East Bay Office Sector Sees Room For Growth Post-Pandemic
As a region bedeviled by long commutes and reliant on mass transit, the Bay Area may be among the quickest markets to take to suburban offices.
Over the last decade, the region has seen its share of super-commuters — people with commutes of 90 minutes or more in each direction — surge, with San Francisco and Contra Costa County experiencing jumps between 2009 and 2017 of 110% and 102%, respectively, according to a study by Apartment List.
In the face of the coronavirus pandemic, mass transit challenges present an even more pressing issue for companies and their workforces.
Before the public health crisis, hundreds of thousands of local workers relied on Bay Area Rapid Transit and municipal transit systems like the San Francisco Municipal Railway every day. On an average pre-pandemic weekday, over 400,000 trips were taken on BART, according to its February monthly ridership report, which took place before shelter-in-place orders took effect.
Now, with flexible-work arrangements likely to become more common and pandemic-induced challenges to surmount, a shift to the suburbs could be in order for more companies, according to some developers.
"I see a lot of demand coming into the suburbs," LBG Real Estate Cos. Managing Partner Leslie Lundin said.
Most of LBG's properties are shopping centers and other retail. But as part of the real estate company's massive mixed-use redevelopment of a long-struggling Richmond mall, it has plans for a large office component that Lundin said has a better outlook now than it did at the beginning of the year.
Overall plans for the project, which is called Hilltop by the Bay, call for thousands of residential units, a revamped retail lineup and up to 800K SF of offices. About 325K SF of the latter would come combined from buildings formerly occupied by a JCPenney store and a Sears location and be ready for tenants in the short term, Lundin said.
“Especially now, in a post-COVID world, we’re seeing an increased demand for office, and, potentially, for life sciences uses as well," Lundin said. “To the extent that we had additional demand, we are looking at potentially converting portions of the rest of the mall as well.”
Existing suburban office owners like Sunset Development Co., which owns Bishop Ranch in San Ramon, may also take a look at building new inventory once the economy stabilizes.
Shelter-in-place orders appear to have accelerated a shift toward mixes of on-site and off-site work becoming more common, and suburban office locations are a potentially better fit for part-time office workforces, Sunset Development Co. President and CEO Alex Mehran Jr. said.
"Clearly, there's a role for suburban office campuses to take in helping companies solve their real estate strategy," Mehran said. "For a long time, we've felt like the all-the-eggs-in-one-basket strategy that's employed by a lot of bigger companies these days is not the best thing from a workforce happiness perspective."
Home to the headquarters of companies like Chevron Corp. and 24 Hour Fitness and large satellite offices for companies like Rodan + Fields, Bishop Ranch only recently overtook peak rental levels it reached in the 1990s, according to Mehran.
He said he thinks rent growth will continue toward levels justifying newer suburban office product as companies opt for more distributed workforces.
"Today's customer loves fresh product," Mehran said. "The customers of the Bay Area really want the systems and the look and feel of a brand-new office building. Certainly, there's an opportunity to build new product once rents stabilize in this crisis and grow a little more."
Likewise, LBG also sees a clear market opportunity once more Bay Area companies have the economic certainty to start making leasing decisions, according to Lundin.
“From what we’re seeing, anybody that was in the city and is trying to figure out how to accommodate their employees that are in the East Bay is a potential target at this point," she said. "It’s really opened it up."
