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SPECIAL BAY AREA RESEARCH REPORT

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A Q&A with Colliers professionals from the Bay Area, providing insights on the ‘new normal’ for their investor and occupier clients as we look forward to what’s next for the Office sector.

On Tenants & Amenities

Top nearby amenities that make office properties desirable have historically been public transportation and retail.

How is this pandemic impacting the amenity priorities for occupiers?

Hear from our experts:

The Impact to the East Bay Office Market

We are beginning to see subleases crop up in markets that have traditionally been tightly held.

What is the opportunity here for occupiers?

Interestingly, the East Bay has not seen the flood of subleases other Bay Area markets have experienced as of yet. A handful of small post-SIP subleases hit the market initially, and we’ve heard of a few larger (mainly tech companies) subleases coming down the pike, but it seems as of yet, East Bay companies are not looking to shed space as quickly as in other markets. With that said, we don’t think this market will remain unscathed and occupiers with near term lease expirations will likely be able to take advantage of low CapEx, shorter term subleases later this year.

Lease Strategies

Office leases signed years ago expire daily. During the 2007-2009 Great Recession “blend-and-extend” lease renewals were a strategy widely employed as a safe alternative to either downsizing or expanding.

What lease renewal strategies are you seeing in response to COVID-19?

It is important to differentiate between what happened in 2007 – 2009 to now, as what we are facing in practicality is a vastly different situation. As this is viewed as an evolving situation, rather than a pure economic downturn, landlords are looking to optimize their asset strategy to “weather the storm” rather than seek to evict. It is too early to reference “blend-and-extend”, as in reality what we are seeing from tenants is an uptick in requests to transition to a month to month lease, at their current rent. Our data shows that landlords are cooperating with this request and extending goodwill as they recognize that tenants are cautious about their income streams and employee expenses rather than a fixation on reducing rent. We will likely not be able to identify a trend of decreasing rent for another couple of quarters, however, we are noticing an increase in vacancies in our market.

Aileen Dolby

Executive Vice President Office Leasing

Employee Density

Following decades in the reduction of square feet per employee, from 500 in the 1970’s to 150 today.

What does the future hold for this metric?

While it is still early, it is likely we could see a shift back to the 200-225 SF per employee for the majority of businesses. Larger workstations, more circulation and larger common areas will be prioritized as well as considerations of shared amenities such as bathrooms and elevators in a multi-tenant building may be less desirable in the future.

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Andy Zighelboim

Capital Markets

Occupier Services Bay Area

Nick Polsky

Office Leasing

Jim Sobel

Office Leasing

Scott Harper

Office Leasing

Aileen Dolby

Workplace Strategy

Michelle Cleverdon

Capital Markets

Bob Gilley

Tenant Representation

Terry Bell

Office Leasing

Brendon Kane

Office Leasing

Michael Rosendin

Office Leasing

Susan Gregory

Executive Managing Director | WNC

Scott Ellis

Nick Polsky

Senior Vice President Occupier Services Bay Area

Jim Sobel

Senior Vice President Office Leasing

Evolving the Office Space

What does the future of the “traditional” office look like now that remote working has had a robust “test drive” for many occupiers?

There is no doubt that occupiers are busy “re-writing” the traditional office playbook, and each company has a different opinion as to how they should move forward. Many have experienced a high level of productivity during this shelter in place environment. This of course has resulted in employees rethinking how they want to proceed in the new normal work environment. Avoiding long commutes, rescheduling their daily routines to accommodate personal goals and responsibilities as well as general safety all play a part of these decisions. However, as the pandemic hopefully subsides, it is unclear if the desire to “work remotely” will continue its current momentum. Will the same level of productivity continue? Will distraction play a role when restrictions are lifted? Will people desire to be “reunited” with their teams and colleagues? Historically, most companies felt that teamwork and close human interaction are the catalyst to creativity and advancement. This has been the “secret sauce” to many hugely successful endeavors. In the short term, there will likely be a hybrid strategy, but every company will have a different take as to what that will be.

