Despite Market Whipsaw, Big Tech Is Buoying Bay Area Office Market -- For Now
With unemployment figures arriving Thursday morning and reports of tech sector layoffs proliferating, the effect of the coronavirus pandemic on Silicon Valley is growing.
During the week ending on March 21, California saw unprecedented demand for unemployment benefits, receiving 186,809 claims, while the nationwide figure totaled nearly 3.3 million people, more than quadruple the previous all-time record.
In the Bay Area, like the rest of the country, the sectors hit most directly are hospitality, malls and restaurants. But the region has also begun seeing venture capital-backed tech startups and well-established tech companies alike making significant cuts.
San Francisco-based travel startups Sonder and Zeus Living have both cut about a third of their staffs, while Silicon Valley juggernauts Cisco and Hitachi Vantara have laid off hundreds of their own. Hitachi told Bisnow that its cuts were made prior to the spread of the coronavirus in the U.S.
"Hitachi Vantara’s recent staff reduction is unrelated to the coronavirus pandemic," the statement said.
Some experts in and around Silicon Valley’s office market see it as resilient in the face of both statewide stay-at-home orders and the impending recession.
That fact that tech — and especially big tech — comprises much of the Bay Area’s economy could be good news going forward for its office market, Cushman & Wakefield Senior Director of Bay Area Research Robert Sammons said.
Low vacancy rates characterized most of the region’s submarkets heading into 2020, with San Francisco (5.4%), Silicon Valley (9.2%) and Oakland (10.8%) all below the 13% national rate, according to Cushman & Wakefield data.
Much of that absorption, at least in Silicon Valley, can be attributed to just a handful of companies: Apple, Alphabet, Amazon, Microsoft and Facebook accounted for 80% of the Valley’s tech job growth last year, according to Joint Venture Silicon Valley.
Except for Facebook, each of those companies has outperformed stock market indexes through the recent plunge, as has much of the Nasdaq, which bodes well for the Bay Area, Sammons said.
For the most part, “tenants are just in the wait-and-see mode,” Sammons said, though “big tenants are still doing deals whether they’re here in San Francisco or down in Silicon Valley. They’re still looking to expand.”
D.A. Davidson Cos. Managing Director and Senior Research Analyst Tom Forte, who focuses on consumer tech companies, said he thinks those that fuel much of the Bay Area’s office growth are positioned to expand even more in the next few quarters, a view shared by others.
Acquisitions, like Google’s of Fitbit last year, could happen more easily now with “fire-sale prices,” which should further big tech’s real estate footprints, he said. “In that regard, big tech will do better than everyone else,” Forte told Bisnow. “This is a tremendous opportunity for them to add assets on the cheap.”
Sares Regis Group of Northern California Commercial Development President Jeff Birdwell, whose company largely builds for companies occupying spaces of 300K SF to 1M-plus SF, doesn’t see an oversupply in that segment, though he says he can’t speak for others.
“As I look at the market, I don’t think we have an abundance of speculative product that’s at risk,” he said. “Nothing that I’ve seen will, I think, have a lasting impact on the local economy.”
Kidder Mathews Executive Vice President Kyle Nelson, who represents Silicon Valley tech companies often looking for spaces between 15K and 100K SF, said most of his clients are looking to wait things out until more clarity is available, and others in the middle of transactions are wondering if a reduction in asking rates will come soon.
“I think we’re early on in the process,” Nelson said. “What we have done is hit the pause button with current transactions and requirements that we’re working on.”
Even if big tech is positioned for growth amid much more uncertain market conditions, the ongoing economic turmoil presents a clearer danger to the Bay Area’s smaller companies and those in other sectors. Even before a recent rise in available sublease space, small to midsized subleased spaces began coming to market in closing weeks of Q1, according to Sammons.
In the new stay-at-home environment and with economists, like those at Wells Fargo, forecasting the sharpest quarterly decline in GDP ever in Q2, how effective the federal government’s $2 trillion stimulus is might determine how many layoffs follow the millions already set in stone.
Tech is about 25% of Silicon Valley’s economy, according to Joint Venture Silicon Valley President and CEO Russell Hancock, who said he expects layoffs that have been announced and reported to be “just the tip of the iceberg.”
As for talk of whether companies forced into remote work might stick with remote work beyond the ongoing pandemic, thoughts are mixed, ranging from curiosity to skepticism.
“I think when everything subsides and we come out on the other end, things will not be the same,” Hancock said. “We will look at allocation and location decisions differently, not just in tech but across the board.”
Birdwell said he is not so sure.
“I’m still a really strong believer in direct, face-to-face communication, and the power of creative thought that comes out of those interactions will always be greater than what can be done in a video call,” he said. “The amount of spectacular thought that comes out of those interactions is, I think, at the heart of Silicon Valley’s secret sauce and success.”
The Bay Area’s heavyweight office users also seem to be managing remote work satisfactorily, both in San Francisco and Silicon Valley. A nine-county poll conducted by the Bay Area Council earlier this month found 63% of respondents were working from home by March 17, the first full day of shelter-in-place in the Bay Area.
In Silicon Valley specifically, tools produced by Bay Area tech companies like Slack and Zoom have enabled many enterprises to remain productive, Hancock said.
“I’m seeing the tech sector carry on, and they’re doing it on the solid foundation that they built,” Hancock told Bisnow.