Bay Area Office Market May Fare Better Than Others

SAN FRANCISCO—Despite the issues surrounding COVID resulting in decreased office vacancies, the Bay Area office market has a long history of performing well, especially with tech companies. In fact, CBRE just named the Bay Area number one for tech talent in the nation for 2020.

Brent Carroll, co-director, senior vice president and asset manager for KBS, recently discussed the Bay Area office market impacts of COVID, office trends accelerated by the pandemic, anticipated changes and how office footprints will be affected.

GlobeSt.com: How has the Bay Area office market been impacted by the current environment? Are there particular submarkets that are faring better than others?

Carroll: We’ve all seen how critical technology has been to everyone during COVID-19, especially office users who were able to pivot from working in an office building to working from home during stay-at-home mandates. Bay Area-located tech companies have benefited from this shift as the demand for better technology that can be accessed remotely from anywhere is heightened.

San Francisco’s office market has been one of the most impacted by the outbreak of COVID-19. Vacancy rates have surged due to the substantial amount of sublease space that has come on the market in the past few months. In addition, the demand for office space is very limited which will likely put additional  downward pressure on rental rates.

In spite of the current environment, KBS is still actively seeking out well-located properties in the Bay area markets. We now have five Bay Area properties that are part of our client portfolios that have continued to perform well during the pandemic. These properties include The Towers Emeryville, 201 Spear St. in San Francisco’s Financial District, and Ten Almaden, District 237 and The Almaden in downtown San Jose. These high-quality assets which are scattered throughout the region have shown minimal changes in occupancy during the pandemic. This indicates to us that these submarkets are still healthy and many of our tenants are navigating their way through the pandemic successfully.

GlobeSt.com: What trends in the office markets might have been accelerated by the current environment?

Carroll: Before the pandemic, companies in the Bay Area were in fierce competition for top talent. In order to compete for the best professionals for their teams, many companies were seeking out superior office space with cutting-edge amenities in the most advantageous locations within these markets.

Office environments that address tenants’ health and wellness were especially popular within the Bay Area even before the current crisis. Office users were demanding buildings that offered abundant natural lighting and minimal off-gassing from construction materials and furnishings, as well as abundant fresh and healthy food options, and on-site or nearby fitness facilities.

This trend has been accelerated by COVID-19. Many tenants and their teams have been working from home for months and may be wary of contracting the virus when they return to the office. Office buildings now must provide not only all of the above health and wellness amenities, but also a workplace that is safe from viral transmission.

In addition to specific health and wellness features, outdoor amenities will become more popular as experts say the virus is less likely to spread in outdoor environments. Many of our tenants are looking at ways to develop new practices that adhere to social distancing and disinfecting protocols designed to keep occupants safe and healthy as we move through the pandemic.

GlobeSt.com: What changes do you anticipate in the office market during the short and long term?

Carroll: Over the short term, we expect office occupancy to remain relatively unchanged. Companies will continue to assess their business performance and make real estate decisions based on their own short- and long-term goals, and naturally the longer the pandemic continues, the more the market will be affected.

That said, COVID-19 has shown us how resilient today’s companies are in the face of a monumental crisis. So many companies were able to transition swiftly to working from home and a large percentage kept their teams intact in the process.

The office sector has dealt successfully with a variety of disruptors, from the dot-com era through the Great Recession, and ultimately emerged strong. We anticipate once this pandemic subsides, the market will likely rebound solidly.

For the Bay Area specifically, companies will always be attracted to this area in an effort to attract the tech talent needed to flourish in a very competitive environment. There is every indication that the office sector in this region will continue to prosper.

GlobeSt.com: Will companies increase or decrease footprints as a result of the current environment?

Carroll:  There is evidence that many companies may actually increase their footprints as a result of the current environment. Keep in mind that one of the biggest workplace trends before the pandemic was toward densification–less personal space per employee and more common-area amenities. With health experts recommending people maintain a distance of at least 6 feet between each other at all times, the densification trend now must be reversed.

Tenants are strategizing ways to achieve this distance in the space they already have, in addition to taking more space in the building if possible. Also, in order to comply with the new mandates, large corporations and even mid-sized companies are turning to a hub-and-spoke strategy with their office space, choosing to keep a central office and several smaller offices nearby to allow for social distancing throughout the organization. These strategies will likely benefit the office real estate sector for the long term.