CORPORATE OFFICE PERSPECTIVES | AUGUST 1, 2022
August 1, 2022
Issue 253
Office furniture manufacturers are designing entirely new concepts to support layout flexibility, a hybrid return to the office, and multiple work environments within the same space. Real estate facility executives are facing the most challenging times of their careers. Do they extend major leases if 50% of their employees are still not coming back to the office? Do they downsize to account for the possibly permanent remote workforce that does not need expensive office space? Do companies in Class B buildings move up to Class A with more bells and whistles in order to attract employees back? Do office amenities really work? Will folks come back if there is foosball, free gourmet coffee, on-site dog care and an amazing fitness center? Or catered gourmet lunches at no cost to the employee? How does one plan three or five years into the future when we don’t know the impact of the latest Omicron variant? Tech appears to be hunkering down in anticipation of a potential recession, conserving cash and reducing new hiring or even laying off employees. Office vacancy rates around the Bay Area range from a low of 16% in Pleasanton and San Ramon to 22% in San Francisco (18 million sf vacant) and 23% in Class A Downtown Walnut Creek. The Pleasant Hill Bart region is the highest at 32%. Extensive landlord concessions dampen the impact of contract rental rates still remaining at pre-COVID levels. Real estate directors know they can make incredible office deals, but for what type of space, how much space, downtown or suburbs or even out of California? If it wasn’t for that darn high-speed internet and the cloud we wouldn’t have such an easy time remote working and everyone would have to come back to the office!
Huge New Office Announcements!
Here are a few of the more notable office announcements over the past few weeks. Chevron announced it was putting it’s 1.6 million square foot office campus in San Ramon’s Bishop Ranch on the market and relocating most of its people to Texas. The 92-acre site might be a biomedical facility or it could be demolished to be replaced by housing, as is happening with other major sites in Bishop Ranch. GoogleCloud just signed a 300,000 square foot office sublease in San Francisco at 510 Townsend. Yelp is closing a number of its offices, including New York, Washington DC, and Chicago, shifting to more remote working. At a number of its locations space utilization was down to as low as 2%! In San Francisco, Block, a fintech company, will not be renewing its 470,000 square foot office lease at 455 Market St. The SFBusinessTimes had a recent article titled ‘Downtown S.F. Faces Increased Office Vacancy Risk Over The Next Two Years’, and warned about the major tech leases expiring and may not be renewed. “The city is projecting that 33% of its workforce will be reduced to remote work permanently.”
Sensors Under The Desk, Is Big Brother Really Watching?
One side of the coin is, Big Brother May Be Watching, while the other side of the coin touts the benefits to improving the workspace by tracking how employees use their office spaces and amenity areas. From an SIOR Article published June 16, 2022, “How Sensor Technology Is Helping Design the Workspace”, ‘temperature sensors from Disruptive Technologies were stuck underneath 230 employee desks and more than 20 conference rooms in two offices and one operation center.’ The sensors could tell when an employee was sitting at their desk or in a conference room, and for how long. “The client moved away from personal desks towards an office design with more flexible workspaces, which were designed to align with actual office usage.’ The objective, of course, was increased productivity and employee job satisfaction.
Prologis May Soon Have Over One Billion SF Of Industrial Properties But Is There Another Angle To This?
Prologis May Soon Have Over One Billion SF Of Industrial Properties, but there is another story in the pending acquisition of Duke Realty. The San Francisco Business Times put a great spin on another angle to industrial real estate. Prologis has a division called Essentials which sells all kinds of products and services important to the warehouse and distribution industry. They have electric vehicle charging stations for delivery trucks, they can install solar panels on your warehouses, upgrade your lighting for more efficiency, help you with warehouse robotics, improve your employee talent and retention, set up your employees with wearable devices to help them work safer, material handling design and equipment, and on and on. Essentials income now is between $70-90 million but the future expectations are at the billion-dollar range. I don’t see this type of energy in the retail, office or apartment sectors but wow, did this open my eyes for industrial!
