CORPORATE OFFICE PERSPECTIVES | JUNE 1, 2020
June 1, 2020 Issue: 240
This Issue #240 marks the 40th year of publication, every other month without an issue missed, and thank you so much for taking the time to read this!
I’ve been contacting scores of corporate decision-makers, managing partners of CPA, law and financial planning firms, and watching or participating in dozens of Zoom webinars with some of the largest corporate heads of real estate. What do I think of the future of America’s office space? Major corporations will dramatically increase long-term working-at-home, whether it be allowing workers to do these one or two days a week or the extreme example of Twitter, letting all its employees know they can permanently work from home if they wish.
Study after study shows the telecommute experience of the past two months has been highly successful. This would not have been the case had this Pandemic occurred even 10 years ago, but with robust high speed Internet at home, Zoom and other conferencing tools, the Cloud hosting work documents, and management by job completion versus watching physical headcount activity, this was the technological and psychological time to allow this success. Major companies are also re-evaluating whether they want 5,000 or 10,000 employees in a single office building or campus. How will they handle employee density, not just in the interim during this Pandemic, but long term? Will this be the only pandemic in this century, or are we now facing possible future pandemics of unknown character? Major urban employers are also considering whether they want employees crammed in mass transit. In major high-rises, where packed elevator cabs were the norm, how do you get employees to their offices safely? It seems many companies will take a cautious phased approach of 15 to 25% employees going back to their office at first, allowing those with underlying medical issues to continue working from home, and letting those who have been successful working from home and want to continue doing so to remain out of the office. There have also been articles interviewing San Francisco small and medium-sized tenants who said due to the $80/SF rental rates, they would not be renewing their leases and doing everything from home. On the other hand, I have spoken to many suburban tenants who plan to totally go back to their offices, with no plans at this point of downsizing. We shall see during the next 6 to 12 months how these various sectors play out.
Over the past week I have been on a number of commercial real estate podcasts and webinars, trying to learn what is happening and will happen to our commercial real estate market in the United States. Here are a few nuggets I have picked up. One international real estate company interviewed a number of their top clients to find out the impact of COVID-19 on their leasing plans. Of those clients, 20% said they dropped deals in process, 20% said they were proceeding as usual with the deals in the pipeline, and 50 to 60% said their leases have been delayed or postponed. In some cases, major tech companies that had large office lease expansions in the works that were in danger of being cancelled due to COVID-19 are now moving forward as a tool to reduce employee density and allow more distancing between employees once the shelter in place is lifted.
Office markets with low vacancy may still experience high demand and continued low vacancy rates, while those with higher vacancy may see even more subdued demand and yet higher future vacancy. There are global retailers competing for major warehouse space as the shift goes from China manufacturing to U.S. manufacturing for certain products.
Commercial tenant rent relief should be collaborative: negotiate not litigate for many reasons such as the fact that it needs to be a win-win for both tenant and landlord, and courts will be backed up for a long time and can be a most expensive route. Most flexible co-working operations are seeing demand virtually on hold, with questions about high density workspace with strangers and who was in this workspace previously.
Published in Bisnow April 12, 2020: What a real estate market emerging from lockdown looks and feels like. “Things will never be the same for how real estate is used and operated.” People want to feel safe being in a property, they want to know it has been properly disinfected and cleaned. Does the air conditioning system filter out the smallest particles possible? For retail, limiting the number of people in a store at any given time, and space between them while in line. “The economic impact of the coronavirus is going to be severe, and a lot of tenants in sectors like retail and hospitality are going to go bust. There is not going to be a long line of new tenants to replace them.”
Bisnow April 8, 2020 reports that 22.7 million of the 45.8 million total rental units are owned by mom-and-pop individual investors and many of these use their tenants rent to pay their property taxes and mortgages. Freddie or Fannie loans, there could be an upcoming avalanche of foreclosures if this non-payment of rent continues too long without Federal assistance mandating lenders to give owners some type of forbearance.
