CORPORATE OFFICE PERSPECTIVES | FEBRUARY 1, 2022
February 1, 2022
Issue: 250
A few weeks ago on January 19th, I gave a one hour Zoom presentation for RINA Accountants & Advisor discussing where 2022 will be going with respect to the various aspects of commercial real estate and our local and national economy. Click on this link to view the presentation: https://www.rina.com/resource-library/videos/january-2022-real-estate-advice-webinar/ . I spent months researching all the published forecasts, and interviewed a wide range of real estate professionals in formatting my conclusions. As I stated in my speech, there will not be a return to the ”Old Normal”. There will be a ”Newmal”, the New Normal, and those that adapt to this and embrace it will be successful going forward in 2022, 2023 and beyond.
2021 Set Investment Sales Records Across the United States
2021 set investment sales records across the United States and 2022 is predicted to be even stronger. There is a tremendous amount of investment capital looking to place funds in industrial and multi-family real estate. According to a December 8, 2021, report by Colliers Capital Markets, 87% of investors are optimistic about the economic outlook, inflation is a mixed bag with 40% of investors seeing both positive and negative impacts, and Dallas, Texas is the #1 location to invest in during 2022.
Executives Are Twice As Eager As Workers to Return to the Office
Wired Magazine November 22, 2021, referenced a study by Future Forum surveying 10,000 knowledge workers and their bosses across six countries including the United States. ”The study showed that executives are more than twice as likely to want to get back to the office full time – every single working day, just like in the ’before times’ – than their employees, with 44% of executives longing for their commutes and fluorescent lighting versus 17% of their staff. Some bosses are willing to offer a bit of flexibility with two-thirds of execs saying they want to work in the office most of the time or all of the time. But staff – or, as the survey identified them, ’non-executive’ knowledge workers – don’t agree. More than three-quarters (76%) said they want flexibility in whether they work from home or the office, and even more (93%) want flexibility in when they work.” The article goes on to surmise that one reason for this differential is bosses may have offices with doors that close, while their staff works in open-plan desks. They may have more flexibility over when and how they work as they are the boss, and bosses also might feel that since they worked their way up the ranks by coming to the office every day, perhaps their subordinates should do the same. What do you think?
The Hybrid Return to Office Has Challenges
The San Francisco Business Times had a few recent articles that raised excellent issues regarding employees returning to the office. If the employer doesn’t mandate which days the employees should come to work the result might be days when only a handful of folks are back in the office, defeating the synergy and physical interface employers are looking for. This also diminishes employee flexibility. Additionally, you don’t want the workers to be in the office stuck on all-day Zoom calls with their remote co-workers, which would be the worst of both worlds. “Beyond the management complexities that’ll likely come with hybrid work, company leaders are tasked with figuring out how to make a semi-in-office, semi-remote workforce equitable. That includes redesigning or reconfiguring office spaces to accommodate needs of employees, including those most reluctant to come back.” Kay Sargent, director of the workplace practice at HOK Group said, “We really need to rethink what is the purpose of the workplace – why am I coming to the office?” Buildings Magazine Sept/Oct 2021 had an article on returning to smarter, safer buildings utilizing 5G and IoT (Internet of Things). “Commercial building executives are expected to utilize smarter technologies in managing regular cleaning and sanitization, proper office ventilation, smart entry control, temperature measuring devices, and space optimization for social distancing. They can track where employees go at the office, what areas need more or less cleaning or more or less ventilation. CBRE did a study of 350 million square feet of office space and found that 79% of companies are tracking employee-badge swipes at entry points, 56% are using visual observation, 46% monitor office WiFi log-ins and 26% are using sensors in rooms and desks. What at first glance may look fairly simple can in reality be quite complex!
Enticing Workers Back To the Office May Also Include Allowing Their Dogs
The Pandemic started a pet adoption surge and now nearly half of all U.S. households own a dog. “As company executives look to find ways to bring their human employees back under one roof, dog-friendly policies are increasingly being used as a lure.” Employees tend to stay at the office longer when they don’t have to rush home to feed or walk their dogs. There are lots of rules, of course, such as limiting the breeds, sizes and number of dogs allowed. Some landlords require dog DNA registry so there are no mysteries of the source of any accidents. Others have a policy of two strikes: you are out, with tenants responsible for clean-up. Dogs are usually not allowed in the lunchroom and must be leashed at all times. “Google is such a pet-positive company it puts its dog-friendly office policy in the company’s code of conduct, which reads “Google’s affection for our canine friends is an integral facet of our corporate culture.” One of the biggest concerns is employees’ allergic reaction to dander. Bisnow Atlanta December 2, 2021.