Sublease Considerations

What are the benefits or challenges associated with subleases that should be considered by occupiers?

Sublease opportunities definitely have an impact on the market and can offer a host of benefits to occupiers. Fundamentally, the presence of new sublease options signal that the balance of supply and demand will be favoring tenants as more competition is entering the market effectively lowering rental expectations for all available properties. Many sublease options will contain several of the “expensive” line items required by todays tenants, effectively making these alternatives significantly less expensive than their direct deal counterparts. Items such as existing tenant improvements, furniture systems, connectivity, audio/video equipment and security can typically be included in transactions in addition to reduced rent making the saving potential significant. This will also drastically reduce the time required for tenants to occupy buildings. There are drawbacks to subleases that must be considered such as lack of flexibility in floorplan layout, fixed lease term, and the fact that there are multiple parties involved making a sublease a more complicated option. But the savings typically outweigh the risks making the emergence of quality sublease offerings a very tenant favorable market dynamic.

Terry Bell

Executive Vice President Tenant Representation Services

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Flight to the East Bay?

Internal data has indicated a renewed interest in East Bay markets from tenants previously focusing their sights on San Francisco and the Peninsula.

What are some factors driving that shift?

BART access has historically been a key requirement for corporate relocation decisions but recent social distancing mandates have created legitimate long term concerns by employees about riding BART. The East Bay is the largest originator of BART commuters to San Francisco and with new legitimate employee reluctance about riding BART there is a renewed focus on employers locating in suburban markets. Concord is a prime example of an East Bay office market where rents are under $30 per year, parking is free and most commuting employees live within 30 minutes by car. Most importantly, with employers reducing payroll costs and splitting work shifts it’s an easier sell to an employee to take a pay cut when their commute costs and times are reduced considerably.

Scott Ellis

Executive Managing Director Walnut Creek Office

Tech Tenant Demand Vs Other Industries

Demand on Space

With significant layoffs occurring throughout COVID-19 from major occupiers in San Francisco and surrounding areas.

Is this likely to impact demand for space - or result in a stalemate as some occupiers need to expand their footprint to comply with new social distancing measures in workplace design?

Recent layoffs will certainly create a drag on overall demand, a sign of which we’re already seeing in the sublease market. Occupiers will need to meet safety concerns by lowering density, or adding space to better accommodate their team, but we see those as short term adjustments, and they haven’t kicked in yet. A greater risk will be companies reconsidering what percentage of their workforce to solve for with a permanent workspace, and what functions their office space serves moving forward.

Brendon Kane

Senior Vice President Office Leasing

San Francisco Development

San Francisco has some incredible new mixed-use projects under development or entitlements over the next couple of years.

What are some of the key impacts we are likely to see to this pipeline? E.g., Will COVID likely impact delivery of spec suites?

The new development pipeline was most recently a race to the finish line to meet an insatiable demand for large blocks of space. We’re seeing the messaging already pivot to a more conservative wait-and-see, pre-lease preference for future sites. Specification for new construction may shift, and higher standards for well-being implemented. Mixed-use projects still stand to benefit from cutting edge infrastructure and refuge from transit obstacles.

San Francisco Development Pipeline

What Can Landlords Do?

What can landlords do to support tenant’s confidence?

The key to maintaining tenant confidence will be balancing safety protocols with accessibility. At present, landlords appear to be responding inconsistently to the challenge. Some are actively setting up clear protocols in lobbies for distancing with extensive signage, markers, and limiting elevators to two or four people as per the BOMA guidelines. Others are still yet to release their protocols, likely resulting in an impact to tenant confidence. Unfortunately, these protocols will likely cause frustration for tenants if they remain for the long term, however, communication with tenants and clear processes will help these partnerships successfully traverse these times.

Coworking Demand

Now that people can work from home and social distancing rules apply, will coworking survive? If so, how? Is this the new lease for traditional office?

