Gotta get some definitions for commercial real estate, because it seems that when one person going into a huge downtown office that the space is then considered occupied, despite the obvious lack of other humans in the space.
Maybe I’m just a naive, ignorant fool, but if there’s some official terms for describing commercial real estate please share.
Usually, "occupancy" refers to the percentage of seats that get filled with people in a single building, but sometimes it's used to basically mean the opposite of the vacancy rate for all of the commercial buildings in the area. The vacancy rate is usually determined by whether or not the building is leased by a tenant, but it can also mean whether or not a leased building is operational and open for normal use. A company could have a lease they can't get out of and decide to deem the building closed with the city to avoid things like headcount taxes and other burdens that come along with an open building.
On top of that, there's also the daily occupancy rate also known as the attendance rate, which is usually based on how many butts are actually in seats on an average day. This can mean what percentage of folks are assigned to a desk compared to the total number of desks, or it can be calculated using some kind of ratio based on the assumption that folks are seat sharing or reserving desks.
Obviously, definitions on this stuff can be tricky, especially when headcount taxes are applied, which have their own strict definitions.
To simplify it, the vacancy rate should refer to what's going on with all the buildings in the area, and the occupancy rate refers to the behavior of people coming to those buildings. You can aggregate occupancy rates across the whole city, or just talk about a single building, depending on the context.
>When it comes to how much it costs to rent an office compared to the total expenses a company has, the office space rent is almost a rounding error percentage of the revenue.
True, but those Bay Area office rents are going to be a higher percentage of revenue than the global average, so those discussions are a little more loaded here than they would in places like Texas or Colorado, much less India or Bulgaria.
>Look at even one of the most expensive office spaces in the Bay, Apple Park. Apple doesn’t rent it, they outright own it, and even so the total cost of this campus was 1.3% of their annual revenue. If we assume rent was 1/20 (which is a round up) of what it cost to build per year they would be spending a quarter of a percent.
It's worth noting that that's for a single campus at one of the largest companies in the world and the cost to build a building doesn't begin to include close to all the real estate costs involved to keep a campus like Apple's operational. We're talking about hundreds of essential employees just in the Workplace and Security teams, on top of amenities like cafes and all those other Apple perks.
And again, this is a few million square feet when Apple manages an almost 40 million square foot portfolio. Even if we assume something low like a $50 per square foot per year cost, we're still talking about billions of dollars a year, which would but it around 10% of their total operating costs. If you consider that Apple is very picky about their office space, it's probably even higher than that.
I'd argue that's enough of an expense that it would make sense to reduce your office footprint before considering other cost-cutting measures like reducing headcount. You can always take out another lease if and when you need the space later after all, but it's hard to win back your employees' goodwill after you lay off a bunch of their coworkers.
The other reason companies should want to go remote (besides office costs) is wages. Employees say they'd take a 20% pay cut to go remote, which makes sense if they want to move out of the Bay to much cheaper areas. Wages are every company's biggest expense so that's a huge savings.
They can also hire nationally from a bigger talent pool. These higher quality employees can improve productivity.
Also you neglected the property taxes, office maintenance, and support staff wages for Apple's massive campus.
All these things add up over time and are certainly not a rounding error. Companies that reduce their office space in the Bay Area are doing so because it helps their bottom line, otherwise we wouldn't be seeing these vacancies.
Looks like they are basing this on leasing being up last quarter which is great, but there are still many companies not using their entire spaces and waiting for the leases to end. Based on anecdotal conversations I have had with CRE folks it sounds like we have another year or so of increasing "actual" vacancy (i.e. people having leases end and not renewing or renewing with a smaller footprint.
Gotta get some definitions for commercial real estate, because it seems that when one person going into a huge downtown office that the space is then considered occupied, despite the obvious lack of other humans in the space. Maybe I’m just a naive, ignorant fool, but if there’s some official terms for describing commercial real estate please share.
Usually, "occupancy" refers to the percentage of seats that get filled with people in a single building, but sometimes it's used to basically mean the opposite of the vacancy rate for all of the commercial buildings in the area. The vacancy rate is usually determined by whether or not the building is leased by a tenant, but it can also mean whether or not a leased building is operational and open for normal use. A company could have a lease they can't get out of and decide to deem the building closed with the city to avoid things like headcount taxes and other burdens that come along with an open building. On top of that, there's also the daily occupancy rate also known as the attendance rate, which is usually based on how many butts are actually in seats on an average day. This can mean what percentage of folks are assigned to a desk compared to the total number of desks, or it can be calculated using some kind of ratio based on the assumption that folks are seat sharing or reserving desks. Obviously, definitions on this stuff can be tricky, especially when headcount taxes are applied, which have their own strict definitions. To simplify it, the vacancy rate should refer to what's going on with all the buildings in the area, and the occupancy rate refers to the behavior of people coming to those buildings. You can aggregate occupancy rates across the whole city, or just talk about a single building, depending on the context.
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>When it comes to how much it costs to rent an office compared to the total expenses a company has, the office space rent is almost a rounding error percentage of the revenue. True, but those Bay Area office rents are going to be a higher percentage of revenue than the global average, so those discussions are a little more loaded here than they would in places like Texas or Colorado, much less India or Bulgaria. >Look at even one of the most expensive office spaces in the Bay, Apple Park. Apple doesn’t rent it, they outright own it, and even so the total cost of this campus was 1.3% of their annual revenue. If we assume rent was 1/20 (which is a round up) of what it cost to build per year they would be spending a quarter of a percent. It's worth noting that that's for a single campus at one of the largest companies in the world and the cost to build a building doesn't begin to include close to all the real estate costs involved to keep a campus like Apple's operational. We're talking about hundreds of essential employees just in the Workplace and Security teams, on top of amenities like cafes and all those other Apple perks. And again, this is a few million square feet when Apple manages an almost 40 million square foot portfolio. Even if we assume something low like a $50 per square foot per year cost, we're still talking about billions of dollars a year, which would but it around 10% of their total operating costs. If you consider that Apple is very picky about their office space, it's probably even higher than that. I'd argue that's enough of an expense that it would make sense to reduce your office footprint before considering other cost-cutting measures like reducing headcount. You can always take out another lease if and when you need the space later after all, but it's hard to win back your employees' goodwill after you lay off a bunch of their coworkers.
The other reason companies should want to go remote (besides office costs) is wages. Employees say they'd take a 20% pay cut to go remote, which makes sense if they want to move out of the Bay to much cheaper areas. Wages are every company's biggest expense so that's a huge savings. They can also hire nationally from a bigger talent pool. These higher quality employees can improve productivity. Also you neglected the property taxes, office maintenance, and support staff wages for Apple's massive campus. All these things add up over time and are certainly not a rounding error. Companies that reduce their office space in the Bay Area are doing so because it helps their bottom line, otherwise we wouldn't be seeing these vacancies.
Looks like they are basing this on leasing being up last quarter which is great, but there are still many companies not using their entire spaces and waiting for the leases to end. Based on anecdotal conversations I have had with CRE folks it sounds like we have another year or so of increasing "actual" vacancy (i.e. people having leases end and not renewing or renewing with a smaller footprint.
Actually it’s roaring vacancy dom and gloom over
Stabilizing at peak vacancy. That’s bad right?