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During the next few minutes we will do an overview of the I-680/580 office market and touch on where industrial is alive and well. We’ll mention some of the hot and less hot subregions, spend a moment on which tenant industries are out looking for office product and then suggest what might be coming up on the horizon.
I’ll try hard not to throw numbers or statistics at you because you’ll get some great hand-outs to take back to your office.
1998 was an awesome year, and for the most part 1997 was also very strong. Along the I-680 Corridor which stretches from Martinez down to Pleasanton we saw substantial office leasing activity from industries like software, telecommunication, internet, insurance, as well as a number of new call centers. Areas like Walnut Creek Shadelands which use to show a 30% vacancy factor are now 97% leased. At the height of the market last year both San Ramon and Pleasanton had vacancy factors less than 3%.
A few of the larger transactions along the I-680 during the last year included Documentum, Robert Half, TCI, Aetna and Nortel who combined leased over 600,000 square feet of office space.
New office projects in Pleasanton leased as fast as they could build them. To digress for a moment, my wife and I went scuba diving in the Bahamas last month, and we went on a number of shark dives where you go down to 50 feet, sit on the bottom, and a crazy diver clad in a chain mail suit sits about 15 feet in front of you and starts pulling fish out of a sealed canister. If the conditions are right, the number of sharks increase to maybe 35 to 50. These are 6 to 9 foot sharks, all trying to get at the same few fish this guy is pulling out of the canister. This is called a feeding frenzy. Sometimes the sharks get over-excited and even take bites out of each other. Well, over the past two years we had a slight feeding frenzy, with Santa Clara companies opening satellite offices in Pleasanton, San Mateo firms trying to cut their rents in half by moving to the Tri-Valley, and during this time period, we did not have many fish in the water – i.e., almost no new office product. What we did have, about 800,000 sf in San Ramon and 500,000 sf in Pleasanton over a two-year period, was quickly gobbled up.
Now we have a lot more fish in the form of over two million square feet under construction or set for next year completion. Plus, we have even more fish available with corporate restructurings – Vanstar, Mallinckrodt, Tri-Valley Growers and others have hundreds of thousands of feet of space for sublet. Add to this that some of our larger sharks which use to devour gobs of fish have swum away, like PeopleSoft which used to lease fifty or a hundred thousand feet a month. Well, the frenzy is over.
The market is semi-hot, not scorching hot, which is probably a lot healthier place to be for both Tenants and Landlords as this has restrained new construction. In a hot market the 375,000 square foot Treat Towers would have been leased months ago instead of 80% vacant today, and there would have been more 100% preleased signs on entitled development sites in Pleasanton instead of the "coming soon for lease" signs we see currently.
So no more 20% compounded annual rental increases and take it or leave it lease documents. Remember, with two mil of new space existing tenants will be relocating to some of this, freeing up second generation space. We saw this with Documentum, who is vacating a string of office/flex buildings in Pleasanton that the Landlord now has to relet in competition with new product on one hand, and below market sublease space on the other hand.
And why do so many companies want to lease here anyway?
I had lunch a few days ago with a real estate director who does huge call centers all across the country and I asked him, Why the heck are you guys still doing San Francisco Bay Area deals with our high real estate rates, high wages and even crazier housing prices when you can go to Nebraska, pay people half, get the space for way less, and be able to get a decent 3,000 square foot home on five acres for $150,000?
He said, the productivity of Bay Area employees is so so much higher then most other areas the numbers absolutely justify being here.
By the way, if you want 24-hour access to tons of market information of the East Bay office market, write this down, www.officetimes.com, and this is also the single-source to go if you want to know when the next NAIOP, SIOR, CREW, BOMA or other organization meeting is because we’ve got the master calendar for everyone right at the top of the page www.officetimes.com
Warehouse and industrial go to Livermore - that’s where it’s all at, lots of new product up, more on the way, and we still see Hayward and Peninsula warehouse and light manufacturing relocations jumping over the hill to Livermore to get relatively cheap rents and quality product.
In your handouts I have included a survey we recently did on what corporate tenants want in the next generation of smart buildings.
OK, predictions for the next twelve months:
Jeff Weil’s 1999/2000 Predictions
for I-680/I-580 Office Corridors
Tri-Valley office rents to stabilize due to increased supply.
Livermore will slowly get on the corporate office business map.
More large blocks of office space put onto the market due to corporate restructuring.
More call centers still a’ coming.
Continued satellite office hubs in Tri-Valley as Sunol Grade stays grid-locked.
Great broker open houses at new office projects that don’t get preleased prior to completion.
Residential growth moratorium – Pleasanton, Livermore, San Ramon, Danville.
As San Mateo office rents hit $4/sf month and housing prices continue to escalate, look for more Trans-bay relocations.
Long-range growth: Not in Walnut Creek, San Ramon, Pleasanton due to unavailability of land.
A few surprise relocations out of San Francisco and Oakland to I-680/580.
In summary, 1999 and the year 2000 should be strong office leasing years, with high-tech and back office continuing to absorb space, but maybe not quite as fast as it gets built.
Tenants coming out of five and ten year leases will still face 50 to 100% rental increases, but they will have more office locational alternatives than any other time during the past five years.
And remember, whether you’re a landlord or a tenant, the other party across the table is still a fellow human being just trying to do the best job they can, so play smart, work hard, and most of all, have fun!
Jeffrey S. Weil is a Vice President with
Colliers International and has been active in the Alameda and Contra Costa office market
since the mid-1970’s. He has leased and sold millions of square feet of office space,
and last year helped lease 45,000 sf to California State Automobile Association, 35,000
square feet to Bechtel Nevada, 45,000 square feet to State Farm Insurance, 42,000 square
feet to Roche Diagnostics, 50,000 square feet to ENRON, and hundreds of thousands of feet
to other assorted office users.