According to a new McKinsey & Co report, the pandemic will force commercial real estate to make significant structural changes. Open office layout and densification trends may reverse, and there may be changes in building codes and regulations relating to how many square feet each employee is allotted. CRE companies may intensify a move toward the use of digital and advanced analytics to enhance tenant experience. In China, e-commerce retail spending during the pandemic remained in e-commerce mode when stores reopened.
I was on a webinar with Transwestern’s Larry Heard, CEO, and Chip Clarke, president and here are the highlights … the office industry will come out of this COVID-19 fine, but there will be a period of transition and adjustment. It won’t be business as usual. Working from home seemed to turn out fine for many of us, but others ask, “Who wants to do this long term?” There may be dramatic changes in the way we office, how we spread employees out and limit interaction. Employee density will lighten up. Logistics and multifamily will come out of this OK once jobs return and renters can pay their rent. Healthcare should be fine, when we get out of this, folks still need to get glasses and see their dentists. Brick and mortar stores will be the most impacted. Amazon importance has accelerated and this may be here to stay. Millennials have led the movement to urbanization away from suburbs, and it remains to be seen how this trend goes. Overall commercial real estate will be great, but we are just not sure when.
Colliers just published a report indicating there will be minimal impact on the office tenants and the office market. CBRE came out with another report that said it may take a year after the economy rebounds for the commercial real estate market to get back to normal. Globest.com had an interesting article where most office tenants will want to get back to being in their offices versus telecommuting. But, current office configurations may not be suitable for social distancing, which may be needed until the vaccine is produced in high quantities sometime in 2021. This may mean tenant improvement work to get office spaces functional if current layouts are too employee-dense. I read an article the other day where while there may be opportunities for distressed property acquisitions, many companies that would ordinarily be raising capital to be ready to do this are instead conserving cash and credit to weather non-payment of rents, higher vacancies and potential businesses closing.
There were three lenders on a recent webinar I attended. Bank of America has processed 350,000 small business applications and the $349 billion in small business loans is all gone. Rates before COVID-19 were as low as 2.7% 30-year amortization 10 year due, then on March 17, 25% of the lenders backed out of the market and on March 23, 50% of the lenders went on hold. Lenders are focused on asset management versus new loans. Some borrowers need help, but others don’t, the caution is don’t ask for loan relief if you don’t need it as it will be a negative in your credit file. Multifamily and industrial financing are seeing lower leverage and higher vacancy written into the loan, with 6 to 18 months’ principal and interest held back by the lender as additional security. Wells Fargo was avoiding cash-out loans and jumbo loans, and might require having $250,000 in a Wells Fargo account. For retail financing, the stores must be open for business and still paying rent. Hospitality loans were almost non-existent.
Recent CoreNet Global survey, 84% of corporations to bring back employees in waves, the remainder plan to bring them back all at once. Staggered work hours, alternating shifts and other strategies will be used to ensure social distancing. High-risk employees may still be asked to work from home. Regarding estimated timing, 35% believe offices will open in May, 30% June or later, and 33% were not sure of the timing. “A majority of the respondents, 65%, said they will consider it safe to go to the office when government stay-at-home orders lift.” One in four said they would wait until there were no new cases of the virus in their community for 14 days. Enhanced cleaning protocols will remain in place for at least six months.
Interesting survey results that 75% of office workers have occasionally worked from home but now with shelter in place almost everyone is working full-time from home. A majority or 54% report no change in productivity, while 24% reported an increase in productivity. The home environments least effective are those with children and those with roommates. The kitchen is one of the least productive rooms in which to work. A resounding 70% of those who hadn’t worked from home prior to COVID-19 would like to work one to two days a week after COVID-19. The least effective business types for working from home are retail and legal. Of those surveyed, 62% reported better work/life balance since working from home and 88% of managers’ report they are able to manage virtually.
Space densities for when we go back to the office vary. There may be staggering with a portion of the workforce rotating to the office so the density is 50%. High risk and those who prefer to work from home may stay at home. Returners should be prioritized and planned. Some companies may lease cheaper suburban office space to spread their workers out and reduce usage of public transportation.
