Capital and Workplace Strategy Collide

I recently attended the NAIOP Capital Markets Review in Newport Beach California.  It was your typical Moderator / Panelist format with Mark Gibson off HFF leading the discussion among 3 large commercial property owners (Donald Akeny of Westcore Properties, Christopher Chee of The Blackstone Group, Bleeker Seaman III of Lowe Enterprises) rounded off by Allen Staff representing B of A on the debt side.  The common theme was that there is a bulk of capital available, but that it was being very selectively deployed, especially by lenders. Core technology markets such as the Silicon Valley, San Francisco, Santa Monica, Boston tech sectors and New York are receiving all the attention.

What was interesting to me is that even thought no tenants were on the panel, the word “Workplace” came up a few times. The tenants in these markets are investing money rapidly to grow their companies and workforces.  To attract the right employees capital is being spent on Workplace Strategy implementations that are changing these markets forever.   Markets such as South of Market or “SoMa” in San Francisco have seen major transitions since the Dot-Com bust as companies such as Twitter have changed the landscape have re-energized older buildings in the district.  The growth of these markets and escalating rental rates are attracting capital and pushing returns to historic lows.

There was some discussion about how the increased efficiencies brought about by Worplace Strategies have decreased the need for space in all markets but the fastest growing.  This isn’t a new trend.  Tenants have been on a quest to shrink the “square foot per person” ratio for longer than I have been representing tenants (since 1989).   This is a concerning issue for markets that do not have growth drivers such as “Tech.”  Capital is not flowing as eagerly to these markets and vacancy remain high with anemic growth holding back space absorption.  The good news for tenants is that, outside of the active markets discussed above, it remains a “Tenants Market.”

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