Technology will continue to drive demand and interest for leasing in the Bay Area
As Managing Director at JLL in Menlo Park, Andy Poppink leads the Silicon Valley operations for JLL and leads JLL’s tenant representation business in the Western U.S. Poppink will assist companies from early start-up stage when they receive their initial funding as well as global corporations, such as Apple and Yahoo! with the formation and implementation of their real estate objectives from inception to execution.
Poppink has years of Silicon Valley experience, so getting his read on the pulse of the market is an important perspective as we consider the leasing outlook in 2018.
How was 2017? Was it surprising for you in any way, and if so, how?
2017 was a great year for JLL’s Silicon Valley team. We were fortunate enough to work with a lot of very exciting clients and achieved record results yet again this year. A few key trends continued in 2017 and most surprising may have been that those key trends continued to expand. In particular, two trends stand out: 1) the largest occupiers continue to expand; and 2) the tech relationship between Silicon Valley, the Peninsula and San Francisco continues to strengthen.
In 2017, we saw some leveling off of leasing rates in some areas, but then also increases in others? Does this have more to do with the type of asset in question than the demand of office space, in general?
There are a number of influences that are driving leasing activity and rental rates in the Valley in general including: large occupier growth around their central operations, autotech, internet of things (IoT) and other uses driving demand for R&D/Industrial product and transportation needs in order for growing startups to access key labor markets. If you follow those three trends, you can see where the demand has been focused.
Worries would be that the large occupiers tap the brakes on growth and long-term growth planning
What about certain submarkets in the region. We saw a lot of vacancy in Santa Clara, for instance, but others surrounding it fared better. Was this a function of volume of building in one submarket vs. the other?
Some of the Santa Clara vacancy is due to large M&A activity and spec development. In just the past few months, activity has picked up in some of the most desirable projects where you can find quality product with readily available amenities like Irvine’s Santa Clara Square. As projects like Santa Clara Square fill up with tenants, some of the other nearby sites should see increased activity in the first half of 2018.
How different is the Bay Area market compared to some others west of the Mississippi? Do we really live in a bubble of prosperity, and are there any factors of the industry that worry you?
I wake up every morning grateful to be living and working in the Bay Area. We live in an amazing center of culture, education, lifestyle and business excellence. On a national basis, many of the markets are reaching stability, and the national economic outlook remains stable. Yes, we live in an amazing place. Yes, we will see a downturn at some point. No, that downturn is not yet visible on the horizon. Many people are concerned with the protracted duration of this expansion and the prospect of pending socio-political disruption but for now we continue to grow at a measured and healthy pace.
What worries you and conversely, what excites you about the year ahead?
Worries would be that the large occupiers tap the brakes on growth and long-term growth planning. They have mostly been very thoughtful about their future expansion plans and have had the ability to plan ahead. Other concerns revolve around landlord expectations for ongoing, broad-based rent growth; which submarket you are in can really make an enormous difference. Excitement continues around the growth of still nascent industries like IoT, transportation, AI/machine learning, robotics etc. New, strong players will hopefully emerge this year in those industries from the strong entrepreneurship and funding of the recent past.
There has been a lot of attention recently around downtown San Jose with the Google’s arrival there. No one seems to be talking about the Apple campus that the city approved in 2016. Do you see the rise of San Jose as a paradigm shift in the valley?
No comment relative to Apple and their plans. Relative to San Jose, it is fair to say that developer and investor interest is as strong as I have seen it for assets in the downtown San Jose market in particular.
Technology tenants move fast. What are some of the hallmarks of their approach to leasing that you think will continue into 2018?
Our industry will have to evolve and learn to move as rapidly as technology tenant’s core businesses do. Brokers, architects, and eventually landlords, will find themselves swept into the digital future of real estate. That may include solutions like co-working partnerships or new digital platforms like the one we are rolling out internally this year, which will allow clients to make faster, better informed decisions and to capitalize on all of the data that has historically sat unused in filing cabinets following projects.
As tenants see opportunity in other markets (Portland, Seattle, elsewhere), will it begin to affect the Bay Area in a meaningful way?
There is so much pressure on talent and the cost of living now that a little pressure release would be welcome and likely create some more leeway for a few emerging companies to grow locally. While our team is constantly performing labor demographics, municipal incentives negotiations and site selections for growth in alternative markets, most companies still want their core R&D functions to reside in the Bay Area.
Are there any overarching trends that you’re seeing emerging in the industry that are interesting to you?
The rise of flexible space and coworking will continue. Today, such flexible spaces represent less than 5 percent of over overall supply, but we believe it may rise to up to 30 percent in the future. Landlords and tenants are still in the process of formulating their future strategies as it relates to flexible space, and all are well aware of the basic opportunities and challenges at this point.
What data points or key metrics do you track to keep a pulse on the market?
We constantly evaluate the market from both a micro and macro standpoint. With the backdrop of the global and national economy, we focus more locally on venture funding, R&D spending, the development pipeline and tenant activity amongst a myriad of other variables.
Are there any other questions about the market the we are not asking that we should be?
There is a lot of discussion about the impact of autonomous vehicles on the way we work, the buildings and parking needs of the future, and where people will want to live. Some developers are starting to plan around with creative development ideas.