CORPORATE OFFICE PERSPECTIVES | JUNE 1, 2021
Issue: 246
This issue # 246 marks the 41st year of publication. I must have started writing this in elementary school! Also please check out my regular blog posting at https://officetimes.com/real-estate-blog/
Will some corporations mandate a full return of employees back to the office, some starting later this summer? Yes! Will some companies allow 100% remote working on a permanent basis? Yes! Will some corporations request employees to come to the office two to three days a week and remote work the rest of the week? Yes! Will all three of these approaches be an experiment to balance productivity, employee job satisfaction, worker safety, and cost-benefit analysis of how much office space, where, suburban versus urban, design, density, collaboration space versus dedicated worker space and a host of other elements to determine the major formula which will vary by industry and company couture? Of course!
Office Prospect Tours Up 28% With Hopes Actual Office Leasing Around The Corner! Google, Facebook, Salesforce and Uber Begin Their Return To The Office!
Bisnow May 2, 2021 reported that around the country office space tours were up 28% from February to March, and although this increase in interest has not yet turned into actual leasing, industry experts believe companies are getting ready to return to the office. Google just announced that most workers will have to come in at least a few days a week, starting this September. Workers who want to be fully remote may get salary cuts. Facebook will start opening Bay Area offices, Salesforce announced it would start bringing workers back to its San Francisco headquarters high-rise, and Uber extended its remote-work option until September 13, with its new San Francisco headquarters open at 20% occupancy.
Most Employers Thinking Of Leaving The Bay Area Plan To Leave California.
The Bay Area Council surveyed 1,000 voters and 47% said they might leave the Bay Area over the next few years. Of that group, 88% said they would leave California, the respondents citing high taxes, the high cost of living and housing costs doubled over the past few years. Texas, Arizona and New Mexico were favored relocation regions. We recently spent several days staying in Calistoga and St. Helena. Napa County has around 485 wineries and Sonoma County has 425 wineries. Several of my buddies were skiing Squaw Valley last month. I am not sure how many great wineries or ski resorts Texas has…
What Factors Motivate Employees To Return To The Office?
According to The San Francisco Business Times April 30, 2021, Austin, Texas averaged a 30.8% office occupancy rate while San Francisco had a 12.2% office occupancy rate during the pandemic. There may be several reasons for this, including Texas’s much looser restrictions during the pandemic and in Austin many employees drive to work. In San Francisco, the mass transit is only running a fraction of normal ridership and this has slowed the migration back into the office. San Francisco also has many more high-rises than Austin, and with California’s more restrictive pandemic rules waiting in line, socially distanced, for an elevator cab that can perhaps only accommodate 2-4 riders at a time makes physically getting to your 40th floor office a challenge.
The Official Date For The United States Office Market Recovery Is September 6, 2021!!
One of the country’s largest owners of office buildings is Boston Properties, and today they announced that this Labor Day, September 6, 2021 will mark the official day when the office market will turn around. Boston Properties has 195 properties, with more than 51 million square feet, and it is ready to take advantage of pent-up demand for larger, newer and nicer office spaces. What is my opinion? I think the work-from-home model in part will be a permanent component of our corporate workspace. There will be a phasing-in of employees which will drift into 2022, and we are still a long way from herd immunity, with approximately only 42% of our population fully vaccinated. However, I always love to hear great news and optimistic projections!
Surprise, California Is Still “The Place To Be!”
Even though some of you think California is losing all our major corporations and tons of our residents, and yes, we are letting a few out of this paradise of high taxes, high utilities, and sometimes challenging politics, the San Francisco Business Times reported the following on Time Magazine’s 100 Most Influential Company List, just published. A full 30% of them are based in California, with 20% based in the San Francisco/Silicon Valley Bay Area: Apple, Facebook, Twitter, Netflix, Stripe, Zoom, Navidia, TikTok, Google, PayPal and the list goes on and on. Click here for the complete list https://time.com/collection/time100-companies/. So go ahead, Nashville and Austin, you can take some of our companies, but we still dominate! Lake Tahoe is three hours away, and it is 74 degrees in Walnut Creek with the ocean just an hour away…
Savills Report Shows Fewer Companies Make Keep More Space Than Previously Reported.
