Corporate Office Perspectives | February 2023 | Issue 256
Unfortunately, not much has changed in the commercial real estate arena as we head into 2023. The increased interest rates have widened the spread between what Sellers want as their return and the cost of money to acquire real estate assets. Buyers are looking for price reductions while most Sellers, unless they have to sell, aren’t yet ready to play ball. Office employers are beginning to mandate at least a partial return to the office, and it remains to be seen how successful this strategy will be. There is still a significant portion of employees who would rather change jobs than be forced to commute into the office. The San Francisco office vacancy rate is reported to be at 28%, with more space expected to be added to this during 2023. The vacancy rate in the suburbs is also in the 20-30% range, with regular downsizing announcements occurring on a regular basis. However, there are a number of silver linings in all of this. There are sub-regions where there have been very few properties coming up for sale and this has now changed. Buyers with cash, or the ability to take a shorter-term financing are in the driver’s seat. I am also involved in office lease renewals with landlord concessions that would have been unheard of just a few years ago. Landlords do not want a vacancy under almost any circumstances, as it might take one to three years to find a replacement tenant, who might require $60-80/rsf (or $125-150/rsf in San Francisco) for new tenant improvements.
Future of Work
Colliers newest report on the future of work had some very interesting thoughts. “30-50% of knowledge management work is anticipated to be automated by 2030. This will result in less real estate and facilities and more reliance on machine learning and predictive analytics to support real estate functions.” …”The office will evolve to be more intentional and focus will shift to meeting and fathering.” To see this most interesting report in detail, click here.
The Office Market Will Improve…But Maybe Not for Three to Five Years
The New York Times recently published a lengthy article titled ‘After pandemic, office buildings are still in trouble’. “The value of office buildings could plunge 39%, or $454 billion, in the coming years, according to a recent study by business professors at Columbia University and New York University…In a sign of how fast the market has turned down in some places, companies are giving up space that they leased only months earlier. Meta, the parent of Facebook, recently decided to sublet the space that it signed up for about 10 months earlier in Austin, Texas, Meta must still pay the rent on 589,000 square feet, but its decision to find somebody else to occupy the space could push rents down across Austin, which until recently was seen as a thriving and growing technology hub.” In discussions with senior office brokers during this past week I shared this story. Most were more optimistic, and brokers representing landlords felt the market would come back sooner than most expect. They believed corporate leaders would begin to mandate at least three days back in the office, just like Salesforce just announced for some employees, and this would require the same amount of office space as a five-day return. Other experts told me, yes, the office market will return, but it may take three to five years…
Only 33% of Corporations Plan to Reduce Office Space!
In a Bisnow article published November 17, 2022, “Fifty-eight percent of those surveyed plan to improve or expand their existing occupancy, many are also implementing new procedures or technologies to help manage the shifting flow of employees into the office. Although hybrid work schedules are now the norm for 70% of workers, only one-third of companies plan to reduce their investment in commercial space, according to a new survey by consultancy EY.” “Employers are trying to encourage (if not mandate) return to office. Besides flexibility, some employers are also investing in-person events, providing meals, reimbursement for commuting costs and childcare support.” These are seismic shifts for how we have treated office employees in the past! We are entering into what might be an extensive transition and learning time for both corporations and their employees. What works, what doesn’t, what keeps employee retention high, what improves the corporate bottom line, and whereas in the past there were work templates like seas of cubicles, tech benching, and for many office types diminished usage of private offices, today the variety of when and how workspace is utilized is staggering!
Perhaps Remote Work Has a Huge Positive Impact on Corporate Earnings?
In The SFRegistry December 2, 2022, Marc Benioff, founder and CEO of Salesforce said this: “There’s a lot of things pre-pandemic that we had in our company that are expenses that we don’t need post-pandemic,” Benioff stated. “So before the pandemic, the percentage of remote workers for Salesforce was approximately 20 percent. For other companies now, we’re seeing that normalize at somewhere around 50 percent even with mandatory workdays.” At the end of 2019 top-line revenue was $13.2 billion, going to 17.1 billion in 2020, then $21.3 billion in 2021, $26.5 billion end of January 2022, and ‘the trailing 12 months of this year brought in $29.3 billion.” What if, just what if, corporate executives got their way and were able to get most or all of their employees back in the office and then sales fell?