Personally, I think coworking/flex-space will struggle in San Francisco for the next 12-24 months. The exception will be the Enterprise spaces that have long term (1-3 year) commitments. Out of 3.3 million SF of flex-space currently leased in San Francisco, we could see up to 1.5 million SF come back onto the market. Long-term there will still be a demand for this type of space, but the impact is likely to force providers to change their pricing models to accommodate the change in demand. Another impact is a change in location strategy for these providers. As employers look to provide options outside of employees travelling to urban markets, suburban coworking/flex-space may become a viable alternative. This is known as the “spoke and hub” model.

Scott Harper

Senior Vice President Office Leasing

Multi-tenant high-rise buildings are set to face some more unique challenges with phase re-opening logistics.

Tech Campuses

How is the impact of COVID-19 shaping the more traditional tech “campus” strategy?

The question is too early to prove out, but I believe the traditional campus strategy will not change. Companies will look beyond COVID-19 and post vaccine for the long term. One shift in strategy will be designing space with health/safety precautions in mind which will result in a higher per rentable square foot per employee allocation. There will be a certain amount of employees that will choose to work from home, but I believe the additional space allocation per employee will result in the need for larger office space in the future. Working from home is not for everyone as we are human beings and by nature desire to interact with colleagues and friends.

Michael Rosendin

Executive Vice President Office Leasing

Landlord Reactions

As this crisis affects commercial tenants, how are landlords changing their portfolio-wide decisions? Are your landlords concerned about reduced operating incomes? If so, do they feel that this will not be a long-term issue for their properties?

There is a huge amount of uncertainty in the future right now. Tenants’ ability to pay, renew their terms, etc. is vague as the impact to our economy continues to unfold. The landlord’s immediate response is to reduce unnecessary expenses and review the “state of play” with each of their assets. We have been supporting them in these efforts, however our experience is that Bay Area landlords remain positive on the future outlook and see these measures as temporary. As we settle into a “new normal” landlords will continue to monitor and adapt their asset strategy to meet demand and support quality tenants.

Virtual Touring

Virtual tours and 3D experiences have skyrocketed in demand during the shelter in place.

Have we seen conversions to deals with these marketing techniques?

Owner-Users

Are they too invested to relocate? If they did, who would purchase or lease their extensive campus holdings?

It is unlikely that one of the largest employers that owned real estate would leave the San Francisco Bay Area entirely. Not only are they invested in real estate, but they are invested in their people. If a company decided to downsize their footprint in the area, the decision to downsize would not be predicated on their real estate holdings, but a more strategic decision for the long term viability of the company. If they did exit, there is always a buyer for real estate in the Bay Area, it all comes down to price.

Michael Rosendin

Executive Vice President Office Leasing

The largest employers in the San Francisco Bay Area own many of the properties they occupy.

Back-to-Business with Colliers

How can Colliers support occupiers and landlords with their back-to-business plans?

During the continued uncertainty of COVID-19 and the “greatest experiment” of mandated work from home ever, many of our clients have questions and are seeking information on short and long-term impacts as well as what is happening in the industry at large. Our goal is to help our clients understand the shifts happening now as employees are working from home, and more importantly, understand how these shifts will influence their real estate and workplace strategies after the crisis. By leveraging data, a proven approach and process, as well as Colliers’ thought leadership, clients can begin to make informed decisions that will mitigate risk and provide an adaptable strategy that ensures a safe and healthy place for their employees. Find out more about our Work Forward >> Together program.

Touchless Technology

Touchless technology was already gaining traction as a desired amenity in buildings pre-COVID-19

How will it and other technologies change the workplace for the future?

The overall digital experience for employees will increase in importance as a result of COVID-19, whether they are in the office or somewhere else. The virtual environment will become almost just as important as the physical in office one. We will continue to see innovation in being able to support, and enhance, employee’s ability to do their best work as safely as possible. This will primarily be done in automation and AI and will include better collaboration technology, tools to support ideation and brainstorming, voice controlled elements, and mobile technologies. The goal will be to achieve digital experiences that are intuitive, seamless, wireless, integrative, as well as those that remove friction in how work gets done.

