Silicon Valley Commercial Real Estate & COVID-19
Apr 03rd, 2020
The financial state in the world right now is uncertain. COVID-19 has affected financial health worldwide. Unemployment rates have risen, manufacturing has been reduced, and the stock market has dropped. This might lead to anxiety regarding the health of the real estate market. Fortunately, there are concrete reasons to believe in the health of the Silicon Valley commercial real estate market.
Technology Is Synonymous With Silicon Valley
Silicon Valley is famous for boasting innovative technology companies. The dense population of technology companies consists of world leaders in innovation for their fields. With the current state of health concern, medical technology companies are more in demand than ever. Additionally, the desire to reopen the economy will require technological innovation and creativity which is likely to come from the Silicon Valley – such as the Apple + Google collaboration to turn smartphones into coronavirus tracking devices which was highlighted in The Wall Street Journal. With technology booming, commercial real estate will have growth opportunities.
Silicon Valley is projected to weather the inevitable economic recession better than other parts of the country. Technology companies can easily adapt to remote workspaces. Many companies already focus on remote work. With the economy suffering less, all sectors should fare better, including commercial real estate.
2019 ended with economic highs. The drop in world economic health was not on anyone’s radar. Thanks to interest rates dropping, refinancing options are prime. Real estate refinancing is booming right now.
Contrary to what landlords are experiencing with retail and hospitality tenants the majority of office tenants in Silicon Valley have continued to pay rent as of the date of this post. Although this does not mean that tenants are not asking for rent relief from their landlords. However, landlords are taking a more bullish approach in handling these requests given the strong technology presence that makes up the Silicon Valley tenant base. Many office tenants had strong financials when signing their leases and have been able to transition their workforce to work from home and continue operations. Therefore, concession requests for existing tenants are being handled on a case-by-case basis. Many times tenants will need to exercise other available relief options before a landlord will consider concessions. Once concessions are being considered, landlords generally require documentation or other objectively verifiable means to demonstrate substantial loss of income due to COVID-19.
Due to COVID-19 and shelter-in-place mandates my family and I have drastically cut down on eating out and have transitioned to cooking at home. In order to avoid the chaos and potential exposure at grocery stores we have utilized Amazon’s online grocery delivery service along with meal delivery services (LeanFeast and Home Chef). We have been very impressed with the ease of use, efficiency, quality of food and it’s much more cost effective than eating out or grocery shopping. This is a transition that will likely stick for the long term. As a result, one submarket that is prime for increased demand and development is cold storage warehouse. I read a recent report that “concluded an additional 75 million to 100 million sq. ft. of freezer/cooler space will be needed to meet demand for D2C food delivery and BOPIS.” Additionally, an article I read stated the average age of cold-storage facilities is 34 years, meaning there is a lot of room for value-add investment to either modernize or develop new facilities to meet increasing demand – especially in the Silicon Valley where inventory is tight.
Those working in commercial real estate need to focus on their leadership qualities right now. As many of their tenants face economic difficulties, communication and flexibility are key to success. If a tenant risks their health to pay rent, there may not be any rent payments in the future. Be sure to let tenants know you sympathize with their struggles. Work on financial plans that will get everyone through tough times today so that you can enjoy the good times tomorrow.
Buyers might be uncertain what can be done concerning real estate right now. To maximize business opportunities, it is important to keep open communication with current clients and prospective clients. Emails and other digital methods are fantastic ways to keep everyone informed. Buy and sell operations are considered essential services and being in Silicon Valley means more of the services necessary to transact can be done so digitally, such as eRecording in Santa Clara County. Additionally, there are options for appraisal, including drive-by appraisals by certain banks. Keeping clients aware of all possibilities will help squelch their fears.
The world economy is taking a hit due to COVID-19 and real estate is not immune. Commercial real estate brokers are already feeling the effects of an uncertain economic future. Some clients will put sales on hold. Others will cancel their purchases altogether. There will be other opportunities, however.
Silicon Valley is based on technology and digital innovation with a powerful culture of entrepreneurship. It will weather this storm and get to the other side. I remain optimistic in the strength and resiliency of the Silicon Valley and intrigued in the new innovation and growth to come. The future for Silicon Valley commercial real estate is bright, despite current turmoil. If you have any questions don’t hesitate to contact us.
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Until next time…