CORPORATE OFFICE PERSPECTIVES | FEBRUARY 1, 2021
Issue: 244
A few weeks ago, thanks to RINA and Chicago Deferred, I gave an hour-long webinar forecasting where the commercial real estate market was headed. If you would like to see this, we recorded it and also have tons of links to the articles I resourced. Just go to:
https://www.rina.com/resource-library/videos/what-can-we-expect-for-commercial-real-estate-in-2021/
Big picture…most everyone you and I know are still working, the top 20% of Americans actually are doing better financially now than before the Pandemic, while the bottom 30% are struggling to feed their families and pay their rent and mortgages. Remote working will be with us in some format for years to come. Corporate America may give up 25% of all their office facilities because of this structural change to how we do business, and there is currently over 178 million square feet of office space on the national market with more on the way. For the most part, in most regions, landlords have not reduced their asking rental rates but are giving more concessions such as free rent, generous tenant improvement allowances and other tenant benefits. In some regions there is a ton of commercial activity, but areas like the San Francisco Bay Area is down, by some estimates, 85% in terms of tenant activity. Our region also has and will continue to experience an outflow of corporations to lower-cost states such as Texas and Tennessee, which is exacerbating the situation. I’ve checked in with fellow brokers around the country, and in some areas office buildings are full of workers, but San Francisco reports only a 12% occupancy. Bottom line, it is a phenomenal time to be a tenant, so call me now as I have associates almost anywhere in the U.S. and we will get you an amazing lease renewal, downsize or relocation. Industrial is strong, as are apartment investments, while it is no secret retail for the most part will be struggling for years to come. The pandemic only accelerated the trend towards on-line retailing, and the lockdowns in many areas have permanently destroyed restaurants and brick and mortar retailers.
A National Office Report Shows 6,245,097,791 square feet of U.S. Office Space, 787,608,807 square feet vacant but the real story is a number of reports predicting that Corporate America will be downsizing by 25% of its total office space. This means we may have 1,561,273,198 square feet of vacant office space as company’s trend towards partial or total long-term work-from-home strategies, which means we have another 773 million square feet of vacant office space still to hit the U.S. markets. Sobering and scary…
Is Oracle Selling Part of Their Peninsula Office Building Portfolio Mean Worse is Going to Happen? It is bad enough that San Francisco Bay Area corporations are putting leased space on the sublease market, packing up and moving part of their operations to Texas or elsewhere, but when major companies begin putting their office campuses on the ‘for sale’ market this is a much more serious sign of what might be coming. This week Oracle placed two office buildings in Belmont plus an office campus in Redwood City on the market for sale. Will other major corporations begin following suit? How long will this exodus of both large and small companies out of California to lower-cost areas take before municipalities begin reversing onerous taxation on business, and become competitive in offering relocation incentives (heck with relocation, just ‘stay here’ incentives) to keep up with what is being offered in Tennessee, Texas and North Carolina?
In case you weren’t aware I have been writing and publishing a newsletter, Corporate Office Perspectives, for the past 43 years and it goes out to tens of thousands of subscribers every other month. If you would like a free subscription just go to www.officetimes.com to sign up. In my February 2020 was the following ‘It is now open season on California companies as Texas, Nevada, Arizona and other much less expensive states take aim at our increasingly vulnerable businesses, whether it is the San Francisco’s high cost of housing, our over-the-top state income and property taxes, our extremely low unemployment, our crazy-high starting salaries, not to mention the worsening traffic congestion and impact of homeless problems. We’ve seen Charles Schwab, McKesson and other headquarters pack up and leave California for greener pastures. In Texas, the governor and economic development directors are dangling relocation incentives to accelerate these moves. As if the thought of $300,0000. Nice homes for your employees isn’t enough incentive!’…and then I said “What is my opinion on all this? If you want the cost of housing in the Bay Area to go down, traffic congestion to ease, and office rents to plummet, just relocate 500,000 tech jobs out of here to elsewhere.” And unfortunately, this is now coming true…
In a survey of 150 C-suite executives conducted by the firm West Monroe, 29% are considering relocating their operations out of state or out of the country due to the high cost of living and high tax burdens. The top relocation is Texas, and the largest region of where these companies will be relocated from is, no surprise, California. Half the executives said they plan to split their employees between remote and onsite, but only 1% said they would go fully remote. California government officials of all levels had better wake up and change their mentality or the golden gooses they have for so long taken for granted will have flown off to greener, and less expensive, pastures!
Fast Food Redesign Due to Pandemic…A number of the major fast food restaurants are coming out with new store designs, emphasizing drive-through and take out, and in some cases eliminating the dining option entirely. Burger King has two new concepts, one with three drive-through lanes, one dedicated to delivery drivers, and a parking lot where customers can order through their app and have the food delivered to their car. Chipotle is getting rid of dining rooms in some of their new locations, allowing them to take less space in more expensive locales. Customers order ahead through an app and their order is waiting on a shelf, getting rid of the assembly line where you picked your ingredients. Some KFC’s of the future may not have a dining room. McDonalds will offer automated order taking, express pickup for digital orders and in some cases an elimination of the dining room. Taco Bell may roll out bellhops that take the customer orders on tablets, and contactless curbside pick-up. Although in a pandemic I can see why it may be safer to eat in one’s car, long term it still feels good to get out, sit inside a fast food, and stretch your legs while grabbing a quick bite. I hope they don’t get rid of too many dining rooms!
