CORPORATE OFFICE PERSPECTIVES | OCTOBER 1, 2022
Issue 254
I’m not totally sure if it is wise to admit this or not, but this month on October 11th which is the day I first stated in commercial real estate marks the beginning my 46th year. I started one week after receiving my MBA from Cal and have never looked back since. I have probably sold and leased more commercial space than most, made a lot of corporate tenants, landlords and investors very very happy with how I helped them solve their real estate challenges, but also have had a lot of fun in the process. For the most part my fellow commercial brokers are great to work with, negotiate against, my clients (for the most part) have been awesome, and I have been blessed to have picked this as my lifelong profession! Thank you!
Overall office market summary, for the most part employers are still waiting for many employees to want to return to the office. In the Midwest and East the figures are higher, while in San Francisco only 40% of workers are coming into the office. In Northern California, Silicon Valley is doing great, while San Francisco and the East Bay is still waiting for office requirements to resurface. LinkedIn June 20, 2022, “According to Ivanti’s 2022 survey, 87% of employees do not want to return to the workplace full-time and 45% do not want to return to the office.” Vacancy is still high, and Landlord concessions create the economic basis for tenants doing deals. I have seen a number of landlords hold out with high contract rents and not offer extensive free rent or other concessions, and they have space sitting empty for years. Institutional landlords may have more restrictions on how aggressive they can be. Just recently I have seen private investor landlords dramatically cut the contract rates by 20% or more which I haven’t seen in years. Industrial is still king of the investment world, and around the Bay Area I have heard of industrial land going for $50 to $100/rsf! We’ve had older industrial buildings selling for $200-250/rsf, while large suburban office parks, mostly leased in a decent location, have sold for as little as $110/rsf. Apartment investments are still very strong. Just last month a 100-unit complex in Walnut Creek CA sold for $660,000 per unit. Retail has come back in a number of places, i.e. many downtowns (but not San Francisco) while a number of regional malls will be repurposed in the future.
Pension Funds Selling Off Office Properties To Reduce Exposure To Remote Work
This was the headline August 25, 2022 in Bisnow. “Pension funds based in the U.S. and Canada are unwinding their bets on office buildings and retail as they reckon with the potential for big value declines…In response to changing attitudes to physical work environments. Many U.S. and Canadian pension funds are slashing office holdings as they predict that the five-day pre-pandemic workweek will not return, according to the Wall Street Journal…Office buildings were in oversupply before the pandemic, with analysts anticipating that remote work could see a 20% reduction in demand for office spaces. One report this summer estimated that as much as $500 billion in value could be lost from the office market as a result of remote work.” All you remote workers staying home in your pj’s, not struggling with the daily commute or not rushing home to let your dog out should feel guilty!!
What Really Is The Purpose Of An Office?
BizNews 9/6/22 had a great quote that to me sums up the dilemma many corporate executives are now facing. “What is the purpose of an office?” said Matthew Saxon, Zoom’s chief people officer. “It’ll be different for different companies, but one of the things I think this huge experience we’ve all been a part of has proven that it’s not necessarily to get work done.” ‘But what Zoom believes is that offices have become a place to be social. They are no longer for doing good work so much as making good work possible, and their primary functions are facilitating collaboration and fostering camaraderie…It turns out Zoom and its 8,000 employees are dealing with the fundamental problem of hybrid work the company’s technology is trying to solve: how to be productive and creative without being in the same place. It’s peculiar how many tech companies were based almost exclusively in offices before the pandemic given how easily they have now left that world behind. Zoom gave employees permission to work from home forever earlier this year, and only 1% are regular office presences, with 75% living remotely and the rest identifying themselves as hybrid workers.” My opinion, this is a gigantic experiment with different major employers trying different approaches. Apple and others are mandating a three-day return to the office, and Zoom is at the other end of the spectrum. Companies are making huge financial decisions on signing major leases or building expensive headquarters. Others are figuring out what bells and whistles are needed to entice more workers back to the office. It will be interesting in ten years to see how this all shakes out. Will the remote worker now up at Lake Tahoe or working in a home office overlooking the ocean have less turnover thoughts than someone mandated to come in three or more days a week? We shall see!
Will There Be An Office Shift To The Suburbs?
