CORPORATE OFFICE PERSPECTIVES | DECEMBER 1, 2020
Issue 243
On the one hand, life has seldom been as bleak as it is now, with thousands dying daily from the virus, Christmas and holiday family gatherings in jeopardy, the prospect of children not going back to in-class learning, not to mention the tens of thousands of restaurants and other businesses forced to curtail hours or totally shut down. Food lines go on for blocks and the seems to be in constant turmoil. However, it could be a whole lot worse! Just think if this pandemic had hit us 20 or 30 years ago, when we had at best very slow dial-up internet, the digital cloud was yet to be invented, there were no smart phones, and it would have been near-impossible for us to work from home as successfully as we have been doing these past eight months. We have vaccines on the horizon, therapeutics have dramatically reduced the mortality rate, and most of corporate America is still cranking it out.
The big picture for the office industry is we expect huge amounts of sublease space to continue to hit the market, and major corporate downsizing of facilities as leases expire. The work from home will be a part of business as usual for the future, with varying hybrids depending on industry and management philosophy. A number of shopping malls will be going back to lenders to either be repurposed or re-tenanted at lower economics. Lenders for the foreseeable future will be able to offer incredible interest rate financing, but will be extremely conservative in their lending. Personal guarantees, holdback for 12-18 months’ rent value, and 50% leverage may become more commonplace.
..A Bisnow report from a few days ago cited 42 million square feet of new subleases hitting the market with 73 U.S. markets reporting negative absorption. Then the next day the Colliers ‘Disruption 2020: Office Sublease Continues To Rise, reporting that sublease space is 30 million higher than it was at the peak of the Great Recession. There was news was Dropbox and Glassdoor dropping big sublease space on the San Francisco market, with 472,000 sf of contiguous space. San Francisco now has 7.2 million square feet of sublease office space. Great time to be a bargain-hunter if you need space, and the news is not all bad…in many cases companies are very successful with working from home, so if they can save money by unloading unneeded space, why not…meanwhile, yesterday Facebook leased 226,000 sf in Fremont, California so all is not gloom and doom!
If you need office space, but not sure how much or for how long…one idea is, using your exclusive tenant rep broker, to go after office subleases that might be much larger than your initial requirement but can accommodate your growth longer-term, and then make aggressive offers (yes, I know this will irritate some listing agents) 50% or even 25% of asking…in today’s market there may be Sub-landlords willing to get something which is more than the nothing many of them will end up with. Your broker can also ask for a termination option if the space doesn’t work out, is still too large, or something else changes. A Sub-landlord may consider this to be preferred over having the space just sent vacant and no sublease rent coming in. This may not work in all markets, but where there is a deluge of office sublease space it may be worth the effort!
I’ve been researching just how safe elevators are during a pandemic, and while the risk factor might be low, you are still better off not having to ride in one. Is the cab small, limited to just one or two people, or is it a larger elevator cab that can hold 4 standing 6 feet apart? Are you just going up and down a few floors, or traveling 50 floors? Is it at all practical to take the stairs? If you step into an elevator that was just vacated by an infected person, the germs may still be present and if you don’t keep your mask on you might endanger yourself. If you are in with others and one of them coughs or sneezes this may put you at a higher risk. One article cautioned not to speak while in an elevator. Don’t use your fingers to touch the buttons. All riders should wear masks, and if someone isn’t, get off immediately. A single cough can expel several thousand to several hundred thousand viral particles. What happens when office occupancy goes back up to 50 or 100% and there are lines waiting for an elevator spot? What sanitizing schedule, if any, does your building management have? Is there a way to increase the elevator cab ventilation?
BISNOW Oct. 30, 2020 reports that real estate companies think they’ll need less office space. “More than any other industry, real estate has a vested interest in making sure office occupiers don’t cut their real estate footprint. Office is the largest of the real estate asset classes, and a reduction in demand would lead to falls in rents, valuations and fees for huge swathes of the industry. A new global survey of more than 550 real estate professionals across the globe, undertaken by the Urban Land Institute and EY, found that more than half (53%) of those polled expect the amount of space needed by their organization to decrease. The report found that 69% if those surveyed spent a day a week or less working remotely before the coronavirus. From here on , 59% expect to spend two days a week or more working remotely. ULI said that the office will still play a major part in corporate culture.
