Corporate Office Perspectives | December 2022
Corporate Office Perspectives | December 1, 2022 | Issue 255
Twitter may have set the bar for many things not to do, especially in regard to enticing workers back to the office. Staying away from the other Twitter-changes, when Elon Musk told workers they had to come into the office at least 40 hours a week, after the past almost-three years of being able to work remotely, and told the free food in the office was gone and they might have to work 80 hours a week (I saw this in a few reports, not sure how he would handle the labor laws)…I don’t think many successful corporations will emulate this course of action. There will be those bosses who insist on seeing their employees physically in the office, perhaps 2-3 days a week. Those mandating five days a week may lose valuable employees to other more-flexible employers. If we do enter into a full-blown recession workers might lose some of their leverage. There are industries where employees are coming back to the office as they and their organization are more productive. I see this in engineering, law firms, financial planners, companies dealing with governmental regulations and other industry segments. There are also fields where the company can be extremely profitable even with employees coming into the office a few days a week, if at all. Overall, the United States is still experiencing 50-60% of their workforce not coming in the full work week, depending on where their office is located, with San Francisco still seeing the lowest in-office body count. As leases expire expect to see significant nationwide office downsizing. I have been saying for the past several years that due to long-range workplace shifts we may have 25-30% too much office space in some parts of the country. This is not to say we don’t have an appetite for new office buildings. In a number of regions these are the sought-after locations, with the healthiest air systems, latest amenities, and the corporate flight to quality providing top-end rental rates for those developers. However, there are also Class A office buildings with 4-50% vacancies. Those with no debt are most viable, but if there is significant leverage and resulting negative cash flow, or the loan is coming due…watch out for potential defaults and foreclosures.
Major Lenders Exploring Reducing Office Loan Portfolios
Barclays Capital, Morgan Chase, Deutsche Bank and possibly other major lenders are reportedly looking to sell office building loans in major cities like New York to reduce their exposure. Bisnow on November 11, 2022, said “Lenders are reportedly focused on unloading office loans in their portfolio because they have been hit hardest by the pandemic and the rise of remote work, leading to record-high vacancy rates in some markets and declining values for many lower-quality assets.” There are also reports that they may be discounting these loans to entice buyers to take them. In recent days there have been major layoff announcements. Amazon just came out with 10,000 tech worker layoffs, Salesforce will be laying off hundreds, Meta 11,000 and every day seems to be another layoff announcement. These are further signs of erosion in the office market. “New York insiders have said they expect a wave of “value destruction’ in the city’s office market.” I have been keeping my eyes open for what might happen in the San Francisco Bay Area which is extremely vulnerable to the office tech sector.
Shorter Leases, Smaller Footprints
Joseph Gordon with Bisnow wrote on November 8, 2022, that according to a number of sources, new office leases showed 18% fewer deals as compared to Q3 2021, and 15% less than Q3 2019. The average size of the deal also went down 16% in 2022 as compared to 2019. Leases are also getting shorter with the average term now 6.2 years. “Office downsizing is a common cost-saving measure as the economy worsens.” It also might make sense if most of the workforce is only coming in a few days a week if at all. One big factor at odds with shorter lease terms is the skyrocketing cost of tenant improvements, as the shorter the lease the less the period to amortize these costs so the landlord gets some type of return from their initial expense.
Stanford and UC Berkeley Are World Leaders In Startup Founders
Sara Bloomberg in the SF Business Times Nov. 4, 2022, reported that according to Pitchfork, Stanford University and UC Berkeley are the top producers of startup founders in the world. Harvard and MIT were next at #3 and #4. This is reassuring as a future source of new companies requiring Bay Area office space!
Is This The Sign Of The Times? Meta Expects To Pay $2 Billion In 2022 To Back Out Of Office Leases
Bisnow October 27, 2022, reported “Dave Welner, chief financial officer of the company that owns Facebook, Instagram, WhatsApp and other platforms, said on its third-quarter earnings call Wednesday that Meta expects to lose roughly $2B from its cutback on office leases this year.”. Then today Meta said it was slashing 11,000 jobs. Lyft is trying to sublease half its San Francisco offices, Yelp is closing offices, Stripe, Twitter, and many other tech firms. My opinion is this trend will get worse before it gets better, especially if the Fed raises rates one or two more times. Just think, if we didn’t have such reliable, fast home Internet much of this work-from-home phenomena would not be possible.