Bisnow April 20, 2021 Survey by Savills reports “Seventy-three percent of the respondent companies said that their employees will be in centralized offices at least three days a week, while very few (4%) expect all their workers to be required to show up in person five days a week. A vast majority of companies (79%) are allowing some employees to relocate permanently away from their previously assigned office, while 67% said that hoteling will be more important than it was before 2020. Still, common space isn’t dead: 45% told Savills that collaboration spaces will be more important than they were pre-pandemic. The results of the survey represented some shifts in attitude on that question compared to earlier Savills surveys, taken last year when the end of the coronavirus pandemic wasn’t in sight. In October, the number of companies expecting to need less office space over the next 12 to 18 months was 82%; in March, only 47% of the respondents indicated the same feeling.”
WeWork Is Back, Works New Angle.
Bisnow April 20, 2021: Over the last three months, Miami, New York and D.C. have announced partnerships with WeWork to offer discounts to companies bringing people back to the office. The coworking company finances the discounts without city subsidies, but the cities are using their promotion and marketing power to push people toward the WeWork spaces. WeWork is planning to expand the partnership model around the country and the globe. The New York partnership offers two months of free office space for companies that make a six-month commitment, and three months for those that make a 12-month commitment. It also offers a one-month free trial and All Access, a pass that allows members to use any WeWork location in the city.
Bay Area Workers Driving Back to The Office.
The highways in the Bay Area seemed to be back to grid-lock during commute periods, and part of this can be attributed to workers avoiding public transportation and driving to work. As of April 21, 2021 Bart ridership was down 86% from its baseline. Out in the suburbs the majority of office building parking lots are fairly empty. JPMorgan Chase plans to reduce employee seating by about 40%, with more open seating arrangements and digital tools to manage conference room and amenity usage. The company is planning for 10% of employees to permanently work from home, with most working totally in the office, and the remainder working a hybrid.
The San Francisco Office Market Continues To implode.
There are currently 9.5 million square feet of office sublease space available in San Francisco today, with an overall vacancy rate above 19%. Landlord reps are still optimistic that the market will come back as more people get vaccinated, while the tenant-biased reps remind us that this is the time to snatch up bargain sublease space, often including all the furniture. A number of major tech firms have announced inviting volunteer office workers back into their buildings this summer and into fall, while others are still evaluating just how much office space is still truly needed if many of their employees have moved to less expensive locales and are being very productive working from home.
National Update On The Industrial Real Estate Frenzy.
Last month I was on a national Zoom call with 60 fellow SIOR members. While the office market in most areas has been hit by heavy amounts of office sublease space put on the market and corporate indecision on where and how much office space will be taken down long-term, the industrial market has been off to the races. In region after region, brokers report industrial manufacturing and warehouse vacancies under 2%, the price of new construction up 25-50% or more as compared to just a few years ago, and well-tenanted industrial leased investments with under 4% cap rates. The national trend to bring manufacturing back to U.S. shores, the last mile for warehousing and e-commerce, has caused this sector of commercial real estate to skyrocket. Meanwhile, high rise office landlords are trying to figure out how to get masses of office workers through the lobby, into small elevator cabs, and up 40-60 stories safely to get them back into the office.
What Do Surveys Say About How Employees Feel Regarding Returning To The Office?
In a recent East Bay Times a recent poll of 1,000 registered voters for the Bay Area Council, concluded that 20% of those surveyed felt working in the office was ‘very unsafe’ and 33% felt it was ‘somewhat unsafe’. This means more than half polled did not feel safe at this point in time going back to the office. That to me was alarming as it is mid-April, in the United States over 192 million doses have been given, 51 million are fully vaccinated and I would have thought there would be more optimism. I checked national polls, and back on December 21, 2020, way before millions had gotten their shots, the overall sentiment was quite a bit different. “According to a recent survey of employed Americans commissioned by OfficeSpace Software, 71% of respondents currently working from home are eager to move back to the office once it is safe to do so. Over 70% indicated that they feel more engaged and more productive in office, and 80% indicated that they miss in-person collaboration with their coworkers. The novelty of virtual meeting programs like Zoom…has also worn thin, with 57% indicated that they are tired of meeting through video”.
