The first quarter of 2022 Tri-Valley Office and Office/Flex campaign is in the books – the masks are off and office buildings are open.
Touring activity was far from robust but hints of future touring and requirements were evidenced by broker market surveys for pending tours. There will be no rush back to the office in the second quarter of 2022 with each active deal in the market illustrating caution as it relates to users taking less footage than before for shorter terms. Defining who will work from the office, who will work from home and who will be a hybrid employee is still the main theme with no apparent progress made quarter to quarter – the rhetoric remains the same. Small users (1,000 SF to 4,000 SF), for the most part, are still absent from the market due in part to success in remote working and generally, anecdotally, no demand from their customers to have physical plants. We would also speculate that until the larger users in the market dictate “all hands back to work” or some degree of that sentiment, the small users will remain working remotely and enjoy not paying rents which for small users is a more meaningful line item in the budget.
Tri-Valley multi-Tenant office realized an uptick in vacancy from the first quarter 2022 going from 21.52% to 23.03% with weighted average asking rents essentially unchanged at $3.05, down one penny from the prior quarter. Mounting vacancy over the last two years has had little effect on asking rents as the notion dropping asking rents in a market void of tenants resonates as futile. The asking rents are also supported by soaring costs of tenant improvements. In leasing deals that involve even modest tenant improvements, the costs are such that current asking rents barely justify the work in approaching a profitable lease. Free rent is the main elixir in enticing tenants from one opportunity to the next. We are also seeing, with so many options on the market, tenants gravitating towards those projects with extensive amenity sets – gyms, conference centers, cafes, and outdoor tenant spaces that include bocce courts, BBQ’s and seating.
The quarter was highlighted by three investment sales. Tarlton Properties and Harrison Street purchased Britannia Business Center, a four building 291,591 sf office and R&D campus located at 4125-4255 Hopyard Road from Virtua Partners of $78MM or $267/SF. The project is home to Teleflex, ADP and DiaCarta. Century Urban purchased 5934 Gibraltar, a two-story Class B office property as part of the Saratoga Center project located in the Hacienda Business Park. The property was fully leased at close of escrow and traded for $11.5MM or $276/SF and the seller was Ridge Capital Investors. In Livermore, 365 N. Canyons Parkway sold for $10.4MM or $207/SF. The Buyer, Franmar Company, purchased the property with 21,569 SF of shell space in two vacant units representing a 43% vacant office building. Silver Key Property Corporation was seller.
Leasing on the quarter included a 20,814 SF lease to Lumin Digital at 3001 Bishop Drive. This San Ramon address is associated with BR2600, the flagship and highest priced project within Bishop Ranch, San Ramon. Asking rents at that property are $3.65/sf full service. In Livermore, DayBreak labs leased 7,215 SF at The Vineyard (7683 Southfront Road). ALIF Semiconductor USA expanded at Stoneridge Place (7901 Stoneridge Drive) taking 8,477 SF. IrisVision, a tenant at Las Positas Office Plaza (5994 W. Las Positas Blvd., Pleasanton) expanded for a third time in the last three years and now lease 7,102 SF in that two building 105,000 SF project. On a sobering note, there are rumors that TriNet Group, Inc. will soon put two of their three floor plates (72,930 SF) at Park Place (the 4th and 5th floors at 1 Park Place, Dublin) on the market for sublease.
Based on current activity, we know the second quarter of 2022 will not bring significant erosion of our lofty Tri-Valley vacancies. We remain hopeful that the year will build momentum and users will start to come back to the office as they get clarity on their space needs in defining who will work in the office and which employee roles will remain “work form home” or a hybrid solution. The euphoria of waning Covid concerns has been subdued by rising interest rates, inflation concerns and the Russian-Ukrainian war. These actualities temper any predication that 2022 will be a banner year for office leasing in the Tri-Valley.
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