Times October 25, 2019, “Huge Block of Office Space Opens Up in Oakland” with 600,000 square feet of Class A office space opening up within 18 months and the 875,000-square-foot Telegraph Tower about to commence construction.
The San Francisco Bay Area has a long list of major companies who either already have or plan to have millions and millions of square feet of office and biotech facilities, including Google, Salesforce, Facebook and many others. Genentech, based in South San Francisco, is working on a 20-year 9 million-square-foot expansion at its 207-acre bayside campus. There is a three letter word that comes to mind: WOW!
A huge change is coming to San Ramon’s Bishop Ranch with a massive housing development instead of more office development. If my memory is correct, way back in I believe the late 1970s 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 big 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!
The 2019 Business Facilities State Ranking Report just came out, and California was number one in manufacturing employment. Having a population just shy of 40 million kinda skewed this category, as a percentage of the workforce gave Indiana the top spot. Wyoming has the best business tax climate, California the highest tech job growth, strongest biotechnology, second to Washington in aerospace, number one in Opportunity Zones as well as semiconductors. Harlington, Texas had the lowest cost of living, (the median home price is $89,900), and they didn’t have a highest cost of living category, but I’m sure the San Francisco Bay Area would be up there. Check out the full report at Business Facilities, July/August 2019.
I recently had breakfast with an office building investor who owns a lot of Class A office buildings. We were discussing the average cost these days of tenant improvements, and $50/sf seems fairly typical for a suburban Class A building. With Class B, you might get away with $10 to 15/sf for carpet and paint, and $25-35/sf if there are a few wall changes, but Class A quality office properties experience higher costs of tenant improvements. Amazingly $50/sf during an office year lease at 6 % interest works out to $0.96/sf per month just for the TI component, and if you somehow get free money at 0 interest it works out to $0.83/rsf! For suburban Class A buildings, the operating expenses can easily run $1.00 to 1.25/sf per month (utilities, property taxes, insurance, janitorial, sewer, water, garbage, etc.) So if your suburban rents are say, $4.00/sf full service, your net rents could be around $2.00/sf for a Class A office building, with all the bells and whistles in one of the best suburban locations.
Along with topics on flooring and acoustical panels at the last BOMA International show, active shooter insurance was discussed. “It’s depressing that this product has to exist, but it can be invaluable if you need it … active shooter insurance focuses on funding recovery, including survivors’ trauma counseling and medical bills, funeral expenses for people who died because of the incident and refurbishing the spaces.” Yuck! I thought bulletproof backpacks were bad enough and now this!
Madison, my 17 ½-year-old Junior at San Ramon Valley High School, had a terrific soccer season. Her team, All Americans, U-19, ended the season winning the Dick King Tournament as champions and a great finish for the team. Madison played defensive, and totally threw her body into blocks, and used defensive kicks and fancy footwork to keep the ball as far away from her goal as possible. Jordan, who officially graduated this month with an Industrial Technology and Packaging in the College of Business at Cal Poly San Luis Obispo, still loves his job as head of industrial manufacturing at Inspired Flight Technologies. Want to buy one of the best industry drones for your local fire, police or sheriff’s department or industrial use? Please give them a call and tell them Jordan Weil’s proud father sent you!
My Rabbi (Rabbi Chabon) last night made a comment that has caused me a lot of personal reflection and might be insightful to others. Sometimes we think while we are battling the elements in the deep thick grass of the jungle, filled with dangerous snakes and spiders, that if we can just get past the deep grass there will be a nice paved road that will be a much easier path through life. But what if there is no road? What if we have to adjust our life expectations and make the most of cutting through the jungle grass? Sure, it will get easier at times, and at other times much more challenging, but isn’t this the true reality of life?
If you want to send me a note on anything you’ve read here or if you want the best office/lab/R&D representation in the business, please call me. If you or your company wants to buy or sell a commercial property anywhere, again please call me. Either way, have a most wonderful Holiday Season, drive safe, love life and family, and I’ll be back to you again in February!
Sincerely.
Jeffrey S. Weil
Colliers International
Jeffrey S. Weil, MCR.h, CCIM, SIOR
Executive Vice President
CA License #: 00786195
(925) 279-5590
Jeff.weil@colliers.com
