The Bay Area Office Market:  Where Is It Headed In 2003 and Beyond?

 

Presented to the Northern California CCIM Chapter Year End Marketing Session

Pleasanton, California

Jeffrey S. Weil, MCR.h, CCIM, SIOR
Senior Vice President
Colliers International
1850 Mt. Diablo Blvd., Suite 200
Walnut Creek, CA 94526
Ph. 925.279.5590 
Fax 925.279.0450
jweil@colliersparrish.com
www.officetimes.com

December 10, 2002

I’m going to talk about predictions, one way to make the market look positive, and cover some big-picture corporate real estate trends affecting our market.  I will touch upon the changing trends in corporate office space layouts and where this is headed.  We will look at the cost of goods and services between 1981 and today, review briefly market spikes that got the office industry fired up, review the big picture vacancy, and give you a few ideas on making money next year.  We’ll hit a few positive notes about the last two years, where we stand today, where we are headed, and what commercial brokers should focus on between now and when the market recovers.

The only thing economists and real estate brokers can accurately predict is last week’s football scores.  What’s fun is to check out a three-year old copy of Forbes or Fortune or Money or just about any of them, and for the most part no one predicted we would be where we are today. 

I thought we’d take a positive look at negative news, so you can see that we can get increasing rents just by flipping the years around to go back in time.

Here is the chart in a more normal perspective.

Here are some ‘big-picture’ corporate real estate trends.  50% of the Fortune 1000 send part of their operations overseas, like Bank of America who has call centers in the Philippines or a number of other large companies who have call centers in India.  Why spend $35,000 a year when you can get great workers for $5,000 a year who speak English with a Texan accent?  Many engineering and software firms send their projects to India, South America and other low-cost countries and this global trend will continue.

Just think-we use to manufacture our own toys, then Japan took this over in the 1960’s, then Mexico grabbed a huge share of the manufacturing market in the 1980’s, and now a great deal of manufacturing is being done in China-Just check the labels during your Christmas shopping and you will be amazed.   So, how long before China gets up to speed to handle our back-office, programming and call center work?

The Changing Cost
of
Goods & Services

1981-2002

1981                                                                                                   2002

  Another changing trend in corporate office space is interior design.  Back in the 1950’s and 1960’s you had rows and rows of metal desks, with parameter offices hogging up all the windows for the big-wigs.  Then in the 1980’s we had the invasion of the cubicles, the open-space plan and movable workstations.  Now in this decade we are seeing more team-working, flexible workspaces, where worksurfaces and tables can roll around, be reconfigured for a week or a month and then at the end of the project the team members can morph into parts of other, newly formed teams.

Telecommuting is here to stay, virtual officing where one has no permanent cubicle or office, technology allows data access from anywhere you want to work.   Wireless telecommunication and computer access is just starting to take off, where you give up the Cat 5 or Cat 6 hard wired office suite and go totally wireless, with your cell phone number following you wherever you go.  We still need to work out the kinks of security issues but our mobile office workforce is just at the forefront of where we are headed.

We’ve had some super-huge spikes which really threw the office market stability way way off.  In the mid to late 1990’s the office market was relatively stable, and rents either went up slowly or leveled off.  Then in 1998 we started getting ready for Y2K, and pumped billions into reprogramming our entire computer infrastructure.  I remember all the hoopla, the fear of economic doom when the clock struck midnight, but tell me if I ‘m wrong but there were a lot of third-world countries who didn’t spend anywhere the amount of money we did, and most of them didn’t fall off the edge of the world.