Sublease space increased 183% overall in major downtown markets, with a 651% increase posted in Boston, 588% in San Jose, 420% in San Francisco and 285% in Seattle…in a mid-2001 office update published by Colliers International and in my October 1, 2001 OfficeTimes newsletter (now Corporate Office Perspectives)…see, history can repeat itself, and we were able to survive what happened back then so we will survive what is happening today!
According to the East Bay Times, “At least 1 in 5 residents in high-priced cities say they have already moved or expect to – a possible harbinger of significant change in the Bay Area. This is the biggest, fastest transformation of how we work since World War II” said Adam Ozemik, chief economist at Upwork. The Upwork survey looked at 20,000 people nationwide, asking if they expected remote work to change where they planned to live. More than half of the people surveyed said they were looking for a lower cost of living. About half said they were moving more than two hours away, and 40 percent said they were moving more than four hours away.” San Francisco apartment rents have dropped 20% compared to a year ago, and while these rates may not return for several years, the Bay Area is expected to bounce back with a future wave of workers in their 20’s and 30’s once the region returns to more normality of restaurants, bars and San Francisco lifestyle excitement.
At a recent SIOR National Conference a few tidbits on the future of office usage in the United States. There appears to be long-term significant compression of how much office space a number of major corporations are planning for. An overall 25% reduction in office usage due to long-term partial remote workers not needing to come to the office on a regular basis. There is also a new hiring trend where employees are sought out as remote workers, which again can have a long-range impact on how companies utilize their office space. Not to overuse the word ‘compression’ but this might be applied to rental rates as this flood of sublease space competes with direct space, and as leases expire, become direct space.
At a recent SIOR National Conference I heard of Amazon 3-5 story 70’ clear warehouses, 3-story warehouses for high-valued land, last mile, using steel supports and costing three times the normal cost of a warehouse, and one of the largest warehouse developers in the world said we had a demand for 400 million square feet of additional warehouse space in the U.S. over just the next 2-3 years!
Stephen Newbold, National Director of Office Research for Colliers International reported that in Q3 of 2020 the United States experienced 33.5 million sf of negative absorption and office subleases in the US hit a record at 168.8 million sf. This is more distressing than we experienced during the Great Recession. The bad news was spread equally between urban and suburban markets. Stay tuned, because in my opinion, it will get way worse before it starts to get better…not a lot of positive spin to this…easy parking at office buildings, less lines at the elevator, more lease concessions coming, and working from home for many is a blessing!
A number of large office users have delayed the return to their offices until mid-2021, while others have told their employees they can work remotely permanently. Facebook and other major players have allowed their employees to relocate to lower-cost regions, some taking a pay cut but still saving substantially over their previous San Francisco or New York cost of living. Dropbox just announced to its 3,000 employees that they will be turning their office space into ‘Dropbox Studios’ to facilitate collaboration and team-building. This is different than the hybrid approach. Dropbox Studios is not for individual work and not for drop-in or desk hoteling, but for strategic team building, leadership development and company community events. Some companies have mandated their employees return to the office. In some regions of the U.S. only a fraction of workers have returned to the office, ie in New York as of August 8, 2020 only 8% had returned to the office while 26% were expected to return by the end of the year. In Dallas and Austin a third have returned. One thing is for sure. There will be no one-size fits all for the future of office design and usage!
The downtown San Jose Google 79-acre development currently in planning stages will have 5,900 residential ‘dwelling units’, 500,000 square feet of retail stores, restaurants and cultural buildings, and 7.3 million square feet of office space. In the old days this might translate to 35-45,000 employees, and after Covid is gone may again be at this level. Up the Peninsula in South San Francisco Genentech is moving forward on a 9 million square foot laboratory complex. Sure, we might lose a handful of companies to Boise or Nashville but these two projects cement a multi-billion dollar long term investment in Northern California employees and our way of life. Expensive to live here, sure, but to many of us, worth every cent!
