CORPORATE OFFICE PERSPECTIVES | APRIL 1, 2021

Issue: 245

I was once heliskiing in Canada and during the helicopter ride up the mountain we encountered serious turbulence, and the helicopter turned on its side in white out, not knowing up from down (I have it on video). Yes, it was very scary, but I was reminded of this while thinking about our current national office market, and the direction it is headed. On the one hand, corporate America appears poised to make long-term systemic changes to both the way it will utilize office space, as well as in many cases the amount of space needed for the long-term. Many companies will return to the office with a hybrid model, allowing employees to work from home two to three days a week and come into the office a few days a week. Others are okay with total remote workforces; some mandating employees be close enough to an office to come in once or twice a month for collaborative events. There are some companies who never left their offices, and others who are mandating total employee return to the office. Bottom line, there will be significantly less need for office space in some regions long-term. 

In many regions of the U.S. office sublease availability has flooded the market and landlords are offering increasingly higher amounts of tenant concessions to entice tenants to lease space. For the most part, office buildings are owned by institutional investors who have not panicked, are holding their asking rates firm, and expect to recover in the not-too-distant future. They also have most of their tenants paying rent even though in many cases the offices are still unoccupied due to COVID 19. I have also seen reports out by doom and gloom tenant rep firms predicting the sky will fall as the sublease terms expire and turn back into direct vacancies. On the other hand, and a much brighter hand it is, I am seeing regions where very smart long-term office developers are proceeding on multi-million square foot new office projects.  During the past month I have heard repeatedly from office brokers in the trenches that tour activity and market velocity, while still not at pre-COVID levels, has picked up considerably. 

Decision makers now see the light at the end of this COVID-19 tunnel with the vaccine roll-out and predictions of a return towards normality this Summer and Fall.  What is my conclusion? I am a tenant rep specialist and recommend tenants get out there and take advantage of the current market to extend their lease, purchase an office building, and take care of business. Get off the fence. I also recommend landlords do whatever they can to keep tenants, as well as secure new tenancies, as we will still be in for a few very rough years. Landlords keeping space vacant to make a better deal two years from now just does not make sense. Please share your thoughts with me on this at jeff.weil@colliers.com

According to George Avalos, business reporter for the East Bay Times the UCLA Anderson Forecast predicts that “California’s job market should outpace the nation’s employment performance during 2021 – but remain two years away from climbing back to the record job totals the state reached in early 2020”.  Also, the report also casts doubt that there would be a widespread exodus from the Bay Area, which is great news to hear!  “The forecasters believe that most departures might be temporary and due primarily to short-term dislocations associated with the COVID-19 outbreak.” They are unconvinced that any exodus has resulted from a structural long-term response to the sky-high taxes and exorbitant cost of living in the Bay Area and California generally.

San Francisco Office Market Update:  A few weeks ago I was on a very enlightening Zoom call with my San Francisco Colliers associates. The office market is seeing landlords hold firm on their asking rents, and there are still Class A office leases happening in the $100/rsf annual price range, per square foot. The top ten buildings have less than 10% vacancy so there is little pressure to discount rents, and landlords feel the market will come back sooner rather than later.  The sublease market accounts for roughly 9% of the space, direct accounts for 7-8% for a total vacancy rate of 16%.  In the past, the group was doing 5-6 tours a day and now there are doing 1-2 tours a day. There have been 303 sublease spaces come on the market, 230 of which are in the 5-25,000 square foot range. Any office leasing or subleasing needed, just let me know!

Your Company Allows You To Work From Home, You Relocate To a Lower-Cost Region, Buy a Home, Move your Family, Then Your Company Changes Its Mind…There have been a number of major tech and finance companies over the past nine months who have announced long-term stay-at-home policies, prompting thousands of employees to uproot their families, relocate to a much less expensive region, purchase a new home, and begin to enjoy life with less financial stress. Many companies have had detailed policies, some maybe are not so detailed. In today’s San Francisco Business Times, “In a sign that companies are starting to clamp down on where remote workers can be based, Lyft is requiring its remote workers to be in one of 36 states where the company is already registered to do business. Employees working in one of the unfavored 14 states must move by month’s end.” Many companies, such as Facebook, have policies requiring employees to get prior approval. And what prevents companies from changing policies in the future?