Michelle Cleverdon

Vice President Workplace Strategy

Susan Gregory

Executive Vice President Office Leasing

Not sure how to reopen your office?

Advice to Clients

With all the changes in the way people populate space due to the COVID-19, what recommendations have you been discussing and/or advice have you been sharing with your clients? What kind of space need changes have been most prominent for your clients?

First and foremost, organizations must start by detailing a plan for the future with a variety of stakeholders that span your organization. A practical approach to future strategies, whether that is supporting cloud commuting or a return to the office, will be critical to ensure that there is balance in investment and implementation. The return to the office has been addressed in three categories; physical workplace changes, workforce planning & occupancy, and employee transition & readiness. This boils down to the who, what, where, when, and how you engage employees to understand what is happening.For the physical office space, maintaining safe physical distances is key, but we are also suppling our clients with tangible recommendations addressing hygiene & cleaning, behaviors & protocols, communications & navigating the space, technology, and design considerations.

Investor Opportunities

What opportunities are evident for investors across the Bay Area in the wake of COVID-19?

We definitely believe there will be dislocations and inefficiencies created by this pandemic that we haven’t seen in many years. In the short-to-mid run, one possibility is driven by the potential of employees who will be reluctant to take public transit and officing in high-rise, vertical CBD markets. The suburbs may be real beneficiaries should employers choose to lease buildings more proximate to their employee base in order to offer them a safe alternative, perceived or real. For those tenants taking a less conservative approach, there could be an uptick in demand for low-rise, single tenant CBD buildings.Worth noting, suburbs may also benefit if we see increased momentum behind a hub-and-spoke approach being contemplated by Bay Area tenants.The sale leaseback and corporate owned real estate market may be another segment which may experience an uptick in activity. Certain corporations will look to monetize their corporate real estate as an opportunity to stabilize their balance sheets. Suburban retail redevelopment may accelerate given the fact that this sector was already experiencing turbulence prior to COVID-19. Alternative uses such as multifamily will make significantly more economic sense.

Continued Investment in the West Coast

Companies and investors have be-moaned the coastal cost of doing business for years, yet, few have actually left.

What are your thoughts on how that might soon change?

We will not likely see any sort of exodus of tenants from coastal markets. The concentration of highly skilled labor and the infrastructure to facilitate robust business environments is unique to these regions. Specific to the Bay Area, the confluence of a deep labor pool of technical engineers, access to venture capital, proximity to world class universities, and a high-quality of life would be very difficult to replicate in other regions. What we may see, though, is a cultural shift within those firms that would foster more of a remote and distributed workforce with a headquarter presence left intact.

Andy Zighelboim

Executive Vice President Capital Markets

Bob Gilley

Executive Vice President Capital Markets

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Contact our Experts from this Q&A:

Research Experts:

It is difficult to say with confidence the long-term impact to tenant demand for amenities. Ultimately, location has always been one of the top requirements for tenants and I do not think that is likely to change. The congestion of the Bay Area means public transport will remain a necessity and thus likely remain a focal point for occupiers. Supporting retail will always be important to service the San Francisco market and while it has been an exceptionally challenging time, retail has demonstrated its ability to adapt to continue to facilitate patrons through takeaway, delivery and other means. Likely areas of focus for tenants when selecting future space could be; low versus high-rise, air filtration systems and touch-less technology across common amenities.

Jim Sobel

Senior Vice President Office Leasing

Colliers Northern California Offices:

The virtual tours and 3D experiences have been instrumental to the marketing experience during shelter in place. Our team have been responding to demand through a variety of techniques and have received great feedback from landlords and prospects alike on the quality of experience we have been able to create. We are actively trading paper on properties with these tools in place.

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COVID-19 Bay Area Impact Reports