A Tale of Two Predictions: Bay Area’s Biggest Players Weigh-In on Fate of Regional Office Sector

Bay Area Council Economic Institute, Prudential, Swift, Sunset Development, Meridian, San Francisco
Image Courtesy of Laura Ockel

By Meghan Hall

Since the beginning of the pandemic, commercial real estate experts have been debating the plausibility of two different realities when it comes to the future of office space. Opinions have ranged from a strong belief in the resurgence of office to the less rosy thought that work from home will dramatically impact companies’ future space needs. At a recent development forum hosted by The Registry, some of the region’s biggest players discussed the evolving role of the office in commercial real estate.

“First of all, there’s this discussion around a U-shaped versus a V-shaped recovery,” explained Jeff Bellisario of the Bay Area Council Economic Institute. “I think we’re already seeing the U part of that; the pandemic has not gone away; uncertainty remains. There is a lot left to go in terms of thinking about the recovery of the economy.” 

For those at the Bay Area Council Economic Institute, recovery will not happen instantaneously for either the economy or the office sector. As of August, 28 percent of people between 25 and 54 were working from home across the United States, compared with 39 percent at the beginning of the pandemic. In the Bay Area, 45 percent of the working population in the region is eligible for work from home. The numbers, stated Bellisario, are typically higher due to the region’s concentration of technology firms.

Additionally, when one major company announces an extended work from home policy, others, especially technology firms, tend to follow suit. At the end of the day, companies within the Bay Area are always competing from talent, despite work from home orders, and flexible work accommodations are now also key when it comes to maintaining a competitive workforce.

“The one thing that we have noticed is that when one company announces that they are going to do remote work until July of next year, or they say 10 percent of their workforce is going to work remotely, then everyone needs to line up behind them,” said Bellisario. 

However, those at the Bay Area Council Economic Institute believe there are a few bright spots that will bring firms back to their physical office space, including the absolute pivotal need for collaboration and strong desire for social interaction. Additionally, the Bay Area is an incubator for some of the nation’s top talent thanks to its abundance of universities and venture capital funding in the region accounts for nearly half of all U.S. investment.

“[These companies] have made all of these investments, particularly on the Peninsula, around people just bumping into each other on a campus or in an open office space,” Bellisario added. “But maybe that’s not as necessary for your HR functions or your accounting functions. So, there is a certain percentage of people who may never go back to work full time in an office.”

What properties—and which submarkets— will fare best in the midst of the pandemic is up to some debate. 

“When this thing hit, we were really trying to figure out something to do…we were all stuck at home trying to get out of first gear,” stated Alexander Mehran of Sunset Development Company. “I think if we’re saying city versus suburban, I’d rather be suburban. And if there’s a market I believe in more than any other, it is the Bay Area.”

Swift’s Chris Peatross concurred that suburban markets do have their advantages, and Swift has been investing in the East Bay since about 2012. Offices will remain relevant, but many may shift to a hub and spoke model, or move all together, in an effort to better accommodate their employees.

“We have liked the suburban office strategy for many years; suburban office was a four-letter word in 2012/2013,” said Peatross. “I think that we see advantages to both markets.”

For Tim Hennessey, managing director over at PGIM, submarket was not the main thought, but rather product type and tenancy. 

“I’m an optimist,” said Hennessey. “My view is that office will continue to be important.” 

PGIM, the global investment management business of Prudential Financial, owns 38 million square feet of office space across the U.S., including One Sansome in San Francisco. However, Hennessey emphasized that PGIM owns more multitenant than single-tenant, triple net properties, a strategy which has provided stability as major tenants have vacated their offices in dense submarkets.

Hennessey continued, adding “…If you really analyze it, the weighted average lease term of our multitenant office is less than three years…It is kind of in the early stages, but when a lot of the corporations have to make decisions… we are really talking about renewals in a post-vaccine environment.”

PGIM has largely stuck with this model throughout the pandemic, even walking away from the opportunity to buy 123 Mission—also known as the Juul Building—in April of this year. According to The Registry’s reporting, PGIM walked away based on not only the lending market, but because of several big block tenants who expressed they may walk away from their desire to lease space in the building.

Meridian’s Chief Executive Officer John Pollock, echoed a similar sentiment to Hennessey, stating that their office portfolio has performed decently thanks to longer weighted average lease terms.

No matter the strategy, however, challenges remain. The general consensus among the panel’s experts was that price discovery remained difficult, and property owners and landlords have attempted to hold lease rates steady, offering up concessions and free rent in lieu of moderating rental rates.

“Our experience is telling us concessions are up,” stated Pollock.

Office won’t likely see its heyday until a vaccine becomes commonplace, and employees become comfortable with working in the office again. Mehran admitted that while Sunset Development has implemented a whole health and cleaning strategy, most companies have chosen to remain at home for at least the near future—a trend that has permeated throughout the region and put pressure on the office sector.

“I think it has become more of a tenant market. There’s sublease space out there and there’s downward pressure on rent,” said Hennessey. “2021 is going to be a bit choppy.”

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