Office Perks May Be Overrated. According to a recent article from Walker & Dunlop published in Bisnow, “From beer kegs to nap rooms to cold-plunge pools, the 2010s saw a parade of trendy office “perks”. For the companies that called the offices home, these add-ons were meant to bolster a bespoke brand of company culture, whether relaxed, luxurious, or hyper-productive. There were meant to be physical proof of the companies’ dedication to keeping employees satisfied. But employees, it turns out, didn’t really care about them.” “There is no correlation between perks and being a great place to work,” Great Place To Work CEO Michael Bush said. “Not free yoga classes or massage chairs or Ping-Pong tables.” Companies that prior to the pandemic had a high trust level with employees saw higher trust levels during the pandemic with work-from-home policies, and companies with low trust levels saw even lower levels during the pandemic. During the work-from-home months is there still enough pressure in the kegerator to pour a bubbly cold one when some workers eventually return back to the office?

National Retail Market Update: Colliers just sent out a brief report on the current state of the national retail market. The good news is Q4 showed signs of recovery, with positive absorption and retail rent collections up to 86%, a huge uptick since the heart of the pandemic. The bad news, 27.6 million square feet of negative absorption in 2020, 16,000 store closures and 110,000 restaurants have permanently closed. While European and Asian countries have a retail ratio of five square feet per capita, the United States retail per capita ranges from 23 to 35 square feet per capita.

Tech Shrinks Footprint, BioScience And Health Services Expands. Here in the San Francisco Bay Area a number of tech companies have recently announced that large portions or in some cases, all of their office facilities are on the sublease market. Work-from-home is here to stay for many reasons, and this does not bode well for the overall health of the office market. However, the bio, life science and health industries have in large part not gone this virtual route. As one example, 20x Genomics, who leased two 150,000 sf office buildings in Pleasanton, just purchased a struggling retail shopping center nearby which they plan to demolish and build three new office buildings and a parking garage…One way to take care of obsolete retail centers!

“The tenant window of opportunity has begun to close in a number of Bay Area office submarkets. I’ve seen effective rental rates go up as much as 10-20% just during the past ninety days! Most of the Bay Area is experiencing net positive absorption, but do not get too excited. It seems for every three companies expanding, two others are laying off employees and/or relocating out of California.” This is a quote from my April 1, 1994 newsletter 27 years ago!

The Society of Industrial and Office Realtors sent out a great short video that you can access at www.SIOR.com/snapshot. Here are the highlights: Industrial real estate confidence is high at 6.9 (out of 10), while office confidence is low at 4.7. “The pandemic continues to negatively affect almost all market sectors…and is expected to continue to do so for 6-12 months in 2021.” 88% of office specialists expect lower leasing activity compared to just 34% of industrial specialists…58% of industrial specialists reported little concessions versus only 2% of office respondents.

Major Corporations Continue Downsizing: While this may not be the norm everywhere in the United States, here in San Francisco one day’s news release was not just another blow to the office market, but much more significant in many ways. First, there was a SF Business Times article that Uber may be quietly shopping 300,000 square feet of its new Mission Bay headquarters space for sublease. Ouch!  Then right after there was an article that Salesforce, the largest employer in San Francisco with almost 2 million square feet of office space, will allow a large portion of its employees to work remotely a few days a week and thus won’t need all its office space. This is not just bad news for the office market, but also terrible news for the retail restaurants, shops and other businesses counting on these workers to patronize their business. This also impacts San Francisco apartment house owners, and the City of San Francisco as well who is still grappling with huge budget shortfalls.

Deals and Rumors:  Much of the positive absorption has taken place on the Peninsula, where in San Carlos Vaxcyte leased about 70,000 sf, Allakos, Inc. 98,000 sf, ChemoCentryx 96,000 sf, Covance Biotheapeutics 50,000 sf and Codexs, Inc. 36,000 sf, all at 825 Industrial.  Impossible Foods may be investigating relocating to 230,000 sf at 150 Industrial from its current Redwood City location. AscendClinical leased 93,000 sf at 435 Oakmead Parkway in Sunnyvale, relocating from Redwood City. In Alameda, East Just, Inc. is rumored to be looking at 120,000 sf R&D space in Research Park at Marina Village. HTC American Holdings purchased the 27,000 sf building at 1625 Shattuck Ave. to occupy. In San Ramon, Rheosense expanded to 12,000 sf at BR 15.

