CORPORATE OFFICE PERSPECTIVES | AUGUST 1, 2020

I’ve been on many, many networking events, broker panels, institutional investor groups, meetings with architects & with engineers, Zoom programs, etc. over the past 90 days.  This has given me a fairly good feeling of what is going on nationally as well as locally with corporate America, office space, office buildings, commercial real estate trends, and getting back to a new normal safely. The Society of Office & Industrial Realtors (SIOR), which in general represents the top 2% of these specialists nationwide, has had a number of Zoom networking meetings. Office leasing across the board is down, but there are pockets where leasing is still moving forward. Tech, labs, health care and R&D appear to be down 50% while corporate leasing in, in areas such as San Francisco, may be down 80%. Short-term lease extensions have become more common as firms try to evaluate if work-from-home is sustainable, & assess its long-term impact on collaboration, company culture, and recruiting and training. There have also been huge long-term leases signed by corporations who see beyond the current pandemic issues. Numerous reports have been published predicting the hub and spoke approach whereby the headquarters is downsized and branch offices in low-cost suburban locations closer to employee residences are opened. This reduces employees being forced to take mass transit then stand in long lines for their four-person maximum capacity elevator cab. So far, we have not seen this out in the suburbs but we are hopeful. Many companies have yet to re-occupy their office facilities, while others are using a hybrid model of telecommuting 2-3 days a week and working in the office 2-3 days a week. Few companies have mandated a complete return to the office. As an industry, industrial is at the top, office next (85-90% rents collected), multifamily (80-85% rents collected), retail near the bottom (only 25% rents collected), and at the very bottom hospitality including hotels and travel-related industries.

Reported in TechCrunch this past week, 63% of the startups surveyed by Founders Forum with Tech Crunch said they would re-open in 1-3 or 3-6 months, regardless of when the government told them it was safe to do so. A small number have re-opened their offices, 10% have closed their offices permanently and many said they would move to a flexible remote working model. Of the 328 surveyed, 36% plan to re-open in 1-3 months, 27% in 3-6 months, and 16% have already returned to work. “Given a choice in the matter, 61% of those surveyed said they would prefer a hybrid model of office and remote work, with only 11% wanting to go remote full-time and 8% returning to the office full-time. And 83% wanted to have set days when the whole team was in the office together.”

Salesforce, with 9,000 employees in three San Francisco office towers, will have temperature scans on every floor, mandatory masks, six-foot separations, hand sanitizers everywhere and cleaning throughout the day. Work areas and conference rooms will be at half-capacity or less and employees will arrive at staggered times. The Bay Area Council surveyed 123 companies last week and found that when offices reopen, nearly 90% expect to work-from-home part of the time, while 18% are preparing for total remote working. Two-thirds will rotate workers on alternate schedules.

First off, I am simply an office broker who has spent many decades representing office tenants in their space needs, and am no way an expert in this. However, I have been doing a lot of reading and researching. If your building has openable windows, great, let the outside fresh air in. Most newer buildings are sealed, as this is more efficient and cost effective, so you don’t have windows that open. Also, when the outside air is 80 degrees or hotter, you may not want to heat your inside air if you have air conditioning. I met yesterday with an HVAC expert who highly recommends ultraviolet Germicidal lights to clean the air. This is a relatively inexpensive way to kill the virus as the air circulates through your system. My guy said it might only take 100 watts, so the power required for the UV light is minimal. I went online and there were systems in the $2,000 range, but the cost depends on what size system you need, how many floors or zones you have, and if you choose one huge HVAC system or multiple rooftop package units.  There are also articles suggesting increasing the air flow so it circulates much more frequently. Others have recommended stronger filters, but caution that the wrong filter might cause damage to your system if it has to work too hard to get the air through the filters. I would suspect that if UVGI systems are proven effective at killing or dramatically reducing the presence of COVID-19, there will be a frenzy by office building owners and their vendors to purchase these, resulting in shortages and long lead times until the manufacturing can ramp up again. And if you know where I can purchase regular 409 let me know as this is still impossible to find in my region!