Remote Work Will Have A Huge Potential Impact On Office Building Values
The San Francisco Business Times had an article on June 9, 2022, where studies are showing that due to remote work office values could drop by half a trillion dollars in the United States during this decade. This $500 Billion-dollar negative valuation change would affect not just investors but also local governments who rely on property tax revenue for their operations. Class A+ office building rents might rise, but Class B office buildings could take the biggest hit as companies downsize and relocate to quality. One factor having a major impact on the return to the office is employee commute patterns. During the pandemic many renters and buyers relocated to less expensive locales, much more distant from the office as they worked remotely, but now with many companies requesting or requiring a return to the office even coming in a few days a week can be problematic. The average one-way commute time in 2019 was 27 minutes, and for 10% of employees over an hour. For those taking the train, ferry or commuter rail the average one-way commute was 71 minutes. “Moody’s is forecasting the current office vacancy rate of 18% nationally to remain around that rate for the next 18 to 24 months.” What is the silver lining in all of this? If the landlord has little or no debt they can be creative in their leasing strategies. Tenants will remain on top of the negotiating game for the next few years.
Major New Office Leases in Bay Area Totaling 712,000 Square Feet!
Elon Musk asked all his Tesla employees “to spend a minimum of 40 hours in the office per week’ and those that didn’t do so would be fired. Then recently Apple leased 382,484 square feet of office space at Mathilda Commons, 625/655 North Mathilda Avenue in Sunnyvale. Pure Storage today sublet 330,000 sf of plug & play space at 2555 and 2565 Augustine Drive in Santa Clara. I am guessing both of these companies will be expecting their employees to show up at the office to work as well. The Second Quarter 2022 in Silicon Valley had a positive 1,750,000 square feet of absorption.
Possible precursor signs of impending recession
Every business day I get several editions of the business news from the San Francisco Business Times. Here are the headlines from June 2, 2022:
Why shares in this tech titan’s AI company have dropped 17% in 17 months; East Bay migraine patch developer files for bankruptcy; Gene therapy company abandons East Bay manufacturing plans. Now, perhaps this afternoon’s news will be full of positive announcements, but after 45 years of my news addiction and thinking about what it might mean to the bigger picture, this comes against a backdrop of 8% inflation, gas prices here in Northern California in the $6+/gallon, Nasdaq down 29% in 2022 and I wonder, where are the positive signs that we will be doing great over the next year or two? Yes, I have a number of clients with tons of money seeking properties that have been almost impossible to find (owner/user flex or industrial buildings for sale in the North I-680 Corridor are non-existent), office tenants are getting incredible concession-filled lease deals, but still…I’m hoping I am wrong, or at the least if we do head into a recession it will be a soft landing…what do you think?
What Do Workers Really Want For A Return To The Office?
Bisnow reported on May 25, 2022 “the demand for office space across the country fell 1.5% in April compared to March…. Almost half of office visits in 2022 to date were just once a week, Bloomberg reported, citing workplace occupancy data company Basking.io, which aggregates Wi-Fi data from 100 offices of seven organizations across a variety of industries. Slumps in demand and actual office usage come as a record number of standard leases are expected to expire this year. A record amount of sublease space – 208.6M SF – was on the market in the first quarter of the year, according to Colliers.” In another Bisnow article on May 26, 2022, there were a number of references to what office landlords were doing to entice tenants to come back to the office. One landlord added a new gym park, wellness center, a café work lounge and new conference rooms. Another added a basketball court, a rock-climbing wall and a town hall space. As one major office landlord commented, “We are really working to create a cool environment. It is a real struggle to get people to come back.” I think many want to roll out of bed, work from home, take a break and walk the dog, work some more from home, take another break, go out for a jog, and save the commute time and hassle to have a much better work-life balance…what do you think?