Silicon Valley One of The Nation’s Hottest Office Markets:  According to a recent report by CBRE, Silicon Valley will be one of the hottest markets, nationwide, for future office development. “The San Jose metro area, defined as Santa Clara County, is touted as the No. 1 market for future development of office space and is also seen as an excellent market for retail and apartment development, “George Avalos wrote in the East Bay Times February 6, 2021.  So that counters all the doom and gloom predictions of corporate America downsizing their office footprint due to working-from-home-trends, as well as all the reports forecasting California sinking into the horizon as its corporations pack up and head off to Texas or Tennessee…

Government Budgets Across The Country Are Stressed:  I’ve been reading report after report documenting and predicting the dire budget strife due to the impact of the Pandemic on business closures, severely decreasing tax revenues, and costs relating to vaccination/testing/school readiness during the Pandemic and other costly issues which have stressed government entities across the U.S. San Francisco has a 400 million shortfall, Detroit a $100 million shortfall, Nashville a $192 million, and on and on. Then today I read that in San Francisco building owners might get a tax break if they can prove the pandemic hurt their property value…there seems to be a disconnect…and at least Nashville and other cities that are reaping the benefits of hundreds if not thousands of companies and individuals relocating from Seattle and San Francisco heading their way, in part because taxes are too high…

Is Your Building Insurance Policy In Jeopardy Due To Non-Occupied Space?  In Bill Gladstone’s excellent Real Estate Review (he is a top commercial SIOR broker in Harrisburg, Pennsylvania), author Jesse Harlan discusses potential exposure of commercial property owners if their building is vacant, and even if it is partially or fully leased but due to the pandemic not fully occupied.  There still might be exposure to the owner, depending on how the policy is written.  In general, it appears buildings are a better risk if they are occupied with actual living bodies working within the building, regardless of how much of the building is leased out. Your insurance broker might be able to assist you in modifying the insurance occupancy requirements…so this is a good heads up to double check this! Thanks Bill and Jesse!

Major Atlanta Shopping Mall Gets No Foreclosure Bids, Goes Back To Lender…AtlantaRetail just reported in Bisnow that the 560,000 square foot Town Center at Cobb mall was foreclosed by Deutsche Bank Feb. 2, 2021, receiving no bids at the foreclosure auction. The mall was valued at $322 million in 2012 but dropped to only $120 million at time of foreclosure. The Cobb Country Commissioner, JoAnn Birrell told the Journal, “There would be developers or companies that may look at purchasing it, but with things the way they are – the pandemic, so many businesses closing because of COVID – it’s not a good time.”  I expect unfortunately we will see many more of these sad events before our economy gets straightened out. Today I saw several reports that predicted the job market may not sufficiently recover until 2023 or 2024…and that millions of jobs have permanently disappeared…just look at how many Amazon deliver vans are in your neighborhood each day!

In Some Regions Distressed Hotels Being Bought Pennies on the Dollar for Conversion.  Diana Olick wrote an article Feb. 4, 2021 citing the affordable housing stock is now 96-99% occupied, while in some communities many hotels are sitting empty due to the pandemic, with 18% behind on their mortgages as of December 2020 as compared with only 2% the prior year. Developers are taking advantage of this, purchasing distressed hotels at bargain prices, then renovating them into affordable housing. I do not think that will be so easy to do if the office industry becomes impacted, and can you imagine cruise ship conversions to low-income housing? (just joking…or maybe not…)

Office Space May Be Down But Not Out.  Even though in many regions in the United States there is a flood of office sublease space and there are reports that Corporate America may be giving up 25% of all their office space, long-term, due to partial or total remote working, there are still tens of millions of feet of new office projects in the works throughout the United States. As one example, in downtown San Jose there are a group of real estate developers planning to build 5 million square feet of office space to house 40,000 workers, on top of the Google project which has plans for 8 million square feet of new office development. There are similar office projects planned in many other regions of the U.S.  What if companies give back 25% of the six billion square feet of office space they currently occupy? (yes, 1.5 billion square feet of potentially vacant office space…) Will this collide with the new office space now being planned?