Employees Want Better Tech, Not Snacks or Massages
Bisnow December 6, 2022: “In an effort to entice employees back into the office, companies have ramped up digestible perks like beverages and food, but a recent survey conducted by proptech firm Essensys indicated that employees don’t care about snacks or other frivolous amenities — they want better technology and flexible workstations. Of the 1,000 U.S. workers the firm surveyed earlier this year, 81% expressed frustration with their office situation, with 56% preferring better technology to enhance their ability to work, and 52% looked at the tech amenities in other buildings with envy, Commercial Observer reported. Such amenities included building-wide WiFi, network access across the building to various services regardless of the in-office location, and sensor-controlled climate control and lighting. Subsequently, only 20% said amenities such as massage rooms or beer were enough to bring them back to the office. Sixty-three percent reported that flexible workspaces were important, and among those, 34% wanted convenience when it comes to layout and space.” Although right now my back is sore, and I would trade a very slightly slower Wi-Fi for a very nice back massage followed by some great snacks waiting in the lunchroom!
Meta Platforms May Be Shedding Massive Amounts of Office Space, As Is Others
Meta has placed 114,000 sf off office space in Fremont on the sublease market. It is also rumored to be considering giving up 430,000 sf at 181 Fremont St. in San Francisco. Pinterest is giving up a chunk of their San Francisco office space. Salesforce just this week considering giving up more space in San Francisco. Oracle just announced it will put 186,000 sf of office space it owns at 5805 Owens Drive in Pleasanton on the market. AT&T may have 400,000 sf of Bishop Ranch office space for sublease. Ross Stores just put 50,000 sf for lease at their headquarters building in Dublin, CA. I also know of a number of East Bay firms downsizing from 50,000 rsf to 10,000 rsf, including some household names. Is there an avalanche still to come or will there be a continual dribble of downsizing announcements?
Gas, Commute and Daycare Stipends to Get Workers Back To The Office?
According to a new survey by Clarify Capital and reported by SF Business Times December 12, 2022, “The survey found about 68% of those working remotely would prefer to look for a new job with remote options if forced to return. About 27% would try to negotiate a higher salary instead of searching for a new job…The commute continues to be a major factor in the battle over the return of remote workers – as it costs both money and time.” The report also mentioned employees wanting gas, commute and daycare stipends as part of returning to work. My associates who represent office buildings for lease believe that if the economy does head into a recession those employees may be less resistant if there were fewer alternative jobs available. I represent tenants and think for the next few years the employee will continue to be in the driver’s seat on this.
We Space, Not Me Space
Credit for this statement goes to Jessica Pernicone, principal at JLL. “There is a certain amount of productivity you can get from being at home when you have heads-down deep work. However, if that’s not what your job requires all the time there are feelings of isolation and people start to feel disconnected from their colleagues.” The article by Jackson Chen October 26, 2022, in Commercial Property Executive discusses how corporate users are “leaning into office design that promotes collaboration and socialization, giving employees an experience that cannot be replicated at home or through virtual meetings.” Corporations are experimenting and there are some that still value a sea of workstations sprinkled with conference rooms. However, the trend is headed towards flexible space that can accommodate a wide variety of employee needs.
Vast Majority of Corporate CRE Pros Predict At Least 20% Office Demand Drop
Bisnow Dec. 16, 2022 “Hybrid work plans are starting to become set in stone across more of corporate America, and as more companies finalize their policies, how much office space they are going to cut from their footprints is becoming clearer. More than 71% of corporate real estate professionals say they expect hybrid work to result in space demand reductions of at least 20%, according to a survey from Colliers and CoreNet Global. Almost 19% expect that demand to shrink by 40% or more, while just 7% believe that the move to hybrid work will either not impact office demand or lead to a need for more space.” When I speak with office landlord brokers many of them are much more optimistic about the future return to the office, believing there will be more mandates that force workers back into the office. I disagree with them. Also, long-term if we build fewer new office properties over time obsolete buildings will be torn down and rebuilt as housing or other more viable uses. What do you think?