Bay Area Leasing Activity Down 50%
THEREGISTRY November 4, 2022, Cresa reported that Bay Area leasing activity to date remains 50.2 percent below 2019 levels during the same timeframe and in the last year, 3.6 million square feet of direct space has been added to landlords availability. There is demand for trophy office space in San Francisco, upper floors with Bay views, and these types of buildings are 95% leased. However, trophy asses only account for 10% of the market. This means the other 90% of the office market has a much higher vacancy factor. In a recent Colliers presentation by their San Francisco office experts, the rental rates for Tier 1 buildings are double what they are for the lower end of the market.
Office Vacancy Is Still Rising
According to the latest Colliers U.S. Research Report, office vacancy went up in the third quarter 2022 with San Francisco and Seattle posting the largest increases and Dallas and Houston seeing their vacancy rate come down. San Francisco is now above 20% as compared with Manhattan which is at 11%. “Class A asking rates are, for the most part, holding steady, but there are generous concessions on offer.” With respect to sublease space, San Francisco is the most exposed market, with 8.3% sublease availability rate followed by Seattle at 5.6% and Los Angeles at 4.3%. to see this entire report go here.
Between 2018 and 2021, 352 Corporate Headquarters Have Left California
Between 2018 and 2021, 352 Corporate headquarters have left California. The three top relocation destinations were Texas, Tennessee and Nevada. The main reasons given for their exodus include California’s high taxes, the cost of living, the heavy regulations and the legal environment. Of the 153 that left just last year, 80 were from Los Angeles, 52 from San Francisco and 58 from Santa Clara. This was published in the San Francisco Business Times Oct. 26, 2022. The good news, according to a new research report just out, is that California is projected to be the world’s fourth-largest economy, possibly by early next year.
“New Sensing Tech To Make Smart Buildings Adaptive To The New Normal”
Published in FUTUREiOT October 25, 2022, “ABI Research forecasts sensor shipments will grow from 18.5 million devices to surpass 300 million by 2030, a CAGR of 35%. “Traditionally, sensing in the commercial building sensing market has been tied to establish systems, such as heating, ventilation, and air conditioning (HVAC), fire and safety, and access control, but a range of additional environmental sensing technologies, sensors, and devices are coming to market at a time of great upheaval in the commercial building market,” says Jonathan Collins, smart home & buildings research director at ABI Research. “As occupancy sensing, or air quality, or energy management, space utilization, and preventative maintenance push further into commercial building operations, systems integrators, building management providers, and sensor and device developers along with manufacturers will have to ensure they select and integrate the best technologies for as many applications as possible,” Collins concluded.” On the one hand this should make corporate office occupancy more efficient, knowing what portions of the space are occupied and need HVAC and lighting, and knowing which aren’t so those systems could be shut down. At some future point there may be technology that detects if an individual has COVID or some other transmissible disease in scanning in the lobby and not allowing access to the building. This also presents a huge differential between high-rise Class A buildings that can afford this type of technology and the Class B and C office buildings who either because of scale or type of building cannot.
Big Brother Is Watching!
San Francisco Business Times 10/24/22, ‘Employers Are Ramping Up Employee Tracking”, and Big Brother may definitely be watching where you are when you claim to be working. “In the new 2022 State of Remote Work Report, from videoconferencing company Owl Labs and Global Workplace Analytics, found 37% of employers had added or increased the use of employee tracking software since the pandemic began.” If you act like you are working from home in the local suburb but your boss can tell you are on a beach in Cozumel, this could lead to serious trust issues, even if you are actually hard at work on your laptop on the beach in Cozumel! ‘Microsoft surveyed 20,000 people in 11 countries and analyzed millions of Microsoft 365 productivity signals, along with LinkedIn labor trends and Glint People Science findings, to come to one big conclusion: Managers need to ditch “productivity paranoia” in the hybrid era. Despite these metrics, 85% of leaders surveyed said the shift to remote and hybrid work has made it challenging to have confidence that their employees are being productive.”