The Omicron Variant May Not Be the Last, yet Business is Optimistic Despite These Fears
I stuck my neck out a few weeks ago and predicted that the commercial real estate market, and specifically the office market, had finally hit bottom and would slowly work its way back up. This was before the Omicron variant hit the scene, and this probably won’t be the last scary variant we encounter. Fortunately, science is at a point where we can fairly quickly modify vaccines, most folks have a supply of masks, and at least in my region a sizable majority of the population is vaccinated and most are boosted. Bayer just received Berkeley city approvals for a 30-year one million square foot expansion project which will eventually expand its campus to 1.7 million square feet of life sciences and related buildings. And, according to Bloomberg News December 1, 2021, “The social networking company, now known as Meta Platforms Inc., will occupy the 719,000 square foot site of the former headquarters of NetApp Inc. in Sunnyvale, California. It also signed a lease in nearby Burlingame – bringing the total new space to more than 1 million square feet.” Short-term, Google and others are delaying the return to the office temporarily.
Industrial May Be Hot, While Office Is Not
A friend of mine just sold a large warehouse in shell condition (usually meaning no offices are built, and there are no restrooms) in the Tri-Valley for $250/square foot. My business partner, Andrew Forbes, and I recently sold a small warehouse/office building in Concord for $300/square foot. Compare this with a very large office complex in Walnut Creek, 450,000 square feet, mostly Class B, mostly leased, for sale at less than $120 a square foot! ie: eighteen two-story garden office buildings, 1,800 parking spaces included, an exercise and conference facility, and several retail centers within walking distance. This just shows in a dramatic fashion why industrial is hot, and office is not.
Office Vacancy Hits 37%, at the Same Time Gridlock Feared
The overall office vacancy rate for the I-680 Corridor is around 20%, with Downtown Walnut Creek Class A at 25%, the Pleasant Hill/Walnut Creek BART region at 30%, while smaller markets like Alamo/Danville are closer to 10%. Cushman Wakefield just reported “The Class A office vacancy rate in Oakland’s core business district reached a historic high of nearly 37% in the third quarter.” Major companies are giving up space, putting space on the sublease market, allowing their workforce to work remotely from anywhere, not committing to large Eastbay blocks of office space, relocating to other states where taxes and labor are much lower, and in general being absent from the office leasing market. The folks who are actually going to the office are for the most part driving, including many who in the past may have taken public transportation. BART ridership, as an example, is currently 26% of its pre-pandemic level. Employers seem to be targeting Tuesdays, Wednesdays and Thursdays as the days hybrid workers come to the office. Jelly Obrabowicz with Bay Area Council stated “We are at a pivotal moment for Bay Area transportation – if more and more people continue to drive by car to get around, as we are seeing them do now, once we reach the new post-pandemic norm for in-office work, Bay Area traffic will hit levels we’ve never seen before.” (Great, that will really motivate folks to come back to the office!) And those poor retailers, with few back at work, will suffer if workers only come three versus five days a week, while their landlords still expect them to pay for the entire week’s rent. Having weekends dark when your business caters to office workers was bad enough…
A Perfect Example of How Quickly Office Plans Can Change
Here is a perfect case in point on how Covid has affected the workplace and is a moving target: on January 11, 2022, Autodesk announced that the new 117,000 square foot office it had just opened this past May at 300 Mission Street in San Francisco, with collaborative workspaces, a fully equipped gym, music studio, a game room and lounge space, was just shut down. “As more employees take advantage of flexible workspace options – in-office, work-from-home, and hybrid, we’re rethinking how we use office space to support the changing needs of our employees and our business” Autodesk said. It is reducing office space worldwide and taking impairment charges of about $180 million.