While many in my commercial real estate arena are optimistic, (what other kind of individual would be in a business where you can work on a transaction for nine months only to have it implode and then you pick yourself up and start over), and those optimists think a vaccine will be here by the end of 2020, and that 2021 will be a gang- buster back-to-normal year. There are reports that 35% of Americans won’t even take a vaccine once it is available, and it could take 2-3 years for a truly viable vaccine to be distributed to the 320 million of us, not even addressing the other 7 billion in the world who will also need it. Those pessimists predict we will be wearing masks and not shaking hands for several more years.  No one really knows and how does one plan with such uncertainty?

The Colliers Capital Markets Group just released a summary of what is going on with major investment property types. With office properties, durable long-term cash flows and quality credit makes it easier to transact and pricing is at pre-COVID-19 levels. The same is true with long-term government-leased buildings, credit single-tenant and triple-net investments. Industrial is a favorite property type today, with the focus on credit. Multifamily debt Is available, but institutions might be on the sidelines. “Retail isn’t as bad as you might think. Price discovery is still underway, but neighborhood/community centers are only seeing a 5-7% price decrease. Half-broken malls are ripe for redevelopment.”

In a article in GlobeSt.com, a recent survey by Gensler found that only 12% of workers want to work full-time from home and 70% said they want to spend most of their week in the office. “Meetings, socializing and impromptu face-to-face interactions with colleagues were ranked as the top reasons people wanted to head back to the office.” The article cited a JLL survey that found ‘ 58% of office workers missed the office, with those 35 and younger showing a stronger desire to return.‘ Many of the largest tech companies appear to also believe this, and as one of many examples, recently Google received approvals for an 800,000 square foot office development in Mountain View.

In a recent morning paper, the headline read “249 experts agree: Virus lingers in the air indoors”. This got me to thinking how safe are office spaces in today’s pandemic environment? Asia has been repopulating many of its corporate office’s months before the U.S., and I couldn’t find any reports one way or the other. There are a number of published recommendations for improving the air quality in office buildings, including increasing the percentage of outdoor air into the system if possible, opening windows if available, increasing the airflow supply to occupied spaces, running the HVAC system after-hours to improve air dilution (that will wreak havoc with your operating expense budget), using ultraviolet germicidal irradiation as a supplement to help inactivate the virus, and numerous other ideas. The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) has a ton of recommendations on their website. Some of their ideas might dramatically increase utility costs, so be aware.  Government at different levels are also starting to get involved which rarely leads to lower costs or less paperwork, but just maybe it will get us safer buildings.

Nikkei Asian Review just reported that Fujitsu will cut their office space in Japan in half over the next three years. Teleworking will be made a standard practice, and Fujitsu has introduced a policy that will limit the number of employees in the office at any one time to just a quarter of its total. Fujitsu has encouraged it’s 85,000 non-factory employees in Japan to do their jobs from home. In China, “to reduce exposure and risk of transmission, many offices are still conducting meetings virtually, even when they are in the same workspace, rather than gathering in physical conference rooms. In addition, workers are typically bringing their lunch or ordering lunch to be delivered, and eating at their desks instead of dining out in restaurants.” (Source: Ideas by WeWork )

The Society of Office and Industrial Realtors (SIOR), of which I have been a proud member for over thirty years, interviews top brokers on a variety of issues and publishes these interviews. Neil Dailey, SIOR, office broker with McGraw Commercial Properties in Tulsa, Oklahoma, stated this about the new view of office buildings. “I also feel that companies looking for space will be underwriting buildings much differently. The selling points are going to be much different and will include information on things like cleaning, sanitation, HEPA air filters in the building/suites, touchless gadgets (doors, elevators, sinks, toilets, etc.) …Rooftop space, green areas, exercise equipment yoga, delivered/catered lunch options, etc.” Another important factor I would add is if the building is multi-story, what floor is the space on, is it low enough to use the stairs or if not, how many can safely ride in the elevator cab. Also some buildings have screening stations in the lobby, mounted scanning thermometers while others have one person stationed to take temperatures, and smaller buildings don’t address this at all. Neil felt, as I do, that office space is here to stay as humans crave collaboration and physical interaction.

The last SIOR Magazine was prepared in print well before COVID-19 came on the horizon, but was just recently distributed.  One big headline read “Regardless of where you fit into the commercial real estate system, or what asset class(es) you work with, one thing is for sure: 2020 will be a year to remember!” This quote by Geoffrey Kasselman, SIOR, Partner at Workplace Strategy and how true (unfortunately)!!  There was another chapter titled “What’s Keeping Brokers Up at Night?” and nothing mentioned from a few months ago comes close to what us brokers are actually losing sleep over today. Timing is everything!