Office subleases are hitting the markets bigtime, from New York to San Francisco, Boston, Houston and many other major markets. Millions of square feet of excess space, with millions more expected to follow. Companies are finding that they can not only survive with working from home, many are thriving, despite the absence of corporate culture, the training and mentoring that can be greatly enhanced only by physically being in the office. In a recent report by Savills, a tenant rep firm, 250 technology companies were surveyed and 82% anticipate needing less space over the next 12 to 18 months, and 55% plan to dispose of existing space over that time period. Examples of this include Zillow putting 150,000 sf on the market in New York as well as Yelp offering 58,000 sf for sublease. ”Before the pandemic 7% if the tech companies said they had more than half of their employees working remotely. Now, 22% of the companies said they expect to keep more than half of their workforce remote for the long term, even after a vaccine is available.” As an office leasing specialist in my 43rd year in this industry this is most depressing news! What may happen is this flood of sublease space, much of which may not be sublet, will eventually lead to leases not being renewed adding to greatly increased direct vacancy with a diminishing demand for office space by tenants. We could see a flood of office foreclosures, less demand for new office development, and perhaps, and I shudder to think, less demand for us office brokers…
According to SocketSite, which tracks the San Francisco rental market, year-over-year apartment rents were down 20S%. The Bay Area regional planning agency, The Metropolitan Transportation Commission, is considering a mandate that large Bay Area employers have 6-% of their work force permanently work from home. Reported in today’s East Bay Times, ‘Significant increases in available sublease office space are a nationwide phenomenon but Cushman & Wakefield indicated in its report that the Bay Area is being hammered to a greater extent than the nation’s other major office markets.’ While we are mentioning Cushman & Wakefield, on September 27, 2020 the headline in one major business report read “Office Real Estate Market Will Get Back to Pre-Covid Level, in 2025”. Ouch! “In all, a net 215 million square feet of office vacancy will have been lost due to the pandemic…the situation will be the worst in the West.”
Bloomberg News reported September 25, 2020 that Deutsche Bank AG is considering a hybrid model of allowing staff to split work between office and home, although a Morgan Chase spokesperson warned that staff productivity might slip if they work remotely too long, and a UBS Group spokesperson commented that working from home makes it harder to maintain a corporate culture. “Deutsche will also switch New York offices next year to cut office space there by almost a third.”
A report just released by Colliers International on the top 25 US Metro Office Markets, show Atlanta on top with 2,055,717 sf of YTD positive net absorption, while New York (Manhattan) had a negative net absorption of 3,375248 sf and San Francisco had a negative net absorption of 3,004,410 sf. Other notables was Seattle with a positive figure of 1,102,622 sf versus Denver and Boston, both with almost 800,000 sf of negative absorption.
A report just out by the California Economic Forecast predicts more doom and gloom than I would have liked to have read. “The economy however is not back to the pre-crisis status. During most of Calendar 2020 and in much of the first half of 2021, ongoing economic restrictions will have resulted in millions of permanent business closures and jobless workers. These closures cannot be reopened quickly by replacement businesses. There may also be some lingering fears that a mutated strain of the virus could be present, unaffected by the vaccine, and this would prevent some consumers from spending freely at stores, shops or other public venues…Consequently, because the economy needs time to fully recover, don’t expect a rapid return to normal once the pandemic is declared over. During 2022 and 2023 new businesses will open, workers become rehired, income is generating and spending will rise as a result of the wider income e growth.” Not in this report but a personal side-note, I am getting the feeling from reading what major corporations are doing with their office facilities that there seems to be a leaning towards recovery in 2022/2023 versus any time sooner.
My 23-year old son Jordan, after graduating last year from Cal Poly, is still running the manufacturing of high-end industrial drones for Inspired Flight, based in San Luis Obispo. It is a great blessing to see him every few months when he comes up to visit, getting his Covid test prior of course! During the summer he was able to do several camping trips with his girlfriend in Utah and Big Sur, which he said were spectacular. Madison, who as a high school senior stuck in virtual classes is doing the best she can. It is so tough on those teens that can’t experience what you and I did at that age! My 95 year old father Arthur is still exercising daily, keeping up on politics and world events, and enjoying action movies and musicals. I call him a few times a day which he really appreciates, send him cards with photos of friends and family, and what he really loves every few weeks is when I drop by a Nation’s hamburger, double everything, which takes him two days to eat! Launa’s folks are doing well, and her kids are wrapping up the Fall semester of their college and Grad School work. We are so happy to have them with us for Thanksgiving this year!
We will get through this. Regardless of your party affiliation. Please mask up for your friends and family sake, stay positive in spite of what is swirling around us, and be truly grateful for everything you are blessed with. Take care and call me even if just to say hi!