CPA Survey on the Future of Remote Work
Among the top 10 concerns in the first quarter’s CPA Outlook Index, a survey of certified public accountants across a broad range of industries conducted by the American Institute of Certified Public Accountants:
The prediction: As 2022 wears on, expect companies that are insistent on a return to the office to transition to a focus on flexibility and remote, rather than defined & regimented schedules. But as we’ve noted, many employers are becoming more comfortable with the idea of not returning at all.
Growing Embrace of Permanent Remote Work
Recruiters have marveled at how quickly remote-work flexibility shifted from a perk to an expectation after the initial wave of Covid-19 lockdowns. Given the acceleration and big moves by accounting firm PwC and a long list of tech giants, don’t be surprised if 2022 brings a wave of employers who declare plans to go permanently remote. Outside of practical considerations posed by the challenges of hybrid setups, employers are also recognizing that permanent remote work is attractive to candidates in this highly competitive hiring market — with many employees saying they’d trade raises for a permanent remote setup. Of course, permanent remote work isn’t without its own challenges, including potential tax pitfalls if employers aren’t careful.
The prediction: Variants like Omicron will continue to disrupt return plans; a few more high-profile employers will announce their shift to permanent remote work and numerous others — especially in white-collar fields — will follow suit in 2022.
So Far Most Office Workers Are Not Returning to the Office
Bisnow reporter Matthew Rothstein on November 18, 2021, reported “For months, ads and sponsored content have popped up all over parts of the internet dealing in commercial real estate claiming to provide amenities or design changes that will lure workers back to the office. None have been proven to work so far. To date, American workers are mostly not being enticed back to the workplace. From mid-October to the week ending November 10, 2021, average office occupancy across 10 of the county’s largest markets has ticked up only slightly, from below 37% to 39%, according to swipe data from Kastle Systems.” Bloomberg News reporter Priya Amand on October 15, 2021, reported that in San Francisco the figures are far worse. “So far, less than 25% of workers in the San Francisco metro area have returned to in-person work, according to data from the building security provider Kastle Systems.” And while it feels like things are getting better in the Covid arena, today’s paper cited a complete lockdown in Austria where everyone will be mandated to be vaccinated by February 1, 2022. There are spikes occurring today in different parts of America, especially in colder areas where more dense masses of unvaccinated folks are gathering. This Covid uncertainty is a serious impediment to more workers returning to the office, but the thought of lengthy, bumper-to-bumper rush-hour commutes and other downsides to returning to the office may also be at play.
Restaurant Industry Hit Hard by Omicron
The Covid-19 Omicron surge has also hit the restaurant industry hard. The survey found:
- 46% of businesses reported their operating hours were impacted for more than 10 days in December 2021.
- 58% of businesses reported their sales decreased by more than half in December 2021.
- Restaurants that did not receive grants from the Restaurant Revitalization Fund are more likely to declare bankruptcy in the coming months — and the industry as a whole has suffered due to the Omicron variant.
- The bleak findings are from a January survey of 1,200 restaurants and bars by the Independent Restaurant Coalition. The survey found 42% of businesses that did not receive RRF funds were in danger or had filed for bankruptcy, compared to 20% of those that received RRF grants.
Omicron Has Had a Major Impact on Return-to-Office Plans
The San Francisco Journal January 6, 2022 ”In a survey by Gartner December 2021, 44% of respondents reported pulling back from their plans to return to the office, 22% have delayed their plans and another 22% decreased the number of people coming to the workplace or re-closed some previously opened workplaces.” One conclusion appears to be an increase in flexibility in making workspace decisions and being able to pivot as the Covid situation changes. There are also major geographical differences, with some U.S. regions in much fuller back-to-office operations than others. In Florida and other Southern states, the worker population back in the office is much higher than that of New York and San Francisco.
No Surprise, Fewer Folks Moving Into California
SFGATE on December 20, 2021, reported that 53% fewer people moved into San Francisco County from out of state since the start of the pandemic, and Santa Clara had 52% less while San Mateo was down 48%. Overall the Bay Area had a drop of 45% fewer folks moving into the Bay Area from other states, and people leaving was up 34%. Almost 1% of Californians, 367,299 to be exact, moved out of the state in the year ending July 1, 2021. Now usually when something like this takes place home prices plummet, but not here in the Golden State. I also read a report that the top industry in Boise, Idaho, was Californians relocating to their state.