Then after we survived Y2K and filled up millions of square feet full of computer programmers, along comes the ‘New Economy’ which totally changed the way we thought about value and company worth.  It didn’t matter when or how cash flow came about, what was important was market share, market cap, and companies like Commerce One going from nothing to a billion dollar company almost overnight made sense to most of us back then.  So we opened Schwab and E-trade accounts, bought as much Cisco and JDS Uniphase as we could, and fueled an economy that could not hire workers fast enough, and could not get these new workers office space quick enough.  We converted warehouses, landlords saw rents go up 100%, then 200%, then 300% and sometimes four times what it had been only a few years previously.  We had bidding wars, one available office space and six tenants offering stock warrants trying to beat the other firms with the highest rent.  I remember taking one e-commerce firm who needed 60,000 square feet.  They toured the East Bay which was about two bucks a foot but ended up staying in San Francisco at six bucks a foot because they were afraid they would lose all their programmers if they moved to the suburbs.

Huge rents generated huge landlord profits, and set the scene for huge overbuilding.  Companies flush with cash started construction on their own office campuses, like Sun, Cisco, PeopleSoft and hundreds more, and when you are afraid you might not be able to get enough office space, well, just lease or buy extra just so you have future expansion.

So how are we doing now?

  As of December 1, 2002
Total Available Office / R & D Space

San Francisco Bay Area

84,000,000 square feet

Breakdown Summary

Santa Clara / Silicon Valley      50,000,000 square feet

San Francisco                             15,000,000 square feet         

Peninsula                                      8,400,000 square feet

I-880 Corridor                            4,900,000 square feet

I-680 / Tri-Valley                        5,500,000 square feet

One of the dangerous things about publishing a newsletter, issue after issue for 22 years is that every prediction I’ve ever made is in black and white for all to see and tell me when I’m wrong.  I won’t mention names, but a few of the largest Bay Area landlords are optimistically upbeat about our coming out of the office slump maybe as early as next year.  Of course, these same folks back in Y2000 were predicting great recoveries in 2002…

But maybe I’m just overly pessimistic-maybe its not all bad-So I did a test, something I never learned getting my MBA from Cal but what the heck-during a six day period I pulled out all the corporate good and bad news from local business sections and wrote it down.

10-31-02   Tri-Valley Hearld-Clorox Reports Soaring Profits.
              First-quarter profit rose 84 percent as the company
                 cut costs and increased sales of high margin product

                Corning to fire 2,200 after more losses.

                 Electronic Data System will fire as many as 1,000
                workers
11-19-02  Contra Costa Times-Bank of America to cut 163 workers
                 at its Concord Technology center.
11-19-02  San Francisco Chronicle-Agilent to cut up to 2,500 jobs
            tech company reports $236 million loss in fourth quarter.

                Advanced Micro Devices said it will take a pretax re-
                structuring charge of between $300 million and $600
                million in the fourth quarter as part of the costs related
                to numerous layoffs the chipmaker announced last week.
                The Sunnyvale chipmaker last week announced the firm
                is slashing 2,000 jobs as part of an effort to ret5un to the
                break-even point at $775 million in revenue by the end
            of the second quarter next year.
11-20-02  Tri-Valley Times-Xerox announces 2,400 more job cuts.
                Conseco with more than $6 billion of debt, near bankruptcy
                Home Depot sales slowing
11-20-02  USA Today-Xerox plans to cut 2,400 jobs worldwide
11-21-02   Contra Costa  Times-Boeing to cut 5,000 jobs as orders fall.
                Sega cuts profit forecast by more than 70%.
                Charles Schwab cut 660 jobs in San Francisco this month.
                Reuters Group has started firing 163 workers at its Palo Alto
                product development center

            Maxter plans to eliminate 200 more jobs next month in Milpitas.
11-21-02  San Francisco Chronicle-HP Profit up 300% for quarter
                ‘But the Palo Alto technology giant also said the number of jobs it
                planned to cut as part of the merger has gone up by an additional
                1,100.  The projected number of jobs to be cut by the end of its fiscal
                year 2003 will now be 17,900’.
11-22-02   Contra Costa Times-Morgan Stanley to lay off 2,200 employees.
11-27-02  San Francisco Chronicle-Sun vows to meet expectations.
                Intel likely to raise forecast for earnings.
                Contra Costa Times-PeopleSoft’s results not pretty.