San Francisco Greater Bay Area Predicted to Grow By 4.8% in 2022
As reported in the San Francisco Business Times October 18, 2022, “Layoffs and economic uncertainty notwithstanding, the Bay Area is expected to enjoy economic growth of 4.8% this year, fueled by what remains strong performance from the tech sector, according to new research from the Kenan Institute of Private Enterprise. The report, 2022’s Fastest-Growing Cities in the U.S., looks at the performance of the greater Bay Area, which includes San Jose, Oakland and San Francisco. The findings underscore the powerful economy that the Bay Area continues to enjoy, with its emphasis on innovation and technology.” The report mentions that the San Francisco Bay Area ‘has extremely high productivity.” The report also mentions that some of the major corporate layoffs and hiring freezes won’t show up yet.
There Are 20 Cities Who Will Pay You To Move There!
In the October 21, 2022, San Francisco Business Times article, 20 cities were mentioned that will pay folks to pack up and move to their city. Here are a few examples, and the incentives range from giving you a discount on buying a home there, unlimited golf membership, free use of co-working spaces, free fitness center use, and other incentives. Morgantown, West Virginia will get you $20,000 in relocation incentives, Ruston, Louisiana $10,000, Harmony, Minnesota $12,000, The Shoals, Alabama $12,000 and on and on. If you want to see the full list with all the details, please go to www.makemymove.com
Industrial Real Estate National Vacancy 3.7%!
According to a just-released Colliers national U.S. Industrial real estate report, the national average is 3.7% vacant ranging from a low as 0.7% in Reno/Sparks, Nevada to a high of 8.8% in Huntsville, Alabama. There is 656.0 million square feet of new industrial space currently under development, with the Dallas/Fort Worth area accounting for 76.4 million of this. Annual rental rates range from a low of $5.96/sf in Chicago to a high of $19/sf in the Greater Los Angeles region.
Office and Industrial Real Estate Slowdown
The CIM Group out of Los Angeles had plans for a 1.1 million square foot office tower in downtown Oakland but is now proposing a 487-foot tower to build 600 residential units. This would be the tallest building in Oakland. According to CoStar News, “While to pivot is a boost of momentum for Oakland’s recovering housing market, it’s a reflection of the struggles of the Bay Area’s office sector, where leasing activity and rent growth have declined.” In the same news source, “Prologis plans to scale back spec development and instead focus on custom builds as volatility in the economy threatens to dampen demand”. I was at a meeting with various commercial brokers, and the apartment investment arena is now seeing challenging financing for apartment house sales, with 50% loan-to-value (in the past it was 60-70% LTV), and with interest rates up some purchases are negative due to cap rates being lower than the cost of financing. As interest rates rise prices may drop…and the all-cash buyer may be in the driver’s seat in 2023…
National Retail Is Improving, New Store Openings Outpace Closures!
E-Commerce be darned, the Third Quarter 2022 Colliers Retail Market update shows the national retail vacancy rate at 4.3%. Compare this with the national office vacancy rate of 12%! Malls are posting an 8.7% vacancy rate. There is 61.5 million square feet of new retail space under construction. NNN rental rates on an annual basis range from $48.51/sf in Honolulu Hawaii to $32.89/sf in the San Francisco East Bay region. “Retailers remain in expansion mode as store openings continue to outpace closures.” Remember not too long ago when we thought Amazon and e-commerce was the end of much of our brick & mortar retail?
With Rising Interest Rates, Cap Rate Spreads Narrow
According to a recent Colliers Capital Markets report, multi-family and industrial cap rates may be negative as they relate to the currently rising interest rates. Cap rates have yet to increase in transactions. Sellers will likely hold onto their assets unless they need liquidity. My opinion, up until a few months ago it was a great time to be a seller. There was plenty of low-rate long-term financing and more Buyers than available properties for sale. Now it is getting increasingly expensive to borrow, and those paying all-cash know they are in the driver’s seat and may expect discounted pricing. There are still many Sellers with last year’s pricing in their mindset, but more and more Buyers are now thinking next-year pricing which causes a market disconnect during this transition period.
