Will the Bay Area Office Market Need to Reinvent Itself?
- May 29, 2020
Bolstered by its trained workforce and high-paying tech jobs, the Bay Area has been a magnet for businesses, but the sudden economic slowdown has put a serious damper on its office market. The sector paused not only due to uncertainties regarding the economic impact of the COVID-19 outbreak but also because of remote work proving to be feasible for many companies.
However, “entrepreneurial investors with a longer-term view see this as a tremendous opportunity,” Shawn Milligan, a partner at KT Urban, told Commercial Property Executive. Despite temporary disruptions, KT Urban submitted a site development permit to the city of San Jose for Woz Way Offices, a 1.8 million-square-foot transit-oriented, mixed-use development. In the interview below, Milligan shares his views on the current office market conditions and talks about investor sentiment in the Bay Area.
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How is the Bay Area office market holding up during these unprecedented times?
Milligan: It’s really difficult to tell how the office market has been impacted by COVID-19 at this point. We still have a couple of weeks before the lockdown gets lifted for most people and the political climate is such that we won’t see a return to normal for several more months.
How has investor interest in the Bay Area office market changed over the past five months?
Milligan: The market has definitely paused. A lot of big, institutional investors have put their pencils down until we get more transactional data on leasing and sales. Entrepreneurial investors with a longer-term view rightfully see this as a tremendous opportunity.
To what extent have your office projects been impacted by the COVID-19 outbreak?
Milligan: Unfortunately, the lockdown shut everyone down here in the Bay Area. The construction industry was finally able to get back to work on May 4. While KT Urban has experience building complex, commercial projects, we currently don’t have any projects under construction. Our core competency is primarily in the land acquisition and entitlement phase.
KT Urban’s Woz Way Offices project might seem a courageous move during these challenging times for the office sector. What are your plans?
Milligan: This isn’t the first time that Silicon Valley has been impacted by a Black Swan event. These are very painful times for many members of our community, but we’ll get through this. We’re believers in the Valley’s ability to reinvent itself and come back stronger than before. We’re not courageous. Courageous are the people on the front lines battling this pandemic every day. We’re going to control what we can control and, for us, that means moving the entitlements forward during these difficult economic times.
When do you expect office space demand to pick up again and reach pre-pandemic levels?
Milligan: Nobody really knows. When fear is replaced by greed, demand will begin to accelerate again and we’ll start on the road to recovery. I’m not smart enough to know when this will happen or when we’ll reach pre-pandemic levels.
Some experts say that strength in the tech sector could support the Bay Area office market’s recovery. Do you agree?
Milligan: Yes, I believe in the American spirit of this country and the entrepreneurial spirit of this valley. Some technology companies won’t survive this shock, but the tech sector in general will emerge a winner. There is no doubt in my mind.
Do you expect the health crisis to change investor behavior across this market?
Milligan: Not really. There are markets that may see less demand in the short term due to health concerns. However, investors will continue to look for well-located properties with strong market fundamentals.
What are your predictions for the Bay Area office sector going forward?
Milligan: I believe that most people’s predictions will be wrong. For example, there’s a lot of talk about people working from home permanently after the lockdown is lifted. Let’s see how that works out.