Distressed Property Experts Predict 2023 May Be a Busy Year
Hilco Real Estate Senior Vice President Steve Madura, who specializes in distressed assets, forecasts that $500 billion of commercial mortgage loans coming due over the next few years will ‘likely lead to a high demand for’ his services. “The combination of rising interest rates and a basically frozen capital market has created what Madura calls a “distress bubble” that will impact CMBS, private lenders, private equity and eventually main street.” Bisnow December 20, 2022. I recently had lunch with a number of commercial real estate investors who anticipate bargain purchase opportunities beginning sometime mid-2023. We shall see…
For The Second Straight Year, almost 1% of California Residents Moved to Another State
According to the Census Bureau data, for the year ending July 1, 2022, 343,000 California residents left the state. However, 106,000 births and 125,700 net international immigrations resulted in a net loss of 113,000. Meanwhile, Texas grew by 470,00, Florida by 416,000 and North Carolina by 133,000. Of course, with our limited water supply (even after our weeks of deluge) and bad roadways it’s possible that having less residents is not necessarily a bad thing?
71% of Corporate Real Estate Professions Predict A 20% Drop in Office Demand
Bisnow Dumber 16, 2022 “More than 71% of corporate real estate professionals say they expect hybrid work to result in space demand reductions of at least 20%, according to a survey from Colliers and CoreNet Global. Almost 19% expect that demand to shrink by 40% or more, while just 7% believe that the move to hybrid work will either not impact office demand or lead to a need for more space.” I love the positive spin Scott Nelson, CEO of Occupier Services at my company, Colliers, put on this. The reduction in office space demand has several benefits, including economic savings, but also increased employee experience. I do agree with Scott, as our office lunchroom is filled with fresh fruit, all kinds of snacks, and we often have pizza or other events to get everyone socializing in the office. Of course, I’m still waiting for the masseuse…
Colliers Reports Dramatic Decrease in Investment Sales Volume
A January 5, 2023 report by Aaron Jodka, Head of Research for Colliers U.S. Capital Markets, investment sales volume was down in November 2022 72% as compared with November 2021. Strong early-2022 numbers will still make last year a terrific success, but industrial volume is now down 80% and multi-family down 74%. Central Business District office building sales are at the lowest level since the Great Recession. In my opinion, part of these trends can be summed up in just four words: “Those Darn Interest Rates!”
How Does One Put a Positive Spin On An Overload Of Negative Business News?
I opened my daily Bisnow.com newsletter and the headlines blew me away. At the top was “Bed Bath & Beyond With 950 Stores Nationwide, Facing Bankruptcy”, and below this was “Salesforce To Exit Office Space, Slash Workforce 10%”, but if this weren’t enough the next headline read ‘Amazon Ups Layoffs To 18,000”.
Salesforce Plans to Shed Significant San Francisco Office Space
On top of already putting hundreds of thousands of square feet of San Francisco office space on the market, Salesforce just announced it will lay off 10% of its employees. The company is taking a $450-650 million dollar write-off due to office space reductions. It currently owns or leases 1.9 million square feet of office space in San Francisco, which has one of the highest vacancy rates in decades. As of November 2022, Salesforce had 10,000 San Francisco employees. At least it is not taking the less-honorable route Twitter appears to have taken. Reportedly being evicted out of its Seattle office for non-payment of rent, possibly not paying rent in San Francisco, auctioning off its cappuccino machines, letting the janitorial staff go with reports that the space smells like old food and a sweaty gym, and rumors of beds installed in some of the offices to make it easier to work crazy-long hours.
I am writing this during yet another too wet rain storm. My friends in property management are going crazy with all their property roof leaks and fallen trees. There has been so much snow in the Sierras that the skiing is wonderful but too often the roads have been too dangerous to get there, or the winds too strong and the ski resort just shuts down for safety reasons. My son Hunter is still at the local Junior College trying to figure out what career path he will follow, while working at the local PetSmart taking care of the animals. Jordan, my 26-year-old who runs Inspired Flight making industrial drones for the fire, police and private industry, has a wonderful girlfriend Mallory who is getting Jordan into horses. My father Arthur still continues to amaze me, taking Uber to San Francisco to see the SF Symphony and working out with a personal trainer…all at age 97! Wife Launa’s son Ryan will be graduating from UCLA this June with art and film degrees, and daughter Lindsey is receiving her master’s from Georgetown University in Washington D.C.
It will be an interesting ride in 2023, so please make sure you and your family stay safe, healthy and in whatever way makes sense for you, please help the less fortunate. Thank you very much for taking the time to read this and your comments to Jeff.Weil@Colliers.com are more than welcome!
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