I-680 Corridor/Tri-Valley Office Market – Is it Office Melt-down or Just a Blip?

By:  Jeffrey S. Weil, MCR.h, CCIM, SIOR
Senior Vice President
Colliers International
ph 925.279.5590  f 925.279.0450
jweil@colliersparrish.com
www.officetimes.com

When I first got into the office leasing business, way back even before game boys and cell phones, the market was in the tank but I was so green I didn’t know it.  Class A space in Walnut Creek was 75 cents a foot, and a $6 tenant improvement allowance could redo your whole space.  The first office lease I ever closed was 2200 square feet at the Papermill in Emeryville back in December 1976 at a whopping 22 cents a square foot.  Then San Francisco got tight, vacancies there went down to a half-of-a-percent, and the floodgates of trans-Bay relocations started.  Rents shot up and we had a huge in-migration of the California state bird, the Construction Crane with millions of feet of new office space built in the mid 1980’s.  We overbuilt all across the country, and by the late 1980’s we had a 35% vacancy factor.  I remember leasing Nationwide Insurance 72,000 sf at Concord Gateway, Class A, turn-key at a buck a foot flat for five years.  So we crashed and burned for about 8 years, and then in the mid 90’s our Eastbay market started to come alive again.  We didn’t build a whole lot at first, but Bishop Ranch and the Hacienda Brittania projects leased as fast as they could get product up.  Rents went up slowly, and it was a fairly stable market until about three years ago.  E-commerce entered our world, and Santa Clara and San Mateo Counties turned red hot.  The dotcom invasion took over South of Market in San Francisco, and old converted warehouses barely worth thirty bucks an annual foot were now getting $65 a foot plus you had to give the landlord stock warrants.  San Mateo rents doubled, and during the past 18 months Tri-Valley office rents also went through the roof.  We also benefited from the Sunol Grade Syndrome, and the Silicon Valley big boys like Cisco and Intel saw the Tri-Valley as a very affordable office environment to help in recruiting and take care of their massive expansion that went on last year.

 I have to preface my next few comments as there are two sides to this office leasing story, and as I do primarily tenant work I of course am focused on that side of the equation.  There may be a few landlord brokers who still believe our market is strong, that the current situation is very temporary, and in a few months Nasdaq will recover, business will jump back, and we will once again be off to the races.  Hey, you could be right, and as I have a few high-tech stocks that could use a boost or my poor son is going to have to work his way through junior college, more power to you.

 However, it was very amazing that our market rents shot up so fast, that there was such a feeding frenzy for space – I remember one Bishop Ranch sublease space I had when in a 48 hour period, no exaggeration, we had four full-priced offers, and then the market went down so quick and two days ago Bishop Ranch called me, and they have 150,000 sf of mostly sublease space, and just the fact they called me says there is no waiting line for the space.  Look at the great value 4550 Norris has, 24,000 sf, 95 cents flat for five years which would give an office or flex user $1.50 full-service office space, flat for five years, in the heart of Bishop Ranch!

 Big picture – South of Market over 4 million feet vacant, very few tenants looking, in 6 months rent down by half.  San Francisco financial district, vacancies headed up, I’ve heard rents dropping $30-40 a foot just in the last 30 days.  The Tri-Valley – over 600,000 sf back on the market, and in my opinion more on the way. 

 Now don’t get me wrong.  This is an awesome place to live and work, no question – We’ve got an incredible housing inventory for executives in Danville, Pleasanton, and Livermore, and comparatively good access to the affordable housing in San Joaquin County and Eastern Contra Costa.  I mean, driving from Antioch to Pleasanton in commute hours is no cakewalk, but it beats fighting the Sunol Grade.  Our rents are still comparatively cheap, still about the lowest in the Bay Area, and we’ve got great fiber, low or no business taxes, tons of corporate hotels and amenities.

 However, just look at the headlines for just the past weeks press:

Inktomi put 380,000 sf back on the market

Accenture  slices employee rolls

Hambrecht & Co. cancels Presidio expansion plans

Yahoo lays off 400

Lam cuts 600

Kozmo closes

Motorola lays off 22,000 since December

Scient cuts 675

Schwab slows pace

Documentum cuts 12% of workforce

And just yesterday, JDS to cut 5,000 jobs    

 It took a lot of these giants many painful months to finally decide to downsize, rightsize or just outright unhire employees.  Remember, just last year it was near impossible to find someone to hire, now after you’ve found them, set up their cubicle and trained them, and bam, to terminate employees, shut down growth and retrench is a very, very tough process.  So, after six months of lowered earnings estimates we are awash in downsizing.  My opinion is we have a lot more of this to come.  Nasdaq may go up or down a hundred points at a time, but the big long-term picture for many companies is to get back to profits, focus on core business, and get in a business position for the long haul.  Motorola laying off 22,000 people back East will trickle to our Tri-Valley at some point in some distributor shutting down a sales office, and it seems every week another significant block of space is coming back on the Tri-Valley market, like Intel or Kvaerner Davy, and what if a Cisco or Schwab or SBC decides to give up 200 or 500,000 square feet, not that they have said they would, but what if?

 So I think we have a ways to go before we hit bottom, and once we are down there it may be awhile before we start to rise back toward the surface.  Do you think these giants who took so long to painfully fire valued employees are going to rush out at the first sign of a stabilized Nasdaq and begin massive rehiring?

 We’ll still see firms in Santa Clara open up shop in the Tri-Valley, especially if any of their management lives in Danville and sees the futility in a 3 hour Sunol grade daily commute, but it will be a trickle, not a flood, and the same holds true for relocations out of San Mateo and San Francisco.  Why move when their Landlord is willing to drop the existing rent to where there is no economic incentive to Trans-Bay relocate? 

 How bad will it get if you’re a property owner trying to justify high rents?  Or, the other side of the fence, how good will it get if you are a tenant facing a lease renewal or needing different space?  Remember, our rents are up 50 to 100% over what they were just two years ago, so I expect some type of drop back down but nowhere as low as we saw in 1999.

 So, prognosis for the future.  Lower rents, more availabilities, happier tenants, although I think they were way more happy paying higher rents in a gangbuster economy, and if you want to know when we can see the light at the end of this office leasing tunnel,

 Ten Signs the Office Market Has Bottomed
From an office leasing broker's perspective:

 10.   The inventory of sublease space is diminishing.

9.       Office Brokers are starting to work longer hours and even come in on weekends to catch – up.

8.       Developers begin dusting off previously shelved office project plans

7.      Local governments are once again more receptive to business growth, and less restrictive on anti-growth issues.
6.       A lot of things are better, but people just don’t know it yet.

5.       There are no layoff announcements during a seven-consecutive day period.

4.       The previous daily deluge of new sublease announcements had turned into a trickle.

3.       Landlords are courting the tenant rep brokers, but a little less aggressively.

2.       Your golf game is finally getting good.

1.    Broker open-houses are almost non-existent.           

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