Yelp Just Listed It’s San Francisco Headquarters For Sublease.  Yelp just placed 14 stories at 140 new Montgomery St., San Francisco, totaling 161,876 square feet, and plans to retain a HQ in San Francisco. “With more employees working remotely we’re reducing some of our footprint in San Francisco, but we will still maintain our HQ office there,” the Yelp spokesperson said, adding that the company plans to continue to operate with a significant portion of our team working remotely on a full-time basis, or for part of the week.,”

According to the East Bay Times reporter George Avalos, California lost 1.41 million jobs last year and the Bay Area lost 360,300 jobs. Ouch! Michael Bernick, employment attorney with Duane Morris and former EDD Director, said “We are looking at a much more gradual recovery than first hoped, and a lot of jobs that were lost are going to be lost permanently, especially in leisure and hospitality.” Steven Levy, director of the Center for Continuing Study of the California Economy, said “It will be a long time before everyone gets their jobs back.” ‘Many people might never get their jobs back or work in the same industries they exited.’  But at least we now have outdoor dining back and I can get my hair cut!

The United States Office Market Continues To Struggle: David Amsterdam, President of Colliers Capital Markets, just sent out a bulletin with the following bullet points: Q4 negative absorption of 40.9 million sf is second-highest on record…ten metros posted negative absorption of at least one million (New York, Los Angeles, San Francisco, Chicago)…Sublease space now a record 188 million sf. I have been doing informal office leasing broker surveys, and most of them feel it will take until mid-2022 before the office market begins to right itself. Most also do not agree with the reports out that Corporate America will eventually shed 25% of its six billion square feet of U.S. office space.

A recent Colliers National 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 companies 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…

At a recent webinar where I forecast what was going to happen in the various commercial real estate segments over the next few years, we had several surveys. One was asking our audience, which included CPA’s, bankers, realtors and lawyers, when they thought the office market was going to return, and the overwhelming consensus was mid-2022. I have done less formal surveys of office brokers who for the most part think June 2021 is a more likely scenario, but as a tenant rep expert I tend to agree with mid-2022. Another survey question was a yes or no to the question, ‘Do you believe the estimate that long-term corporate office space needs will be reduced by 25%? And 86% answered, ‘Yes!’  This is scary because this means 500 million square feet of existing office space will come on the market as companies downsize. If you would like to watch my 45 minute presentation please click https://www.rina.com/resource-library/videos/what-can-we-expect-for-commercial-real-estate-in-2021/

My daughter Madison, who is missing sports and Senior year social activities, is not having a great Senior year in High School with remote learning.  She is looking forward to starting Diablo Valley College this August, however, and we hope that some or most of her classes will be held in person. Jordan, my 24-year-old Cal Poly graduate, has been experiencing an extremely balanced lifestyle, which I am so proud of! He works 60-hour weeks, then heads off to Montana, Mammoth or Lake Tahoe to ski.  As I write this, he is headed back from powder days at Squaw then to San Luis Obispo to play golf before another 60-hour work-week in charge of manufacturing industrial drones. I looked back on my April 1, 2001 newsletter, 20 years ago when son Jordan was only 4 years old. ”Jordan and I have been having a blast this past winter…we went skiing at Boreal and he learned to get on and off chairlifts (not easy when you’re only 42 inches tall!).”  Now Jordan is 6’2”, 195 lbs. and a double-black diamond skier that I cannot keep up with. I’m sure many of you can relate!  My fiancée’s daughter, Lindsey, lives in San Diego and has a full-time job as a Program Assistant at the International Center for Religion and Diplomacy, working on grant proposals, evaluating educational and social issues in half a dozen different countries, and doing research.  She loves it and is excited to move to Washington D.C. this Summer to begin her Graduate School Dual Degree Program at Georgetown University, studying International Relations/Peace and Global Conflict Studies.  My future stepson, Ryan, will be doing an intensive Film Studies Program with UCLA during the Summer Quarter, which he is very much looking forward to.  The Film Department is extremely impacted, so getting accepted into this program was a major coup!  Both kids are hoping for in-person classes next year.  Launa and I have been busily getting all the plans and details finalized for our beautiful lakeside, winery wedding & wine cave celebration this Summer, and have our fingers crossed that COVID will not be able to interfere with the festivities this time around!   Arthur at 95 is doing well and cannot wait for the day I can come and once again visit him in person. He has a personal trainer and does daily laps on the roof of the 23-story senior residence.  For seniors everywhere at least some normality can’t come soon enough! 

By time you are reading this I will have had my second Moderna vaccine shot, and when your turn comes, please take it! Until then, stay safe, cherish your family, help those less fortunate, and don’t hesitate to call me!