Vaccination Passports Required To Come Back To The Office?
The San Francisco Business Times April 12, 2021 reported that Salesforce will be requiring proof of vaccination for its first employees coming back to its San Francisco headquarters, along with reopening their Palo Alto office. I Googled to try to identify other American companies with a similar requirement (none came up), and I am certain over time more will emerge. I am guessing there may be exceptions for religious or medical reasons, and it would not surprise me if some states enact restrictions on corporations within their boundaries from requiring vaccinations.
Potential Major Danger to Office Buildings-Ransom Hacking.
I was recently on a RE Journal webinar about the future of office space and Jon Murchison, Founder and CEO of Blackpoint Cyber had a serious concern for office building owners. If hackers can take out hospitals and water districts, at some point as office buildings become more system-integrated with elevators, HVAC, security, accounting and everything else being done on the Web, this may be low-hanging fruit to the armies of hackers out there looking to make a fast buck. In today’s COVID-19 environment, where in many buildings occupancy may be less than 20%, it may not make sense to take a building system hostage for ransom. But once we get back up and running, and our buildings are filled with employees, locking down the stairwells or elevators or locking out the HVAC during a hot summer as part of a ransom scheme might not be too farfetched.
Returning To The Office; What Do We Really Need To Worry About?
Remember after a major earthquake we stock up on bottled water, battery-operated radios, freeze-dried food, and other necessities if we were shut off from civilization until the highways and bridges were fixed? Six months later these supplies were sitting someplace in storage. Now we have major COVID-19 sanitization, consultants advising office building owners to invest in self-opening doors, touchless elevator controls, and temperature checking stations in the lobby capable of scanning twenty entrants at a time. Interior office spaces are being transformed into socially distant, safe workspaces with plexi-glass barriers, one way arrows on the floor, and low-capacity limit signs on the break and conference rooms. If by this summer almost all of us will have been vaccinated, how long will these measures still need to be in place? Some states have been mask-less for months, while in others this is still a requirement. Will new variants threaten our recovery? Will the anti-Covid pill they are currently working on soon be a reality? How does corporate America, or even the local office space user, make decisions with so many unknown variables?
Gensler Envisions the Future Of Office Space.
Gensler, the largest architectural firm in the United States with a roster of some of the world’s largest corporate clients, has been studying the future of office space design. Outdoor spaces will be utilized for meeting areas, on rooftops, courtyards and nearby public areas. Safety for the employee will be forefront as the pandemic winds down, and with the emerging long-term trend of hybrid workspace, redesigns of office space will allow for those working part-time at home. Collaboration design and space flexibility will be key. The San Francisco Business Times April 8, 2021 stated: “Office furniture will be more flexible so conference rooms can easily be turned into collaborative spaces when needed. In the most futuristic case, furniture can be moved out of the way so employees can don virtual headsets, and all collaborate together in a virtual office.”
So Many Different Return-to-Office Strategies!
In my 43 years of representing corporate office tenants, I have never seen the immense variety of how companies plan to use or not use office space. In the old days there were rows of desks, then we had private offices and workstations, then more open offices other than lawyers and CPA ‘s who still utilized private offices. Tech began to pack employees in, having work benches with laptop after laptop next to each other at a 10 per 1,000 square foot ratio. Last March 2020 when the pandemic struck, most corporations sent their employees home to work. Now, with vaccinations shining the light at the end of the pandemic tunnel, Corporate America is deciding what to do with its workforce. There are companies that sold off headquarters and have gone to multiple, smaller office locations. Others are encouraging employees to return at least a few days a week. Some are going 100% remote, permanently. Others are redesigning their existing office space to emphasize collaboration, with both indoor and outdoor meeting spaces of all types. It seems we are embarking on a major office-usage experiment and over the next few years we may learn what works and what doesn’t!
John McNellis Reflections on the Retail Market.
