Building more vacant office space?

Some dots are so obvious to connect that it's child's play.  Take for example all the office building going on up and down the mid-Peninsula.  One wonders what the developers are thinking.  A big dot was publicized last week in Mountain View per the Merc:

MOUNTAIN VIEW — A lender has seized through foreclosure a South Bay tech campus once touted as an “exquisite” property in fresh sign of the economic troubles facing the Bay Area office market.  The office campus, located at 350 and 380 Ellis Street in Mountain View, was seized by an affiliate of KKR Real Estate Finance Trust, which is managed by New York City-based investment behemoth KKR & Co. Inc.

The $120.6 million that KKR invested to buy the tech campus is a jaw-dropping 66% less than the $357.6 million that an alliance of investment behemoth Goldman Sachs and Bay Area real estate firm TMG Partners paid in 2021 to buy the office complex.  The Ellis Street tech campus is now worth just one-third of its value at the time Goldman Sachs and TMG bought the property almost exactly three years ago.

I did business with clients in those buildings for years.  They are nice spaces (probably "Class A" but I'm no expert).  I just know they have a great location compared to many others in Silicon Valley.  And they lost 2/3 of their value in three years. The dot begging to be connected is this building below on Old Bayshore in dear Old B'game.  It's just one of several in progress as materials and labor costs jump and interest rates stay sticky at about 7%.  It will be a nice space as well with a giant parking garage on the left.  But will it be vacant for a while...or longer?  There are more Bayfront spaces lined up for redevelopment--the Hyatt Cinema is looking ready to fall down by itself.  At least the Broadway-California intersection is getting fixed.....wait, what?

Comments

[Spurinna]

Instead of building a new city hall, the city could use some of that empty space with plenty of parking.

[resident]

Most of City Hall could be run out of leased space anywhere in town. Council meetings could run in the Wreck Center. Nobody’s attending live anyway

[Joe]

It's not just the Bay Area. Add Boston, San Diego and Virginia to the "build it and they will not come" life sciences vacancy rate. From the WSJ today:

This Once Hot Real-Estate Type Is Now Being Offered as Office Space

Developers thought the pandemic era’s supercharged demand for life-science properties was sustainable, but they were wrong

Biotech and pharmaceutical buildings became one of the hottest investments in commercial property at the start of the pandemic. Now, the glut of life-sciences properties has gotten so bad that some developers are exploring the unthinkable: marketing the space for office use.

In the Boston region, for example, owners of at least 10 life-sciences locations are now offering those buildings for office space instead of lab space, according to brokers and other real-estate professionals. The building owners are willing to lease it for office use even though they can face a 30% haircut on what they had hoped to charge for life-sciences use.

Since the first quarter of 2020, more than 59 million square feet of new space has been added with an additional 19.1 million square feet in the pipeline in the U.S., according to real-estate services firm JLL.

By comparison, an average of 3.7 million was added annually in the five years leading up to the pandemic. “A lot of people just threw money in stupidly,” said Joel Marcus, executive chairman and founder of Alexandria Real Estate Equities, one of the largest owners of life-sciences property in the U.S.

Making matters worse, demand for life-sciences space has fallen sharply from its pandemic peaks. Many biotech, pharmaceutical and other life-sciences companies have lost their appetites for rapid expansion because of high interest rates, weak venture-capital financing and an uncertain economy.
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Now about those fictitious RHNA numbers local councils are scrambling to comply with?

[Cassandra]

I called this over a year ago.
SSF had the jump on Millbrae and Burlingame.

[Joe]

It's another new all time high according to the Merc:

SAN JOSE — The Bay Area’s three primary office markets, haunted by empty buildings, have reached forbidding new milestones of record-high vacancy levels, according to a grim new report.

Silicon Valley, which roughly equates to Santa Clara County; downtown Oakland; and San Francisco all hit record-high office vacancy rates in the most recent three-month period, JLL, a commercial real estate firm, reported in separate surveys of those markets.

Silicon Valley reported an office vacancy level of 22%.

“Leasing activity in Silicon Valley is up 21.6% from the previous quarter,” JLL reported in their assessment of the South Bay office market for the third quarter.

[Joe]

And the beat goes on. From today's Merc:

SANTA CLARA — A big tech campus in Santa Clara has landed a new owner in a property purchase that suggests office market values continue to wobble during the early stages of 2025.

The office hub on Jay Street in Santa Clara was bought for just under $21.2 million, according to public documents filed on Feb. 28. The tech campus has addresses that include 3250, 3250 and 3270 Jay Street in Santa Clara. The two-building office complex is near the interchange of U.S. Highway 101 and San Tomas Expressway.

The price that Four Corners Properties paid was just one-fourth of its prior value.

As of January 2024, the tech campus had an estimated value of $80.1 million, according to documents on file with the Santa Clara County Assessor’s Office.

Commercial real estate’s slumping values are poised to become a widening challenge for Bay Area city, county, and regional agencies, as well as public school districts, that depend on property taxes for some or much of their revenue.

Lower prices for office, retail and hotel buildings might do more than slow gains for property tax revenue. The slumping values might even cause property tax revenue to decrease.

[Joe]

News out of Belmont shows the reaction to overbuilding office space. And biotech/biosience space is quite specialized. B'game expected to get a slice of what has been a SSF and Foster City fattened goose. We'll see....

From the DJ today:

Belmont’s efforts to ramp up life science development may take longer than anticipated, as three of five major biotechnology projects have been withdrawn or indefinitely paused.

The projects included developments at 601 Harbor Blvd., 2 Davis Drive and 300-400 Island Parkway. A couple of the proposals would have been some of the largest developments in the city.

[Joe]

Another year another pile of empty offices, per the DJ:

With a 23.7% vacancy rate last quarter, San Mateo County’s office market is showing signs of increasing demand but not enough to demonstrate a substantial recovery.

The area’s vacancy rate was higher than last year’s first quarter, which was about 21.5%. Net absorption, which measures the difference between leased and vacated space, was -425,650 square feet last quarter.

Gary Baragona, vice president of research at Kidder Matthews, said he is seeing similar trends in the second quarter thus far.

“The demand fuels new development, and those new developments are being built, in theory, to have space for those companies to grow into,” Baragona said. “But when demand slows down, you can't just pause your development. You have to bring those to completion, so it adds to the supply.”

Even though Class A spaces had high vacancy rates last quarter, Baragona said that was likely attributable to more of those buildings coming to the market.