Bisnow interviewed Rockspring President Michael Ross, “How do you think coronavirus could permanently affect the way real estate does business?” And he replied “I think the office markets will be the most permanently impacted, and the work-from-home model will become more prevalent. It won’t happen overnight, but as leases renew or companies are shopping for new office space, the size and structure of those spaces will change to accommodate a workforce that isn’t forced to be in the office from 9-5, five days a week.”

The Society of Industrial and Office Brokers (SIOR) just surveyed their membership. One SIOR commented he has seen rent discounts of between 10 and 13 percent due to the COVID-19 pandemic, and that during the last three down cycles rents ended up dropping by nearly 20 percent. A New York broker said the Manhattan office market may not begin to recover from the COVID-19 lockdown until 2022, and expects that office tenants will rotate employees between working from home and the office, so that only 30 percent of office space will be occupied at any one time. “This is likely to continue through the end of this year and the next, unless a vaccine becomes available.”  A lot of sublease space is expected to hit the market and urban offices may move to the suburbs where there are high concentrations of their employees.” Brokers from the large firms and networks in the Central, Great Lakes and Northwest regions expressed a low level of confidence in their local markets in the SIOR survey. A broker from Overland, Kansas commented that showing space to prospects is more difficult, and felt that the de-densification of office space to allow more distancing would offset any increase in remote working. He also expects employees to open offices in the suburbs, as entering a three-to-six story suburban office building makes more sense in a social distancing environment when high-rise office buildings only allow one to four occupants in an elevator at one time. A SIOR in San Diego remained optimistic, stating “The unmatched value of a dedicated space for commercial innovation and professional collaboration will endure, even if some long-term design changes occur.”

One blessing I have heard numerous parents tell me is the silver lining of having their college-age children back in the home, and with the shelter-in-place regulations, having the family be together day and night.  The kids don’t necessarily agree, of course!  There are many sad stories of top youth athletes not able to play sports, no school musicals or concerts, and no vacations, other than limited close-to-home excursions. During these long summer days and hot summer nights, Launa and I are savoring time in the pool, cooking together, hikes, bike rides, and long walks with our dogs. We also spent six fabulous days relaxing in beautiful Napa, enjoying delicious food, long walks, scenic hikes among waterfalls and lakes, and a bit of wine tasting.  We added a furry new addition to our family in June: a very sweet 4-year old Corgi mix, adopted from Jelly’s Place in San Pablo.  If you are interested in adopting a rescue dog or cat, we highly recommend them!  Thanks to COVID testing and masks, Launa and her kids were able to safely visit her 79 & 85 year-old parents up in Tahoe for the first time in five months.  What a gift to have all 3 generations healthy, happy, and together for several days.   My daughter Madison, who turns 18 on August 23, is a high school Senior, works at Five Guys Burger and Fries, and also helps a friend by sanitizing his apartment houses’ common areas.  My son, Jordan, just tested negative and for the first time in four months, I was able to give him a huge, real hug!  What a treat!  We also visited my almost 95-year-old father Arthur, but with a large plexiglass barrier.  So sad for those seniors who know they have a limited time on Earth, but must spend it in isolation.  Arthur’s 95th birthday is September 4th, and it would make his day if you are able to send him a birthday card! He escaped from Nazi Germany when he was 11 as his mom put him on a ship with no parents and 1,000 other kids, and sent him to a foster home in Chicago (Kindertransport). He was able to enlist in the U.S. Army and fought the Germans in WWI II, and then taught middle-school U.S. History and German for 20 years, sold residential real estate for 20 more years, and then wrote and published 22 books since then. He has given presentations on the Holocaust to tens of thousands of inner-city high school children, and you can Google Arthur Weil Poet and tons of pages will come up. His address is: Arthur Weil 100 Bay Place, Apt. 1911, Oakland, CA 94610 and I am sure he will be thrilled to receive a birthday card from you! Thank you so much in advance to those who are able to take the time to do this!

Be safe, more so now than ever before, remember all we are blessed with, and have faith that we will all get through this safely and hopefully be on the other side sooner than expected!