In the SF Business Times April 1, 2021, John McNellis, who is one of the top Retail industry gurus, reflected on what retail types thrived during the past years pandemic, and which didn’t. Home Depot and others in that category had a great year, as those stuck at home worked on remodeling projects. Netflix did great, while movie theaters might be an endangered species. Major grocery chains for the most part, did great, as did discounters, while Macy’s, JC Penney and the like were already in trouble prior to the pandemic. McNellis cited Bloomberg reported this past December that 16% of all U.S. eateries, 110,000 of them, went permanently out of business. A number of fast foods adapted and thrived with drive-through.
Corporations Begin Announcing Plans to Return Employees to the Office.
Wells Fargo just told its employees that employees would be coming back to the office after Labor Day. “We believe most of us benefit by being physically together”, Wells told employees. They currently have 200,000 employees working from home. Google said some of its U.S. employees could return to the offices this month in a limited capacity. I have also heard of major corporations such as Lockheed Martin planning to have a portion of their employees return full-time, another group that can come in 2-3 days a week and work from home the rest of the week, with another group that is able to work permanently from home and will stay this way. “Productivity and efficiency didn’t falter. In fact, in some cases, it improved,” Roderick McLean of Lockheed Martin stated.
Bisnow The Future of Office In San Francisco: How will The Office Market Recover?
I recently attended a great webinar with a panel of some of the largest San Francisco office landlords. Here are a few of the highlights: There is a flight to quality, which does not necessarily mean Class A space. Sublease space is growing exponentially. How healthy buildings are during this Pandemic is imperative. Activity is coming back. Ground floor retail has been severely impacted, but there is a resurgence of restaurants and other retail looking at end of 2021 and into 2022. One speaker with the Regus group of companies said during the first three months of 2021 alone, they signed up over 500,000 corporate space subscriptions as companies seek space flexibility and hub and spoke locations near where the workforce lives. Workers will come back to the office but will be hybrid, working 2-3 days a week in the office, the remainder from home. It was suggested that it will take 24-36 months for the market to recover. Space will be used differently, not just to house workers sitting at their desks all day, every day, but for collaborative synergistic meeting space. Work is not just about ‘where’ anymore. Some San Francisco office building garages are full now, not because the buildings are full but because of fear of taking public transit.
Commercial Mortgage-Backed Securities Update.
The Colliers Capital Markets recent report on where national CMBS delinquencies stand had overall improvement for the eighth months straight, with Industrial (0.9%), office (2%) and multifamily (2.3%) having the lowest delinquency rates. Hotel delinquencies are the highest (16.4%), with retail second (11.8%). “The Mortgage Bankers Association notes that 5.2% of commercial and multifamily loan balances were not current in February, the best reading since April 2020.” All in all, very positive news, considering how challenging portions of our economy have faced during the Pandemic!
My 24-year-old son, after graduating from Cal Poly, is still living and working in San Luis Obispo, helping run Inspired Flight. This industrial drone company sells high-end flying machines to police and fire departments and it is amazing what they can do. Definitely saves lives and can help our officers and firefighters with advanced eyes and ears. Jordan was just promoted to Director of Operations. Madison will be graduating this week from San Ramon Valley High School, having spent the past 1 ½ years remote learning. What a way to spend your Senior year! She will start college this summer. Two big personal bits of news-Launa and I will be getting married June 13th up in the wine country, after two years of delays due to my father breaking his hip and then the pandemic shutting everything down. My father, Arthur, who will turn 96 this September, after 13 months and three weeks of solitary confinement (or just about, with strict lockdown requirements in his senior center to protect the residents) has finally been allowed to have visitors and get out. We have been doing sightseeing drives and taking him to his favorite restaurants. Launa’s daughter, Lindsey, who will be 24 this October 11th (on my birthday as well!) has been working full-time at the International Center for Religion and Diplomacy. She loves her job with a passion, and recently went on a 2-week business trip to the Maldives with her boss. This August she will begin her double-Masters at Georgetown University. Launa’s 20-year-old son Ryan will be taking a full load of Film Courses at UCLA for his Film Minor, while also interning at both Silent R Management and Zero Gravity, this Summer. I expect one day in the not-too-distant future to see his name up on the big screen.
The United States appears to be headed to a healthy new-normal, but with new variants and over 7 billion folks yet to be vaccinated we aren’t out of the woods yet. Not to be political but please get your shot if you haven’t already, call me for your commercial real estate needs, and this summer, please travel safe!