Leaders of Commercial Real Estate Organizations Predict Office Space and Hotels Will Regain Strength. Bisnow on January 24, 2021 reported that CEO Bruce Flatt of Brookfield Asset Management, with 500 million square feet of space under management, and Willy Walker, CEO of Walker & Dunlop which manages a $93 billion dollar portfolio, are upbeat about the future . “…workers will re-embrace offices as soon as it is safe to do so, and shoppers will return in force to malls as well.” These two guys are way smarter and more successful than I am, so who knows, but in the same article Bill Gates stated “My prediction would be that over 50% of business travel and over 30% of days in the office will go away.” You decide…
Office Workers Began To Return To Their Offices, Now Headed Back Home…The Wall Street Journal a few days ago reported that the return for office workers back to office buildings has been significantly impacted due to the surge in COVID 19. “About a quarter of employees had returned to work as of Nov. 18, according to Kastle Systems, a security firm that monitors access-card swipes in more than 2,500 office buildings in 10 of the largest U.S. Cities. That rate is sharply up from an April low of less than 15%, which largely consisted of building maintenance and essential workers.” Now corporate executives are reluctant to push their employees to come back to work, and allowing them to continue zooming remotely. Shutdown figures vary widely between different cities with different virus ‘atmospheres’, i.e. Dallas-Fort Worth Texas had 40.3% of their workers back, while downtown San Francisco is a ghost town.
In The San Francisco Business Times Nov. 20, 2020 “Bank of the West Chief Economist Scott Anderson said he anticipates national commercial real estate values will fall 22% from peak to trough. ‘Office and retail are going to be in for tough sledding over the next year and a half to two years,’ Anderson said. ‘A lot of big companies aren’t going to need the big offices they needed before.’ Perhaps a more troubling sign for the national office market is the news this month that State Farm Insurance is closing a dozen operation centers around the country that employ thousands of people who will now work from home permanently.” On the other hand, I have heard from senior brokers around the country that there is an immense amount of capital looking for quality commercial real estate investments. How do you price a high-rise that has substantial amounts of available sublease space knowing this will come back to the landlord at lease expiration?
Corenet Global Covid-19 Implications: Working Remotely Or Back to the Office? Cynthia Milota of Ware Malcomb and Sally Augustin, Design With Science, wrote an article for Corenet Global discussing working from home vs returning to the office. “Organizations are re-imagining their mobility profiles. Will they be remote first with come in-office presence, or will the model largely be in-office first while allowing for remote work? Pre-COVID, employees often had to prove whey they should be permitted to work from home. Post-COVID, employers will have to prove why their employees should return to the office. The pandemic workforce conducting business from home is working longer hours, taking less vacation and reporting increasingly negative feelings. The honeymoon of working from home is over, reality has set in and office workplace burnout has followed the workforce home.”
Colliers just completed a study Implications of COVID-19 on the Workplace with data from more than 5,000 global respondents. 76% reported same or improved levels of productivity. 74% felt connected to their team even though not physically with them 67% experienced improvement in work-life balance, and 83% wanted to work from home at least one day a week permanently. ’Globally, the strongest desire to work from home after COVID-19 is the pharmaceutical, technology and education and research sectors. The lowest desire is in the retail, legal, and transport and logistics sectors. But even in these sectors, 70% of the respondents would like to work one day or a week or more from home.’
My kids are doing okay, in spite of this darn Pandemic. Jordan just told me a few days ago he grew another inch and is now 6’ 2”. I think I lost an inch so now I know who found it! He is still running the manufacturing at Inspired Flight, making high-end drones for industry. He did get a week off to go skiing in Montana and gets tested frequently. Madison, my 18-year-old high school Senior, really misses all the special moments of being a Senior…no Senior Ball, football and the other sports, no high school concerts…just virtual everything…so sad for so many! My 95-year-old father Arthur received his first vaccine shot a few weeks ago and by the time you read this he should have gotten his second shot. He can’t wait for me to get mine, and for his senior home rules to change so we can get together, masked and distanced of course…who knows! After writing 22 poetry books he is now working on his autobiography. I have seen portions and he has had a very interesting life! Launa and I are still planning on getting married this June, with all the contracts signed and our fingers crossed. We’ve been together seven years and we are looking forward to another 40 or so!
It has hit home recently to hear of close friends losing immediate family to COVID-19 and I recently lost an awesome broker associate, my age, my expertise, and I feel especially humbled and vulnerable during these most trying times. Please be safe out there, look after others by wearing your mask and following protocols, and I know, together, that we will get out of this to the other side!