The National Office Market May Be Improving!
According to Colliers in their 2021 Q4 report, the year-end numbers are in and, once more, the signs are encouraging for the U.S. office market. The vacancy rate is starting to tick down, the amount of sublease space is slowly falling and net absorption was positive for the second successive quarter. The U.S. office vacancy rate now stands at 14.8%, a fall of 10 basis points in the fourth quarter. If this does represent a leveling off for this cycle, it will be comfortably below the record peak of 16.3% seen at the height of the Global Financial Crisis. Sublease space has been a key contributor to the increase in vacancy. There is now 199.7 million square feet of sublease space available across the U.S. office market, down from the record 208.8 million square feet posted in Q2 2021. While this remains significantly higher than the prior peak of 143.3 million square feet seen in Q2 2009, the fourth quarter saw the amount of sublease space fall for the second successive quarter.
Older Office Buildings May Be More at Risk of Default
This hasn’t been the case in the San Francisco East Bay, where in fact there has been higher leasing velocity in Class B and C office buildings where owners have been able to competitively drop their rental rates and roll up their sleeves to make deals, especially in the under 5,000 square foot tenant category, but around the United States, there are reports that in many cases office tenants are vacating older office buildings and relocating to more modern projects. They are shrinking their footprint and are able to get extensive landlord concessions which allows them to keep their monthly rent constant while upgrading their office space. This is not a rampant downturn, but delinquency rates went up 2.53% in November 2021.
One City Is Tired of Good, Clean Jobs
The San Francisco Business Times January 20, 2022, published an article where the Richmond, California market, which has over 6 million square feet of warehouse space, has triggered a complaint from one County Supervisors that e-commerce fulfillment centers ”increase traffic, threaten the climate and pedestrian safety and offer mostly low-paying jobs.” Perhaps they should be looking for a chemical plant or maybe just ban new jobs altogether? There are regions across the United States that are eager for as many fulfillment centers as they can get!
Amazon Signs Another Major East Bay Lease!
Amazon announced back in September 2020 that it was leasing 150,0000 square feet of warehouse space at the Contra Costa Logistics Center in Oakley, about 45 minutes to the East of San Francisco, and on January 19, 2022, it announced taking an additional 643,000 square feet in this same project.
Keep your seat belts buckled, and be ready to hang on tight as 2022 may be like Mr. Toad’s Wild Ride! As I write this the stock market went down like a lead balloon, Covid cases are hitting record levels, yet there are positive signs of regions with falling case rates. I am not sure where the world will be when this newsletter gets published in ten days (I have to write this in advance to allow my staff to get it set up and distributed) but Korea just sent off more missiles and Ukraine appears on the brink of war. This morning I noticed an ad for a 3,000 square foot normal rancher on a 10,000 square foot lot in Saratoga with an asking price close to $5 million, and I know most of my friends are concerned that our children will never be able to afford to remain in the Bay Area unless they rent, or we help them out. Remember the age-old saying that you concentrate on what you can impact, don’t waste time worrying about what you can’t impact, and make sure you know the difference.
I am writing this Sunday evening, having spent the afternoon picnicking and playing board games with my wife and 96-year-old father, Arthur. A few weeks ago, the County shut down all visitors to my father’s senior residence building unless they get lab-tested 24 hours prior, which is nearly impossible. We take an at-home test or get tested at work before we take him to a nearby local park for hamburgers and Rummikub. They just shut down the home’s restaurant and all residents must now eat alone in their apartments. Depressing! for sure, but of the 850,000 that have already passed due to Covid, 200,000 were over the age of 85, so his age group is at super-high risk. Our daughter, Lindsey, is now going back to in-person classes at Georgetown, as will her brother Ryan at UCLA in two weeks (fingers crossed), while daughter Madison just started her second semester at Diablo Valley College. Literally, as I was writing this my 24-year-old son texted me from his seat at the Warriors game…and my new wife, Launa, and I are still enjoying our first year as newlyweds!
It almost goes without saying, please stay safe whatever your beliefs are. We will get through this and the Newmal on the other side will be wonderful! Have a super Winter, feel free to email or call me with any questions or commercial real estate needs, and thank you for reading this!
