Herd Mentality Could Trigger Healing Of S.F.’s Battered Office Market

Signs of big tech companies announcing the return of employees to offices bodes well for Bay Area office markets, especially San Francisco where the overall vacancy rate increased by 650 basis points over the past year, according to a report from Yardi Matrix.

However, the tepid announcements to date lack the teeth that may eventually trigger a domino effect of bringing bodies back to the workplace en masse, undoubtedly accompanied by unique post-pandemic challenges as well as pre-existing issues.

“I think right now people are just putting their toes in the water in regards to bringing employees back, and companies are cautiously moving forward,” Colliers Executive Vice President Dave Sandlin said. “But I think once you get some stronger announcements and more people back to work, I think you're going to see some of the big companies say we all need to be back at work or a majority of us do.”

So far companies like Uber and Google have reopened offices at limited capacities with Facebook announcing 10% occupancy starting on May 10, increasing to 50% after Labor Day, as reported by CBS Bay Area.

“It's the herd mentality — when the big guys go back everyone is going to say we need to go back,” Avison Young Managing Director Gregg von Thaden said.

The continued vaccination rollout is the crucial factor in triggering the expected stampede back to offices as well as continued low ICU counts — two criteria outlined in Gov. Gavin Newsom’s announcement about reopening the state’s economy on June 15. Yet questions loom about the finer details of companies’ hybrid work models and whether companies will need less square footage due to more employees working remotely or more square footage to facilitate social distancing.

Although he said it is too early to know all the details of what workspaces will look like, Sandlin said that instead of the standard 150 SF per employee, the space requirements could go up to 250 SF, even with some employees continuing to work remotely.

Providing the additional space could be a necessity. Hanson Bridgett LLP partner Jordan Lavinsky said that there are issues of liability for both landlords and tenants to create a safer working environment for employees. For landlords that could mean making sure that common areas like lobbies and elevators are sanitized regularly and for tenants it could involve ensuring that desks are properly spaced.

“The key for landlords is taking the precautions,” Lavinsky said. “I don't think anyone is expecting a landlord to completely eliminate risk — we don't know how to do that. A landlord can't ensure the safety of their employees or other users of a building, but they can take reasonable steps to warn and to mitigate the risk, whether that risk is Covid or anything else. The legal issue is actually the same. It's just that now there's this new foreseeable risk, that being Covid.”

Instances of liability could arise, for instance, if a landlord is aware of coronavirus exposure in a building and fails to take any action, resulting in a further viral spread. Tenants may similarly be responsible for conducting contact tracing among employees.

“There are a lot of challenges with respect to proving these cases,” Lavinsky said. “Someone who's injured needs to prove causation. They need to prove that they got sick because they came into the lobby or maybe the receptionist would need to prove that they got Covid during their work versus commuting to work or at a party over the weekend.”

One promising aspect is that landlords now have over a year of experience creating safer environments under their belts and more is known about the virus than when the coronavirus pandemic first emerged. Increased vaccinations also make indoor environments safer, something that Salesforce is capitalizing on with its announcement of a mid-May S.F. headquarters reopening for employees who are vaccinated, as reported by the S.F. Chronicle.

The outlook for the Bay Area’s office market recovery as a whole is positive, according to Sandlin who said he is seeing more users in the marketplace right now, more leasing and more significant deals of 100K SF or larger. The uptick in activity is also expected to yield positive change for the retail, restaurant and hospitality sectors that have also severely struggled during the pandemic.

For the retail world, vaccinations have a double effect in not only providing protection for employees but also making customers feel safer while out dining and shopping, according to The Econic Co. founder and principal James Chung.

“The return to offices will impact the downtown cores even more so, because places like the financial district are still fairly sparse in terms of foot traffic and a lot of those tenants have chosen not to reopen only because the cost of even just operating the location will exceed the amount of revenue they'll be able to pull in,” Chung said. “So I think the quicker that happens, especially in the downtown cores there's going to be a direct correlation with tenants reopening storefronts.”

Yet the economic recovery isn’t the only issue on the minds of Bay Area inhabitants and potentially those weighing whether to return. A March poll by the Bay Area Council found that the issue of homelessness far surpassed concern about other pressing issues like housing, climate change, wildfires, income inequality and racial inequality. There were, however, notes of optimism with 87% of respondents expecting that the region’s economy will be doing somewhat or much better six months from now.

“Only by building more housing, particularly housing that is affordable for those at the lower end of the economic ladder, can we hope to bend the curve on homelessness,” Bay Area Council President and CEO Jim Wunderman said.