The Eastbay Office Market Is In Balance (Temporarily)
Prepared by:
Jeffrey S. Weil, MCR.h, CCIM, SIOR
Senior Vice President
Colliers International
1850 Mt. Diablo Blvd., Suite 200
Walnut Creek, CA 94596
Ph. 925.279.5590 Fax 925.279.0450
For the first time in many years, the Eastbay office market overall is in balance between landlords and tenants. What does this mean if you’re a landlord, investor, tenant or a provider of services to this industry? How long will this “balance” last and what are the signs the pendulum is beginning its swing to take the market back “out of balance”.
There are a number of submarkets within the Eastbay office regions of Alameda/Contra Costa counties. Overall, the office space availability has continued its downward fall, with vacancy rates falling from their post-dot com peaks of 20-30% to an overall 9-12% vacancy rate of today.
Leasing velocity, especially in the under-7,000 square foot category, is vibrant. Major corporations merging, offshoring or otherwise downsizing created legions of new start-up smaller firms. Savvy office landlords are carving up larger floor plates to build speculative 2-5,000 square foot office suites which lease almost as quickly as they became available. Eastbay landlords such as Bishop Ranch and Equity Office have filled hundreds of thousands of square feet of office space through this method.
During the “Tenant” market, aggressive lease transactions might have included substantial free rent, significant landlord tenant improvements, and other concessions required to seal the transaction. In many areas the Tenant concessions have not disappeared – however, in this now-balanced office market, both the Tenant as well as the Landlord feel empowered during negotiation, whereas in the past it may have been more one-sided. As an exclusive tenant representative who does not take any landlord lease listings I am experiencing situations which have not been evident for a number of years. When a client hesitates before committing to a specific space they now face losing the space to another prospective tenant.
Brokers are more likely to run into other brokers touring the same space, whereas in past years the tour velocity has been tepid at best. Developers are dusting off new project drawings that lay dormant for the past four years. Rental rates are either creeping upwards in a number of submarkets, or as has happened in a few cases, sudden and severe upward increases by as much as 20% increments.
What are some of the signs that this temporary balancing act is over and we are headed to a landlord market? Developers who have entitled office land tied up will begin dusting off previously shelved new office construction plans. Once we begin to see new office development hit city planning department agendas we should be well into the landlord market.
New office furniture is still much less costly today than it was during the height of the dotcom boom, but expect this to change in the very near future. Furniture prices will rise, potentially dramatically.
Long-term subleases are becoming a rare commodity as most of the great plug & play space have already been sublet.
Office parking has been relatively easy with office vacancies, but as these projects near 100% capacity parking will be more difficult and commute times will worsen.
Investors have been paying record-high purchase prices for well located office buildings in anticipation of future rent increases. Cap rates are at all-time lows. Expect this to continue.
Office expansion opportunities will diminish. Companies will not have the luxury of contemplating an office availability over an extended period of time as there may be multiple prospects seeking the same space. We will have “musical chairs” with the market-savvy office brokers pre-leasing space that the relocating tenant is planning to vacate, at times even before the space officially reaches the market.
What implications does this have for the sophisticated office tenant? Enlist your exclusive tenant representative services as early as possible. Prepare your future corporate budgeting with higher occupancy costs. Prepare to be more flexible in your office layout requirements as it might not be just the landlords nickel at stake. Check your existing lease for your leasehold rights as your next-door neighbor might already be contracting to expand into your space if you don’t have renewal option rights.
This office market will eventually get far worse for the Tenant and conversely, much more beneficial for the landlord as the pendulum continues to shift from a Tenant’s market to a Landlord’s market. However, it is my opinion that today, for the most part, in most areas, it is a balanced office market so both sides can smile at the office negotiating table … at least for the time being!
Jeffrey S. Weil, CCIM, SIOR, MCR.h is a Senior Vice President with Colliers International in Walnut Creek, California. He has represented Eastbay office tenants since 1976 and can be reached at jweil@colliersparrish.com.