Is Office Demand Coming Back?

Episode Transcript
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(00:02):
Welcome to the Real Estate Express podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show we're talking
about the office apocalypse. But first, I'd like to invite
you to our upcoming Build to Scale Mastermind, November 9th
through 13th in Tulum, Mexico. This exclusive 4 day event is
for you to learn how to scale your business and your life.

(00:23):
This is an opportunity to spend 4 high quality days with the
leadership at YG Capital and to take your investing business to
the next level. To learn more, click on the link
in the show notes. We'd love to have you at the
Build a Scale Mastermind in Tulu, Mexico, November 9th
through 13th. On today's show, we're talking
about the office apocalypse and how it's been felt across most
major cities worldwide. The impact of the pandemic was

(00:45):
to reduce the need for conventional office space.
There are still people working from home who were in an office
environment back in 2019, but slowly, demand for conventional
office space is starting to normalize.
We're seeing it in multiple markets now today show we're
going to look at San Francisco specifically.
This city took a major hit in office vacancy.
Several commercial real estate reports indicate that the peak

(01:08):
office vacancy rate in San Francisco was 36.6% in the first
quarter of 2024. That's according to CBR E.
Other reports have cited rates slightly above 37%.
Based on the vacancy rate and the total inventory in the
market, we can estimate that in fact, we about 36.6 million
square feet of vacant space. About 10 million square feet of

(01:28):
that vacant space was in the downtown alone.
We're now starting to see a resurgence in demand.
Now numbers might seem small because the vacancy is still
incredibly high. This year started on a shaky
footing. The first quarter began with, of
course, a very high vacancy ratewith some reports citing an
overall vacancy rate increasing slightly from the end of 2024.

(01:49):
So it was still getting worse inthe first quarter of this year.
Leasing activity was strong withone report noting that the
highest quarterly volume since the start of the pandemic era.
But it wasn't enough to make a dent in the overall vacancy
because at the same time there was a lot of space being vacated
as leases ran out. The second quarter did see a
notable shift. Several reports indicate that
the vacancy rate decreased. One report from CBRE states the

(02:13):
vacancy rate dropped to 34.8% from 35.8% at the end of the
first quarter. CBRE reported net absorption of
780,000 square feet. That is a notable turn around
and the first time the market has seen positive absorption in
a long time. The AI sector was the undisputed
leader in leasing activity. Companies like Harvey AI,

(02:35):
Databricks, and others were consistently responsible for a
significant portion of the new leases.
One report noted that AI companies accounted for 40.4% of
all new leasing activity in the tech sector in the second
quarter. Now the companies are not just
leasing space, they're leasing very high quality space.
The majority of the leasing activity was concentrated in

(02:56):
Class A and Trophy properties, which offer way better amenities
and more modern layouts. Coinbase, the crypto company,
signed a new lease for 151,000 square feet at Mission Rock
Building B. This is a relocation to a new,
more modern development. It highlights the flight to
quality trend where companies are opting for newer amenity
rich buildings. While there were a lot of new

(03:17):
leases, there were a few fairly significant give backs.
Google vacated 365,000 square feet, contributing to negative
absorption to offset some of thegains.
Another strong leasing activity was the city and the County of
San Francisco. The city itself committed to
224,000 square feet in the mid market area.
That's a significant boost for that sub market.
That major lease represents a consolidation of newly renovated

(03:39):
space that will result in major operational savings as they
vacate about 20 other buildings to consolidate into this one.
Spacesalesforce.com is a good example of a company that had
previously embraced remote work and the hybrid model.
During the pandemic, the companyannounced a permanent policy
allowing the majority of employees to work remotely or in
a hybrid schedule. This drastically reduced the

(04:02):
need for a large amount of dedicated office space they had
planned to occupy. As a direct result of that
shift, they made a strategic decision to significantly reduce
their overall real estate footprint in San Francisco.
They cancelled major lease commitments at the unbuilt Tower
F, which represented about 325,000 square feet.
At the time, CEO Marc Benioff had stated that office mandates

(04:24):
are never going to work. The company has since reversed
course on that policy. Effective October 2024, the
company has established a new policy with different
categories. Certain departments like sales,
workplace services, data center,engineering, anything reporting
into the Chief Information officer are required to be in
the office four to five days a week.

(04:45):
Other departments like legal, product and marketing are
mandated to be in the office at least three days a week.
And then some specific engineering roles have a less
frequent requirement, like 10 days 1/4 full time remote work
has become the exception rather than the norm, and it's only
granted under very specific, limited circumstances.
Like for example, working at a client's site.
Google reduced their footprint by 365,000 square feet.

(05:07):
Now some of that may have been driven by layoffs, but the
reductions of Google have been fairly small in the Bay Area.
In 2024 the company reduced about 750 people, much of that
concentrated in Mountain View. But most of the reductions this
year have been actually quite small in numbers.
The smaller footprint I think isattributed to more efficient use
of space and some hybrid work. But even Google is pushing
employees to return to the office, with termination of

(05:29):
employment being a consequence for non compliance.
Tech companies, new and mature, are all embracing the notion
that people are more productive in the office environment than
working from home. That will eventually result in
the absorption of office space and the vacancy being
concentrated in the oldest inventory in the market.
Vacancies still above 30%, whichis still incredibly high, but

(05:50):
there are signs of renewed demand for office, albeit in a
smaller footprint. As you think about that, have an
awesome rest of your day. Go make some great things
happen. We'll talk to you again
tomorrow.

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