Many CEO’s Want Workers Back In The Office, But Most Employees Would Quit First
Reported in the San Francisco Business Times 9/29/22, the CEO of JPMorgan Chase & Co. Jamie Dimon suggested that those who come to the office every day will be getting the better assignments versus those who work remotely or only come in occasionally. But “The Survey job site Monster found most workers would quit their job if they were forced to return to the office full time – and 40% would quit their jobs if they were mandated to come in just one day a week.” Monster Career Expert Vicki Salemi said, “Employers need to weigh retention and recruitment costs when it comes to return-to-office policies.” The State of Remote Work in 2022: A Survey of the American Workforce, by GoodHire, “about 73% said they feared that remote workers would be more at risk of losing their jobs in a layoff than their full-time office colleagues. About 68% also were concerned their manager would view full-time office workers as high performers and full-time remote workers as lazier.” I have also read reports that even the very fancy offices, with tons of bells and whistles, are very under-utilized with a low percentage of employees taking advantage of all these amenities. Companies keep trying different methods to get folks back to the office. Of course, if we have a serious recession with tons of layoffs all bets are off on who stays home and who comes in for fear of not having a job…
The San Francisco Office Market, Where Is Its Future?
“Is San Francisco’s CRE Market On the Verge Of Collapse? MyEListing.com, a Texas-based commercial real estate marketplace, has published a report based on San Francisco data, and it paints a picture of a seriously struggling office market. The pandemic-driven “work-from-home” model appears to be taking permanent hold in The City by the Bay. With San Francisco’s high percentage of tech companies, employees can easily work from home, and employers are seeing benefits. Workers, on average, are 47% more productive with fewer distractions while working remotely, and investors also worry that companies are embracing the trend to save money on office rents.” This past week various Bay Area companies have announced layoffs, including Gap laying off 104 employees, Twilio 11% of its workforce, Docusign laying off 700, WeDriveU 100, and then other signs of downsizing. Airbnb put 300,000 square feet in Santa Clara and 150,000 square feet of office space in San Francisco on the sublease market. Golden Gate University put its 210,000 square foot 536 Mission St on the for-sale market. Chevron sold its 1.3 million square foot San Ramon office campus to Sunset Development and in turn leased 400,000 square feet at 2600 Camino Ramon in Bishop Ranch. On the more positive side, ByteDance, the owner of Tik Tok, sublet 658,000 square feet of office space in San Jose.
Cybersecurity Risks For Major Office Buildings
Manufacturing has been well aware of cybersecurity risks for years, and remember last year when one of the largest meat processors was shut down due to getting hacked, costing them millions in downtown and ransom? With so much of major office building technology going into the cloud and The Internet of Things (IoT) now connecting building security, HVAC, elevators, and just about every other digital function what type of chaos could be created if, say, the elevators of a high rise were locked down until a ransom was paid, or the exterior locks or parking garage controls were taken over by a hacker? Sure, this might not be as disruptive as a hospital computer system being hijacked but to the building manager, owner and building tenants it could be seriously disruptive.
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 here. Did you know California currently has a budget surplus of $97 billion?
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.
Hard to believe, but my father, Arthur Weil, who turned 97 this past September, put on a suit a few weeks ago and briefly went dancing at the senior residence where he is living. He told me a very nice lady asked him to dance. Power to him for taking her up on the offer! My wife, Launa, and I have three children happily in college. Although when your kids are in their early to mid-20’s, they no longer feel like children but adult peers. My son Jordan, who runs Inspired Flight in San Luis Obispo, makes some of the most sophisticated drones in the world and his associates are considering setting up a GoFundMe to raise money to send these mechanical marvels to Ukraine to help in their intelligence gathering. I’ll let you know if it goes live.
Have a safe and warm holiday season and may all your dreams for the upcoming 2023 come true!
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