San Francisco and National Office Update
San Francisco’s office vacancy rate went from 5% in early 2020 to 24% in April 2022, with leasing coming almost to a standstill combines with a number of companies giving back space. Not surprisingly, this has placed millions of feet of planned office projects on hold. Right now there are about 17 million feet of planned or approved office projects in the pipeline just waiting for demand to increase, and the existing supply to diminish. On the national basis office vacancy ticked upward during the first quarter of 2022, sublease space levels went up slightly, with the positive news that office occupancy levels went up as companies slowly returned to the office. According to a recent Colliers report, “Asking rents are holding firm, but generous concessions are on offer.” The overall national office vacancy is at 15%. The entire report can be downloaded at https://www.colliers.com/en/research/colliers-us-office-outlook-q1-2022
Recent Sale of a 450,000 Square Foot Walnut Creek CA Office Park for $110/SF Epitomizes The Office Market
I have a lot of personal experience with the 450,000 square foot multi-building Walnut Creek Executive Park. After I received my MBA from Cal Berkeley way back in 1976 I joined Grubb & Ellis. They told me to work the Walnut Creek office market as no one else wanted to work this territory. I remember the full-service rental rate at this project was $0.72 rsf, and an $8/rsf tenant improvement allowance would build out your office space. The buildings ranged in size from 28-32,000 square feet, two-story, and later they built a 75,000 square foot Class A building. Parking was abundant, and if memory serves me there are over 1,800 on-site parking stalls. There is an extensive waterway system, which over time has had ducks and made for a very pleasant working environment, The ownerships over the years added exercise and conference facilities free of charge for the tenants. Within walking distance are several retail shopping centers with tons of restaurants and retail amenities. So why did this wonderful office park sell at such a low, $110/sf price? If it were in downtown San Francisco, Class A, with long-term credit tenants the price per foot might have been in the $800-1,000 range, but out in the suburbs of the suburbs, this is not the case. Located around 15-30 minutes from Downtown Walnut Creek, where rental rates are in the $3.50-5.50/rsf per month range, Shadelands rents have been stuck in the $2-2.25/rsf for years. These are Class B office buildings and even though there have been major tenants, i.e. Air Touch who at one point leased 125,000 sf or more, the smaller floor sizes do not lend themselves to major credit tenants. The tenant velocity in this region is extremely slow, and office vacancy rates of 25-30% for extended periods of time is not uncommon. But one of the major elements that made this sell at such a low price is the cost of tenant turn-over. A space might sit vacant for 3-4 years before leasing, and then when it is leased it might require $40-80/rsf in tenant improvements, plus leasing fees. I personally have sold eighteen office buildings in the Shadelands region and have represented many hundreds of thousands of square feet in tenant leasing, and this is how this market has always been. It is a wonderful, tree-filled, quiet office park with huge amounts of free parking and if you and your employees live in this area or live in East Contra Costa it is a terrific place to have your offices. If you frequently use BART, need to be near the major freeways, or live in Blackhawk, Lafayette or Oakland, it is a constant trek. At this sale price rents should continue to be among the lowest in the entire Bay Area and for the right tenant, an awesome place to do business!
It has been a very thrilling summer so far! My father Arthur, who turns 97 this September 4th (sure, go ahead and email him an ecard at aweil444@aol.com, he would love it!) took the entire family on a ten-day cruise to Alaska out of San Francisco. What a treat, to be on the same ship with my father, son, sister, wife and others! We had fabulous dining, shows, all kinds of activities, and amazing excursions like helicoptering to a glacier, putting on crampons and walking the ancient ice. One of my best memories is the ship had arranged an event for military veterans and about 60 showed up. Past war veterans from Korea, Viet Nam, Iraq, one of the first female Navy pilots and each was asked to stand and state their branch, rank and where they served. When it was my father’s turn and he announced he had been in the Army as an infantry engineer clearing buzz bombs and building river bridge crossings in World War II and the entire room broke out in loud applause. Guess there aren’t many of his kind still around! Arthur has also written 22 poetry books (you can look him up on Google, Art Weil Poet) and if you would like me to mail you a few, no charge, just e-mail me your address to jeff.weil@colliers.com. My wife Launa has enjoyed her summer immensely. Taking her two children Lindsey and Ryan to Mexico for a week, going with me to St. Orres up by Gualala in the rugged Northern California coastal region, doing a road trip to San Luis Obispo and then Santa Barbara…all in all a great, but way too short, summer!
What a world we live in! The war in Ukraine, COVID, mid-term elections, Supreme Court rulings (notice how cautious I am not to offend either side!), and somewhere on the list, commercial real estate. Please keep calling me with your real estate questions and requirements and I, or one of my 14,000 Colliers associates, will gladly help you out! Take care, as always be safe and hug your family for me!
