Californians Going Back To The Office Soon? Investors Don’t Think So

Buzz: When will workers get back into the office? My trusty spreadsheet reviewed Property Shark’s stats on statewide office-building investments, looking at last year vs. 2019. This data is one indicator one when workplace life returns to the water-cooler routine.

Debate: So what’s the thinking behind the $22 billion spent in 2021 on 373 large California office properties for a total 49 million square feet?

That’s serious cash and lots of hallways, cubicles, break rooms and meeting spaces in towers, mid-rises and office parks. But compared with pre-pandemic 2019, that $22 billion was a 24% drop in investment dollars for 20% fewer deals involving 26% less office space.

Glass half-full

In a year where many commercial real estate niches were flooded with investor dollars, less buying of office spaces suggests investors aren’t yet willing to bet on any widespread and swift “back to the office” movement, even as the virus wanes in California.

But these office investment trends are by no means universal across the state. Look at what markets had the most relative investment interest in office space last year, as measured against 2019 levels …

Central Valley: It says a lot when the place with the largest investment growth has only a 1% share of all sales. Investors bet $211 million on 12 office properties with 1.3 million square feet last year. That’s 40% more investment; 8% fewer deals; and 52% more space sold vs. 2019.

Bay Area:  Maybe the flight from San Francisco in the pandemic’s early days created some urban bargains. Last year, $9.3 billion was spent in the city and across the bay on 106 properties with 17 million square feet. That’s 5% more investment; flat deal counts; yet 8% less space sold vs. 2019.

Orange County:  Could it be sizzle over substance with a long-term view, instead of investors eyeing any office return? This high-end market saw fewer but pricier deals as $1.9 billion million was spent on 41 properties with 5.8 million square feet. Compared with 2019, that’s only 1% fewer investment dollars — but deal counts fell 29% and 19% less space changed ownership.

Glass half-empty

It’s interesting to note the cities investors were avoiding …

Inland Empire: The place where Southern Californians moved to work remotely is another tiny office market. The $263 million spent on 19 properties with 1.5 million square feet last year was 24% less investment vs. 2019, with 10% fewer deals involving 17% less space.

Los Angeles: The $3.64 billion spent on 101 properties with 8.8 million square feet is a very different view than the Bay Area’s big urban market. Compared with 2019, there were 31% fewer investment dollars spent in Los Angeles in 6% more deals with 31% less space.

San Diego: Not lots of enthusiasm here either as the $2.1 billion spent on 40 properties with 4.7 million square feet was far below 2019: 32% less investment; 40% fewer deals; 41% less space sold.

Sacramento: This inland market wasn’t as alluring with $606 million spent on 20 properties with 3.2 million square feet — 43% less investment vs. 2019; 49% fewer deals; and 35% less space sold.

San Francisco South: From the peninsula south of the city through Silicon Valley, $3.9 billion was spent on 29 properties with 6 million square feet. This tech industry hub saw a 52% drop in investments vs. 2019. That’s 49% fewer deals and 46% less space sold.

Central Coast:  A tiny region for business with small investor interest: $114 million spent on five properties with 403,000 square feet — vs. 2019. That’s 54% less investment, 55% fewer deals and 55% less space sold.

What’s ahead

Office landlords need fewer vacant offices to make their 2021 gambles pay off.

So now we wait and see who’s right — last year’s buyer who sees workers in offices en masse soon or 2021’s sellers who weren’t willing to hang around to see if that thesis is correct.

Post Script

California’s three biggest office deals of 2021 …

$1.08 billion: The Exchange on 16th, the San Francisco home to online storage specialist Dropbox, among others, which was bought by KKR from Kilroy Realty.

$800 million: The San Francisco HQ for utility giant PG&E, bought by Hines from PG&E.

$780 million: Coleman Highline, a San Jose work hub for search engine Yahoo! — bought by AGC Equity Partners from Hunter Properties.


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