The Contra Costa County Office Market: Now and in the Future

While much of the greater Bay Area is still in the midst of an office leasing and construction frenzy, the Contra Costa office market remains a relatively calm suburban backwater in leasing activity. As an example, during 2017, San Francisco witnessed 9.5 million square feet of gross office leases, including the large Dropbox 732,000 square foot monster deal. Class A rental rates are now in the range of $80-95 per rentable square foot (rsf). San Francisco has a 7 percent overall vacancy rate with very few available blocks of large space. In contrast, Class A rents in Concord and San Ramon range from $30-35/rsf and Class A downtown Walnut Creek office rents range from $48-60/rsf. There is still fully-serviced Class B office space in Walnut Creek Shadelands which ranges from $21-24/rsf.

Rental rates have gone up significantly during the past three to four years, in some cases 30-50 percent, as vacancy rates slowly dropped and Contra Costa landlords readied for an invasion of relocation tenancies from across the San Francisco Bay and/or through the tunnel. However, for the most part, there have been few TransBay relocations and very little tech growth. Our 680 Corridor remains primarily made up of CPAs, financial planners, law firms, and local offices of national companies.

A major trend that is emerging in corporate America is utilizing office space as a significant strategy to attract and retain talent. Recruiting has become more difficult as unemployment rates have dropped, and competition for the cream of the labor crop can be fierce. Companies, including law firms, are re-examining how their office design, layout, type of building and location support keeping their employee talent “happy.” There are even new corporate designations like “Director of Employee Happiness,” as highly-satisfied employees generally have much higher productivity, lower absenteeism and lower turnover. Also, as the cost of real estate per employee can be 10-20 percent of the overall cost of the employee and a fraction of wages, monies spent on the workplace can be a wise investment with a substantial rate of return. Companies are providing a number of alternative work environments from touchdown spaces, private pods, collaboration lounges, meeting rooms, and leisure amenities like foosball, game rooms and beer bars.

The Millennial generation may not have a 9 to 5 mentality, with employees able to work anywhere and anytime, and the lines are often blurred between the job and personal life. Checking e-mails while on vacation and ordering from Amazon at work seem like routine functions to the younger generation who grew up on the Internet. Millennials also want to work in an amenity-rich environment, either downtown with easy access to restaurants and retail or as part of a corporate campus loaded with employee amenities.

Law firms in major cities have been making the shift towards the new paradigm with one or two office sizes for all, benching for contract attorneys, and having three or four associate attorneys share one corner office. Today’s law firms are also more concerned with costs, and it is not uncommon to outsource the IT department totally, eliminate the law library, and relocate back office functions such as accounting to lower-cost regions if the size of the operation makes this possible.

In a number of regions in the United States, there is still new office construction, and the legal industry is often at the forefront of relocation to the newest office building in town equipped with all the bells and whistles that go with being in a brand-new state-of-the-art office complex. While this is happening in a number of cities across the United States, out here, in the suburbs of Contra Costa, there have been no new office buildings constructed and none are planned for perhaps years to come. Land prices of what in the past might have been a great office building site have shot up to astronomical levels as apartment and retail developers have purchased redevelopment opportunities as quickly as they have come onto the market. Our office rents still have a dramatic way to go up before new office projects make sense, and as a result, we can anticipate a continuing increase of existing office building rental rates with this long-term lack of new construction.

New commercial development along the 680 corridor

Here is a brief overview of the multi-family and retail development now underway: The 375,000 square foot retail shopping center, The Veranda, in Concord, is fairly leased up, with a new wine and dine IMAX Theater, Cost Plus, Super Duper Burgers, T.J. Maxx, and 365 by Whole Foods.

In San Ramon, The Shops at Bishop Ranch has had a flurry of leasing activity and is anticipated to be fully leased prior to this November’s pegged completion with 75 merchants, 18 of which offer food service, including six sit-down establishments; there is also a large health club and spa and The Lot, a 42,000 square foot ten-screen wine and dine luxury theater complex.

For the hotel and extended stay world, The Marriot Residence Inn on Pringle Ave at North California Blvd is expected to be completed in fall 2018 with 160 rooms.

There are thousands of new apartment and condo units either under construction or anticipated to open this year, including The Walnut Creek Transit Village at the BART Station, with 596 apartment units scheduled for 2019 first phase completion; The Lyric at 1500 North California, now almost 60 percent preleased with one bedroom units at $3,800 and two-bedrooms up to $5,800 a month; The Landing on Ygnacio Valley has 178 units and will be finished this spring; Riviera Avenue Condos will have 48 units; Riviera Apartments – 30 units; 2211 North Main – 52 apartments; 1716 Lofts on North Main will feature 42 units, and 1380 North California – 112 units.

Takeaways for law firms

With no new office construction in sight, start early in the renewal process, no matter what size law firm you have. For under 5,000 square-foot firms, a 12-18 month lead time is suggested, and with rental rates expected to continue their upward trend, locking in a lower rate earlier is to the tenant’s advantage. For 10,000 square foot and larger law firms, strategic lease renewal planning might start a full two years prior to lease expiration.

Engage your own tenant representation broker, who will be paid by the landlord, not you, but will be looking after your side of the equation. It can cost a Class A office landlord $40-50/square foot to replace a tenant, and it is up to your tenant rep to get a portion of this back to you in lease concessions for not vacating. Don’t let the landlord keep all the savings! Use your lease renewal as a window of opportunity to re-evaluate your office layout and design. How will your space serve to attract and retain employees, especially as it won’t be too many years before Millennials and Gen Z make up the majority of your workforce? What do they want and how can you make their being at work enjoyable and satisfying?

Plan for flexibility by considering taking on excess space and subleasing future expansion, so you can grow without being forced to relocate. Have expansion options, and conversely, be able to demise and sublet or early terminate a portion of your space if your practice heads in this direction.

We who live and work in Contra Costa County are most fortunate in avoiding the long commute, and being able to access the beauty of our Mt. Diablo Valley and other scenic corridors, and taking advantage of the many retail amenities within the region.

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