Deals and Rumors: In San Francisco, Deloitte did a renewal and expansion to 220,000 sf at 550Mission; Kotol signed for 82,000 sf at 1301 Brannan St.; Skilz leased 52,000 sf at 505 Howard St., and Google is reconsidering its 1.5 million square foot lease in one of the Piers on the waterfront. In Redwood City, Chan Zuckerberg Initiative leased 118,000 sf at 1180 Main St.; Allakos leased 98,000 sf at 825 Industrial Road, San Carlos. In Oakland, Lithium Extraction Technologies and Services took 93,000 sf at 1700 20th St. Down in Fremont, Facebook signed for 229,000 sf at 6800-6900 Dumbarton Circle. In Pleasanton, Amazon paid $50 mil to purchase the 120,000-sf flex building at 5160 Hacienda Drive.
Gensler’s 2020 U.S. Workplace survey, reported “Workplace effectiveness and experience have declined, a consequence of continued dramatic shifts in the way people work. Data from the 2020 survey registers the lowest effectiveness numbers we’ve measured since beginning our workplace surveys in 2005.” Of course, this study was done prior to COVID-19 so we will have a new normal (NewNorm?). In 2019, one in 10 workers didn’t have an assigned seat, while in 2020 this figure went up to five in 10. The study also found that 65% of workers found unassigned seating both stressful and confusing and only 24% found it efficient.
On April 24, 2020 CoStar News had projections by Abby Corbett, its senior economist. In a moderate downside forecast, 50 million square feet of retail space will shut down and it will take seven quarters to return. A less-optimistic forecast sees 128 million square feet of retail in the U.S going dark, taking four years to recover. The severe forecast is nasty, with 360 million square feet of retail going empty, and the downturn to persist for four years before beginning its recovery. Yuck!!!
I heard an interview with Howard Schultz, former CEO of Starbucks, where he was concerned that without additional billions or trillions in Federal support, hundreds of thousands of restaurants would not survive this pandemic, and of the 30 million small businesses in the United States, 10 million of these might go broke.
According to a recent Savills research report, during the past several months since the shelter-in-place/shutdown of office buildings, there has been a 300% increase in office sublease availability, with more than 3.7 million square feet of space currently available. “It is likely that sublease space will increase further, placing downward pressure on overall asking rents.” My opinion: many companies are reevaluating long-term occupancy strategies for housing their employees, realizing that until there is a vaccine, social distancing and less office density will be a must. And there is also the scary but real thought out there that this may not be the last pandemic we see in our lifetime and this must be taken into account when planning office space long term.
Nationwide Insurance said it will permanently exit most buildings outside its four main campuses and move those associates to permanent remote-working status. I wonder what will happen to those employees who live with small children, roommates, or don’t have adequate quiet working space … I’m also wondering how many other major office users are considering this same workplace philosophy. Will this lead to a future glut of office space?
Bisnow just reported a study by CoreNet, the corporate real estate director’s organization, conducted between April 22 and April 27, 2020, polling its 11,000-person membership, indicating that 69% of corporate real estate professionals said their company would take less real estate after spending time working from home. Another survey done by the research firm Gardner released April 3, 2020 said that 75% of the 314 chief financial officers surveyed said they planned to downsize the number of people that came into the office each day. “There will be a long-term adjustment to our location strategy, “Barclay’s CEO Jes Staley said. “The notion of putting 7,000 people in the building may be a thing of the past.”
Miriam Hall of Bisnow reported that Vornado Realty Trust said two-thirds of delinquent tenants were credit-worthy, “but businesses are hurting and the future is uncertain”. Vornado collected 90% of office rents and 53% of retail rents in April and May looks to be similar. Office occupancy is currently 5%. Vice chairman David Greenbaum said “I think as the world begins to open, it’s going to be a gradual process. Tenants are anticipating returning initially 10 to 20% occupancy range. Fewer people are going to be using mass transit. When we open up, people will be walking to work, bicycling to work or driving to work.”
