CORPORATE OFFICE PERSPECTIVES | DECEMBER 1, 2021
Issue: 249
This is my 45th year representing corporations in the sale and leasing of Northern California office space. I may be sticking my neck out, but that is the privilege I have in writing this newsletter! I believe that we are finally at the low point in the office leasing cycle, and that while we might stay at the low point for some time, from here on out things will get better. This will vary by region. There was a recent article that the Seattle market boomed during the Pandemic, with the largest tech firms leasing 25% more space than they had pre-pandemic. However, this was an exception, and for the most part the U.S. office market has been severely impacted by COVID-19. There are now signs of recovery, The national available inventory of office sublease space is going down. Major companies are making huge forward commitments for office space. As just one example, YouTube is in the process of obtaining approvals in San Bruno for a long-term 1.8 million square foot office expansion. Apple, Google, Facebook and many others are also acquiring huge office campus locations. Down in the trenches my office leasing associates report surges of leasing activity, although primarily with smaller-size tenancies. California has had one of the most restrictive mask mandates, has one of the lowest case counts but some counties are now easing mask mandates. While there is no overall decision of hybrid vs virtual vs must be in the office, most agree that flexibility for the workforce will be here to stay. If you are a landlord, the future looks brighter than it has for some time. If you are a tenant, call me because now is when you should be negotiating your lease extensions or relocations. At some point the huge landlord concessions found in many markets will begin to slowly diminish. Now is the turning point!
An Amazing Commercial Real Estate Sector!
While the national office vacancy rate is 15%, the industrial national vacancy rate is only 4.5%, and in some sub-markets like Santa Fe, New Mexico, as low as 0.1%! Net absorption for just Q3 2021 was 175 million square feet. Lease rates overall average $6.65/sf, with lower rates in Chicago at $5.50/sf and the higher rates in the San Francisco Bay Area at $19.75/sf. To see this report, just released by Colliers, click here.
Big-Box Retail Continues to Transition to Housing, Laboratory Development
Alexandria Real Estate Equities, one of the nation’s largest laboratory developers, just announced it has purchased the JC Penny property at the Tanforan Mall in San Bruno, California. When the existing leases expire it plans to raze the building and build 700,000 square feet of life science space. Conversion and re-use of big box has been going on well before the pandemic. Sears, JC Penny’s and other large retailers have been shutting down stores for a number of years, in some cases the huge demand for last-mile distribution made it easy to convert, especially if the stores were located in close proximity to dense population centers. Some indoor shopping centers have been converted to creative office spaces, and others to medical facilities. A number have been demolished to make way for major residential development, which will be the case with Richmond, California’s Hilltop Mall. Obsolescence to modern functionality…
Commercial Property Market Dichotomy
One recent headline in Bisnow reads “Commercial Property Values, Sales Volume Breaks Records as Recovery Gives Way To Expansion”, while on the same day in the San Francisco Business Times the headline reads “Analysis: High-profile office towers face foreclosure warnings as occupancy slips, debts come due”. What is happening is overall commercial real estate is setting record sales volumes. “The $193 Billion in commercial sales in 2021 Q3 alone was 19% more than the same period in 2019…. The new valuation record was set despite shopping malls, suburban office buildings and hotels declining in value.” Industrial and self-storage have gone up 40% since the pandemic began. On the other side of this coin, nationwide there are 91 major office properties or portfolios currently watch-listed, in special servicing or delinquent, as of this month, with New York and Houston having the bulk of these. A rising tide does not necessarily float all boats…
Tesla Relocates HQ to Austin, Texas, At Same Time Expands 325,000 sf in Palo Alto Stanford Research Park
On the one hand the current richest person in America ($280 billion as of a few weeks ago) Elon Musk announced he is relocating Tesla’s corporate headquarters to Austin, Texas, and on the same day Tesla announced it has leased 325,000 square feet of office space at 1501 Page Mill Road in Palo Alto. This Stanford Research Park boasts some of the highest rental rates in America, so maybe moving the HQ to a lower-cost region like Texas averages out with the more-costly Palo Alto digs. California is still the world’s leader in electric vehicle design and development with over 200 companies involved in this industry located here. Governor Newsom has banned new gas-powered cars in the state by 2035, and lower-income residents who switch to hybrid and all-electric vehicles can receive up to a $8,500 credit through the Clean Cars For All program.
National Office Market Statistic Update
According to the Colliers Third Quarter 2021 report just out, the national office vacancy rate is 14.9%, with Central Idaho being the lowest at 2.5% vacant and Houston the highest, at 23.2%. Currently there are 126.6 million square feet of new office projects under construction, including 12.3 million square feet in San Francisco. Net absorption turned positive for the first time since Q1 2020! The suburban and CBD vacancy rates are about the same, 14.5-15%. “Asking rates are mostly holding up despite soft market fundamentals. The gap between asking and effective rents is widening as concessions continue to increase.” Highest average Class A CBD asking rates range from $45.80/rsf in Fort Lauderdale to $82.85/rsf in San Francisco. To see this report with its great color graphics click here.