In an article by Sougata Mukherjeee, Editor-in-Chief of the Triangle Business Journal in Raleigh-Durham, North Carolina, he writes that GICPte and Workspace Property Trust just spent $1.1 billion on purchasing 53 suburban office buildings “That’s a bet that reflects institutional investors believe remote work is here to stay, and now office buildings near residential neighborhoods should become more desirable.” He goes on to reference Kastle Systems, that tracks how many workers are returning to the office, that the figure is now 45%, only slightly higher than last year. “Based on that survey alone, companies are beginning to accept the fact that they may never have all their workers come to the office five days a week.” He also cites a recent CBRE vacancy report that shows downtown vacancy rates are now higher than suburban for the first time in decades. I agree with part of this premise, that long-term all workers are not going back to the office. However, work-from-home does not necessarily mean work from a suburban office, and in my region with a 20-30% suburban vacancy rate and limited tenant activity we have yet to see companies moving to the suburbs.
Know When To Hold Them, Know When To Fold Them, Amazon Pulls Back on 66 Warehouses
I give Amazon credit for reversing their former expand-at-all-costs to closing some facilities and cancelling or postponing other facilities across the United States. As one industry expert said, ‘they aren’t slamming on the brakes, just easing off the gas!’ At the end of 2021 Amazon had 370 million square feet of warehouse space, twice as much as it had two years earlier. One of its largest warehouses is 4.1 million square feet and is 97 feet tall under construction in Ontario, Southern California.
Pandemic Planning For Office Users
It is probably something most of us don’t even want to think about now. However, many corporate leaders already have emergency contingency plans for what to do in case of a fire, earthquake, flood, power outage, or other natural disaster and unfortunately COVID has now been added to the list. Buildings magazine July 2022 had an excellent article on this. “…a pandemic affects everything from occupancy and layouts to cleaning schedules and security protocols. The article recommends having this directed by a qualified person or persons and not by committee. The key words are ‘business continuity’ and what if, God forbid, the next pandemic is far more contagious and deadlier than COVID? It is also like wearing your seat belt and having an airbag…items you never ever want to use, but what lifesavers when you need them!
California Still Leads The Nation In Many Categories!
Business Facilities is one of the leading sources for corporate site selectors and in its July/August 2022 edition published its 18th annual Rankings Report. Of the twenty-two different categories including Semiconductors, Aerospace, and Food Processing, California placed first or second eight out of twenty-two, which isn’t too bad considering all the negativity California has had thrown at it in recent years. If you want to access the complete report please click https://businessfacilities.com/2022/08/business-facilities-18th-annual-rankings-report-state-rankings/. Did you know California currently has a budget surplus of $97 billion?
A Great Example Of Making Money In Bay Area Commercial Real Estate
The Registry published on Sept. 6. 2022 where in 2015 Northwestern Mutual paid $37.8 million for the 100-unit Arroyo Residences apartment complex in downtown Walnut Creek at 1250 Arroyo Way, and now Rockwood Capital just purchased this property for $66 million, $660,000 per unit. The property is a half-mile walk from Bart, walking distance to Downtown Walnut Creek and the apartment vacancy rate in Walnut Creek is less than 4%.
A Scary Sign Of The Times: Major San Francisco Office Property Owners Believe Their Values Have Gone Down By 50%!
The SF Business Times August 28, 2022 reported “The owners of nine San Francisco properties assessed at more than $100 million are scheduled to appear before a city board to reduce their assessments be cut in half”. They claim that the pandemic impact in 2021 dramatically affected their property values. I added up the nine property value reductions and it came to $946 million! If successful that is a lot of City tax dollars disappearing in the wind. What if this is just the start of a devaluation of property in San Francisco and perhaps elsewhere? In further support of this downward-value trend, two major San Francisco office buildings which had been on the for-sale market were just pulled. Wells Fargo, according to the SF Business Times Sept. 2, 2022, had listed 550 California St. in San Francisco for $450/sf but bids came in around $250/sf, and UBS Realty Investors was trying to get $750/rsf for its 374,000 sf office building at 455 Market Street but according to this article, bids came in around $500/sf.
If You Want More Employees Back In The Office, Let Them Bring Their Dogs!