There may be a long-term trend away from partition fabrics towards less-porous, more cleanable surfaces like glass, vinyl and laminates. These types of materials can be cleaned easily and regularly with products that kill viruses and withstand that cleaning for years of use. This is no guarantee of protection from the virus but it is a mitigation. No matter how resistant a surface is, you still have to clean and rinse regularly.,
Monitors may be mounted so they’re not sitting on the desk, and other items are cleared daily from the desk so the cleaning crew can wipe down with virus-killing cleaners. Other health barriers may include carpet markings showing 6 foot bubbles around cubicle workers, higher panels and pocket doors. There are manufacturers making panel extenders that fit a variety of panel-manufacturers so you are not forced to use one vendor. I asked about lead times and was told, 48 hours so it is not true that panel extenders, glass, plexiglass, etc. have months of lead times required.
“In these trying times, psychological comfort is as important as physical comfort,” said Lauren Grant, human factors and ergonomics manager at Allsteel.
Twitter just announced to its 1,000 San Francisco office employees that if they wanted to continue working from home, they could on a permanent basis. What will happen to Twitter’s very cool downtown HQ remains to be seen. The San Francisco Business Times also interviewed a number of smaller 2,000 to 4,000-square-foot office users in downtown San Francisco who said that with working from home being as successful as it has been, and downtown rents as expensive as they are, they do not plan on renewing their office leases upon expiration.
One of the largest office landlords in the United States, Bishop Ranch in San Ramon, just released new guidelines for reopening their dozens of suburban office complexes. They have partnered with John Muir Health to man screening and temperature stations. Questions will be asked and only “no” answers will be admitted. Temperatures must be under 100 degrees and masks of course worn. Then you get a sticker which must be worn to remain in the building. Bishop Ranch is also partnering with Contra Costa County to set up a drive-through COVID-19 testing station as well as partnering with DiaCarta to do quick turnaround bulk testing.
My son Jordan, who turned 23 last week, is still working making industrial drones down in San Luis Obispo as is an essential business. His younger sister Madison just finished her junior year in high school and what a tough time these kids had! She was on the school badminton team and after just three games the season was over and the school was shut down. No Junior Prom (we do have the dress ready), no socializing in person with friends, and many hours of on-line screen time in classes. My fiancée Launa, who teaches middle school Spanish, has been working hard preparing fun, engaging, interactive classes which her students have really gotten into. It’s very cute to see them rap in Spanish, and excitedly Zoom because they miss being with their classmates and teachers so much. These kids are amazingly positive and resilient. It’s been very impressive to witness. Her 22-year-old daughter Lindsey just graduated two weeks ago from UC Berkeley with multiple undergraduate degrees and what a bummer that graduation ceremony was online, FORTNITE based, and no celebrations with friends! Her 19-year-old son Ryan started as a freshman at UCLA last year, loved his dorm, new dorm mates, his classes (math and film) and was having the best time of his life. Then in March it was pack up, move out, and go online. My 94-year-old father and those of his generation may have it the worst, as many of them are confined to their rooms. Even though the senior residences have beautiful dining halls and great food, they have to eat by themselves in their rooms. They are forbidden to socialize, are not permitted to leave the building and no visitors are allowed. Before the pandemic, my dad and I had gotten into a routine where I would see him 2 to 3 times a week, play one-on-one poker or Rummikub, watch sports together and on weekends I would take him to the local museum or park. Now I call him 2 to 3 times a day, and every few days send him a funny card with photos. I can sense the sadness of isolation in our senior citizens who are at risk the most, and know they will be the last to return to any type of new normal.
Stay safe, make the most of what we have, give love and support to all you can, and know that we will make it to the other side of this extraordinarily dark tunnel.
Sincerely.
Jeffrey S. Weil, MCR.h, CCIM, SIOR
Executive Vice President
CA License #: 00786195
(925) 279-5590
Jeff.weil@colliers.com
Colliers International
