Silicon Valley Commercial Real Estate Developments Delayed by COVID-19

As the spread of COVID-19 continues, many industries have been forced to furlough their workers and suspend business. Pursuant to Executive Order N-33-20, issued on March 19, all non-essential industries have been put on hold. Even construction, with the exception of construction having to do with an essential industry, has been forced to stop. This means that Silicon Valley commercial real estate development is being delayed until further notice… with the goal being to bend the curve, and disrupt the spread of the virus.

Silicon Valley Commercial Real Estate Development Delayed

The crisis struck while the economy was booming and development growth across the South Bay area was still strong. Few expected the COVID-19 crisis to be as long-lasting or as severe as it has been, especially with several major developments in San Jose and Santa Clara, such as Related Santa Clara, Boston Properties & TMG’s Platform 16 and dozens of smaller ones, in the process of being green-lit at the time of the governor’s order. With architects’ offices closed and planning put on hold, it is unclear whether they will be able to submit plans in time to meet civic deadlines. Cities may be willing to offer extensions, but such a move might be blocked by affordable housing advocates who oppose the use of downtown real estate for corporate purposes or any number of other issues that could derail development.

And that’s not to mention the projects that were already underway. At the beginning of the crisis, 14.2 million square feet of commercial real estate was under construction throughout Silicon Valley, per the new development pipeline we track at Colliers International. It is difficult to say when these projects will be completed, or what increased costs may be incurred from the delay.

Deals Break Down

As the economy continues to take a hit from ongoing layoffs in all industries, it seems that real estate developers are beginning to wonder what’s in store for the Silicon Valley office market. Pre-COVID-19, at Colliers, we were tracking 68 office/R&D requirements (>20K SF) totaling 11.35 million square feet…now most real estate requirements are on hold, and it’s hard to know how many of them will resume when the crisis ends. Even Google’s insatiable appetite for expansion has been halted.

Companies are currently reacting to the crisis, putting out fires and trying to survive the evolving situation. With a focus on cash reserves, cutting expenses and trying to maintain business operations as best they can through remote work.

A lean business strategy may appeal to CEOs as the economic downturn worsens. As American workers lose their jobs or are furloughed, they will cut unnecessary expenses. Software companies stand to lose from a slump in consumer spending, meaning they too will have to tighten their belts. As executives cast their eyes on their bottom lines, state-of-the-art office buildings and research facilities on prime Silicon Valley real estate may be the first line items on the chopping block…

Future Speculation

At this point, there are two themes being tossed around on speculation of what the future may hold for office demand in Silicon Valley. 

1) Increased Demand: Some companies may go back to normal after the crisis, moving their workforce back into offices and re-hiring. This will increase demand for office as companies adjust their floor plans to adhere to social distancing guidelines to meet government mandates while addressing employee health and wellness concerns. It is anticipated that office densities will reverse from high-density trends of the last decade, which averaged 191 square feet per employee in Silicon Valley but could reach as high as 75 to 150 square feet per employee, and shift more towards traditional densities allocated to employees at the start of the 21st century, closer to 325 square feet per employee. 

2) Decreased Demand: Many companies are laying off or furloughing employees. Initially, such layoffs have been communicated as temporary, but as this crisis continues to drag out, and the economic outlook continues to slide… what was originally “temporary” could quickly become permanent. 

Additionally, some may take advantage of the great work from home experiment to maintain leaner, more remote workforces, cutting overhead costs. Google and Facebook, along with a number of other large tech companies in Silicon Valley, are extending their work from home policies through the end of the year and beyond, which doesn’t bode well for the commercial real estate market.

Construction is scheduled to open back up Monday, May 4… there is a lot of uncertainty in the marketplace but one thing that is certain is that the future landscape will look very different than before this pandemic took the world by surprise in March. As the COVID-19 crisis affects the real estate marketplace in unpredictable ways, we work tirelessly to provide the insights you need to make sense of the situation. To keep abreast of the latest developments, visit our website or contact us.

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Until next time…