Recent surveys have supported allowing pets in the office will increase workers returning to the office. About 71% of employees said their employer made changes to its workplace pet policies within the last year. Those sorts of changes can help employee retention and satisfaction, with about 86% of employees surveyed saying they would look forward to the office more if they can bring their pets. Part pf the pet-friendly policies include dogs allowed anytime or certain days of the week; outdoor spaces for dogs; indoor gated area for pets; pet insurance. ‘The survey found that 50% of pet owners would be more willing to return to the office if it was pet friendly, with 67% of Gen Z workers and 64% of millennial workers agreeing. At the time of that survey, only 10% of workers said they were working in a pet-friendly office.’ SF Business Times August 25, 2022
The San Francisco Bay Area Is Still The Place To Be!!
The San Francisco Business Times on August 26, 2022 reported “that of the 25 startups on Forbes ‘Net Billion Dollar Startups 2022’ list 12 of them are Bay Area companies. So go ahead and move to less-costly areas like Boise or Oklahoma and try to raise millions or hundreds of millions for your next blockbuster startup!
A Major 800,000 SF Office User Backs Out Of New HQ Just Prior To Completion
This story encapsulates what is going on these days in the ‘back to the office’ vs hybrid vs remote work discussions on-going in today’s Corporate America. In Bisnow August 19, 2022, Centene, a large healthcare company in North Carolina, was weeks away from completing it’s 800,000 square foot headquarters facility in Charlotte and stated “Today, almost 90* of our workforce is working fully remote or in hybrid work environment and workspace flexibility is essential to attracting and retaining our top talent.” They may be leaving $31.6 million in grant money and $26 million in County subsidies on the table. This illustrates the difficult decisions going on regarding enticing vs mandating employees back to the workplace or allowing them to continue working remotely in some fashion. In Northern California Google, Apple and others are investing hundreds of millions of dollars into new office campuses. Build it and they will come? There is no easy answer and only time will tell what worked and what didn’t…
Great Economic News, and More Great News!
Colliers just released a bullet list for August of a few of the very positive news clips out. Blackstone, one of the biggest commercial real estate investment companies in the world, just raised 24.1 billion for its latest real estate fund, ‘the largest fund-raise on record’. “July’s job report marks the return of full-pre-pandemic employment and the second-fastest job recovery since 1981.” And 48% of U.S. homes with a mortgage have at least 50% equity, the highest ever. All in all, our economy is strong! Inflation is world-wide, not just in the U.S. (England just hit double-digits) but appears to be coming down. Maybe, just maybe, we can tame inflation without going into a recession…
New Insight On Working From Home vs Office!
A recent Colliers Workplace Advisory survey of over 200 major corporate office occupiers found that 69% have set a number of days to be in the office, with the majority requiring three or more days in the office. Trip.com, with 35,000 employees, did a study on hybrid vs full-time office work and found that attrition went down 35% with workers working from home. They also found that workers worked 80 minutes less during the week but increased work over the weekend by 30 minutes, and overall, there was no different in performance between hybrid and full-time in-the-office productivity. Eagle Hill Consulting, in an article published in the SF Business Times, found ‘46% of government employees who teleworked part time or all the time said their team’s performance has improved, and 35% of those who worked in person in the office said their team’s performance improved.’ Apple just announced that as of Sept. 5 workers will have to be in the office at least three days a week, and Comcast announced that as of Sept. 12 their employees will be in the office Tuesday, Wednesday and Thursdays.
There May Be A Very High Cost In Re-Tenanting Vacant Big-Box Retail
I was at a recent commercial real estate brokers meeting where the topic touched on the high cost of converting big and medium retail boxes to accommodate smaller-sized retail tenants. Taking a former CVS or RiteAid building of 35,000 square feet and demising it to fit 2-3 smaller tenants could cost the landlord $100/sf or more in tenant improvements, and in some of the suburban areas the nnn rental rate of $12-15/rsf nnn per annum means it might take the landlord eight years or more just to recoup their upfront construction costs of re-tenanting the space. Electrical, HVAC and construction costs above the ceiling were mentioned as big-ticket.