A Huge Announcement From PricewaterhouseCoopers To Allow Tens of Thousands To Work From Home
As reported in the San Francisco Business Times, “The announcement that consulting giant PricewaterhouseCoopers will allow tens of thousands of its employees to work from home sent shockwaves through the business world. But it could be the start of an even larger wave…it will allow 40,000 of its 55,000 workers to work remotely anywhere in the continental United States. If other professional service firms and corporate titans follow suit, the implications could be huge for commercial real estate developers and brokers, small businesses in central business districts and city governments among others. That’s not to mention the effect of hiring dynamics – as recruiters already say workplace flexibility is an expectation, rather than a perk.” Think about the impact on downtown restaurants that won’t have office workers coming in for lunch or business dinners, public transit agencies who in many regions are begging riders to come back, even the holiday party venues…a survey of 1,000 recent college graduates showed that remote work is one of the biggest factors in picking an employer.
Business Facilities 17th Annual Rankings Report
Every year the Business Facilities magazine publishes It’s National Rankings of States for 27 different categories including Health Care Jobs, Tech Talent Pipeline, Aerospace/Defense and while California did terribly in the Best Business Tax Climate category, of the 27 categories California ranked #1 nine times and was in the top ten 17 times. Very impressive, California, and if you want to see the entire report just Google Business Facilities July/August 2021.
The National Office Market Worsens But At A Slower Pace
The relatively good news is the vacancy increases in the office sector is slowing. The U.S. office vacancy rate rose for the sixth consecutive quarter in Q2 2021. Asking rates for the most part are holding firm but concessions have increased, meaning effective rents have dropped. According to a recently released Colliers report, “Combined net absorption across the top 10 markets was negative 24.4 million square feet in Q1 2021 and negative 9.1 million Q2 2021. Download Full Report
In Spite Of The Bad Press, California is Doing Quite Well, Thank you!
I mentioned in a recent blog that Boston Properties is planning for downtown San Jose, California, which will feature 1.4 million square feet of office space. Kilroy Realty is in the approval process for 676,801 square feet of new office space at the SoMa Flower Mart project in San Francisco. Amazon just purchased 304 acres in Pleasanton, near Livermore where it already has 600,000 sf of warehouse space at Longfellow Logistics Center, 707,000 sf in Richmond, 506,000 sf in Hayward and maybe 850,000 sf at the Prologics project in Tracy. Tesla could have put its new mega factory anywhere in the U.S. it wanted, but in Lathrop, California it announced a Mega factory with 500,000 sf, which brings its total for Lathrop to over 2.3 million square feet of space. Say what you want, kudos to California, 5th largest economy in the World!!!
If Companies Are Seeing No Loss In Productivity Due to Employees Working
From Home, Why Bring Them Back?
As time goes on and the Pandemic light at the end of the tunnel continues to be more distant, companies may be more open to embracing hybrid and even total remote working and not expecting a return to the office. “Digital.com’s survey found the increasing embrace of remote work is one of the top factors leading companies to consider downsizing their spaces. ‘People want to spend more time with their families and less time commuting. They want to spend less money on commuting and childcare. Additionally, our survey data shows that, after over a year of lockdown, companies have had no loss in productivity due to people working from home,” said Dennis Consorte, small business consultant at Digital.com. “This is a tremendous win for companies and saving on the cost of office space is a huge bonus for their bottom line.” San Francisco Business Times Spt. 15, 2021
Airbnb has announced that its employees are not expected to return to the office until September 2022, Will more companies extend their return-to-work target dates? And if many employees are willing to work for less if they have a flexible hybrid work schedule, and others who are allowed to relocate to significantly lower cost regions are willing to take a big pay cut, what will this mean for the future of traditional office space? On the other hand, there have been recent announcements of major office developments planned around the U.S., and with construction and material costs skyrocketing these new office locations will not be cheap. With 200 million square feet of office space on the sublease market, an overall average of 17% vacancy for office space across the United States, and yet tens of millions of feet of new office projects being planned, all while corporate America is not sure they even need office space…the next few years will indeed be interesting!
A quick update on how the family is doing. Lindsey, my new stepdaughter, is working on her Masters at Georgetown University in Washington DC and step-son Ryan, a Junior at UCLA, sold his first screenplay and was there for opening night of its production at a Downtown LA theater just two weeks ago. Madison is at Diablo Valley College taking her prerequisites and son Jordan is busy making sophisticated drones for the police and fire departments. My 96-year-old father Arthur is still going strong and a few weeks ago went to the San Francisco Opera as well as a musical at San Francisco’s Golden Gate Theater. My wife, Launa, and I are happy newlyweds, spending our weekends in San Francisco, Lake Tahoe, Gualala/Sea Ranch, & Napa and working our tails off during the week. We are so fortunate!
We are transitioning out of this evil pandemic, so please stay safe, have a wonderful and healthy holiday season and be thankful for all the blessings you have!