Office Update, Nationally and Locally
On a national level, the Colliers Q2 2022 U.S. Research Report reported that net absorption was positive for the third time in the past four quarters. Asking rents are holding firm but ‘generous concessions are on offer’. Sublease space is at record levels, now totaling 218 million square feet. Locally there is good news and some not-so good news. In the Tri-Valley East Bay office region almost 400,000 square feet of office deals were just signed, including Vagaro subleasing 106,000 sf at 4430 Rosewood and Unchained Labs expanding from 60,000 sf to 121,000 sf at 4747 Willow Road, both deals in Pleasanton. Next door in Dublin, Snowflake Software expanded from 40,000 sf to 153,000 sf at 4140 Dublin Blvd. On the other side of the equation, ADP just announced it was shutting down its 63,000 sf office at Britannia Business Center in Pleasanton. In San Francisco, according to the latest CBRE report, 29% of the city’s office space, 25 million square feet, is now available. In the Business Times article 8-10-22, “One industry executive wryly observed: ‘We’re not overbuilt, we’re under-demanded.” San Francisco’s occupancy rate, which is how many workers are actually back in the office, is at 39%, compared to 50-60% back East. “…the country’s biggest banks have all but ceased lending on high-rises.”
The Silver Linings Of Coming To Work While Most Are Staying Home
Traffic getting to the office is usually light as many stay home to telecommute. Then when I get the office on Mondays and Fridays there is a ton of available parking, and still not so bad the rest of the week. There is no wait for an elevator, and the same with the restrooms. The office is much quieter than it was pre-COVID, and our office brings in tons of fresh fruit and all kinds of free snacks to entice us to be in the office. Going out to eat is easy, with few lines at the nearby restaurants praying more customers will return to the office.
Consistent Week After Week San Francisco Company Reductions
Recent headlines: Bulk of genetic testing company’s 1,000 layoffs will be in S. F.; Metromile’s new owner slashes dozens of San Francisco jobs; yesterday headlines, Twitter set to close parts of its San Francisco footprint. There have been a few bright spots but overall, during the past six or more months folks may have left their hearts in San Francisco but not necessarily their jobs. My opinion, San Francisco with its corporate taxing policies, continued homeless situation and still among the highest office rental rates in the country. What is the solution? Lower rental rates to be competitive with most other parts of the United States and stop trying to fix low-income housing subsidies and the homeless crisis by making corporations write most of the checks.
Traffic or Table Tennis?
A recent Bisnow headline said it perfectly. “Traffic or Table Tennis?” The article cited amenities like golf simulators, food trucks and coffee carts as ways to incentivize workers returning to the office. The statistics have improved, with a national average of 44.7% for office occupancy, but the time and hassle in getting to and from the office is one of the biggest barriers to higher occupancy figures. Add in the high price of gas, the still-presence of COVID cases and working from home still for many is the only way to go.
Last month we celebrated my Father Arthur’s 97th birthday, and it still blows me away that he is still actively going to musicals and theater in San Francisco and elsewhere (three just in the month of September!). My Dad does complain he doesn’t have the same energy level he did of just a few years ago, but he still plays chair volleyball at the Senior Center he lives in in Oakland, walks the 23rd floor roof for exercise, has a personal trainer, participates in men’s group discussions, and has dinner with 3-4 friends every evening. Not a bad lifestyle! I recently visited my son Jordan’s Inspired Flight headquarters in San Luis Obispo where he spends 12-hour workdays building very high-tech drones for the police, fire, utility companies and other major industries. His crew of engineers and production were amazing and his degree from Cal Poly in Industrial Technology was perfect for the job! Hunter (formerly Madison) is now 20, is at Diablo Valley College and works at PetSmart taking care of all kinds of animals. My wife Launa’s daughter Lindsey will be getting her master’s from Georgetown this May, and with her past experience working for the United Nations in Beirut and the State Department in The Maldives (she has been to 54 different countries so far and is fluent in French and Arabic) who knows what career path she will be headed on. My stepson Ryan, who is 21 and a Senior at UCLA, spent the summer reviewing movie scripts for several movie producers. Not a bad gig for a college kid!
By the time you read this the Feds will have raised interest rates, the stock market will have gone up or down another thousand or more points, and most of us will have had their fill of television, radio and mailbox-filled campaign ads…I hope your summer was awesome, and here comes the holiday season! Stay safe, be well, and be blessed with your friends and family, and I’ll be back to you December 1st!
