The coronavirus changed how — and even if — Silicon Valley works following statewide and regional orders to stay home. But real estate insiders say it may change the way employees work long after the outbreak, too.
“I truly believe the biggest change coming out of the COVID-19 pandemic of 2020 will be the downsizing of businesses and the realization that the remote working arrangements work,” said Sean Cottle, a real estate attorney for San Jose-based Hoge Fenton. “That’s going to cut down on the long commutes from the Central Valley to the Bay Area.”
Cottle, along with a panel of real estate experts, on Tuesday laid out the ripple effects the Bay Area’s shelter in place order has had on real estate — and by extension the economy — during a virtual event hosted by The Silicon Valley Organization and moderated by Steven Kahn, a real estate attorney with Hoge Fenton
The full economic impacts of the coronavirus, which causes a deadly respiratory illness known as COVID-19, won’t be known for at least a couple more months, the panelists agreed.
But undoubtedly the shut-down of businesses, schools, construction sites and some government departments will be felt in the form of small businesses struggling to get up and running after weeks or months closed, as well as property owners behind on their mortgages, said Ralph Barnett, executive vice president at Bridge Bank.
Like the nearly one-third of residential renters who didn’t pay their April rent, small businesses are already falling behind, Barnett said.
“Many retailers didn’t make their April payment, they’re not expected to make their May payment,” he said. “I think part of that is it’s just too early to see the impact the CARES Act has had on the economy and that money is just now starting to get out.”
The federal CARES Act, which includes stimulus money to individuals and programs to help small businesses, was passed last month by Washington legislators.
Meanwhile, the tech titans that take up a massive portion of the real estate in the South Bay will likely start re-thinking workspaces as employees slowly start tricking back into the office, according to Walt Stephenson, managing director at commercial brokerage Cushman & Wakefield. The number of square feet per employee in typical offices has shrunk consistently in the past five years and many employers have switched to an open office environment with fewer cubicles and private offices.
“I think for any tenant involved in a relocation, everyone is rethinking … how furniture layouts are going to be,” he said. “If there were low-style benching cubes, I think you’re going to see those see-through screens coming in to kind of protect people.”
Though some companies may be feeling a sense of “doom and gloom” over the coronavirus impacts, most see it more as “a speed-bump,” Stephenson said. Silicon Valley’s largest companies, like Apple, Google, LinkedIn and Cisco that aren’t likely to fold over the outbreak disruption, will also help keep the region’s economy relatively strong, he added.
At the same time, local municipalities will likely be stretched thin to pay out pensions and assist businesses while the stock market struggles and tax revenue shrinks, said former Assemblywoman Catharine Baker, who is now special counsel at Hoge Fenton.
CalPERS, the state’s public employee retirement system, relies heavily on the stock market and its fund balance has already shrunk, the Sacramento Bee reported late last month.
“When CalPERS has a shortfall because the stock market has gone down, it’s our local governments that have to pay for that and … those payments don’t get deferred,” Baker said. “Going into the next few months, you’re going to see local governments very much eager to support their communities in any way they can … but at the same time they have some major stresses coming into play.”
That might be a factor that pushes some to advocate for the controversial Proposition 13 measure that all Californians will vote on in November, she added. The measure would create a so-called “split roll” when it comes to the property taxes that go to fund local schools and governments and would raise taxes for commercial property owners.
Backers of the measure earlier this month announced submitting twice the number of signatures needed to quality the measure for the ballot.
Under the current system, property tax assessments are essentially frozen in place until an owner sells or does significant construction. Under the proposed measure, residential properties would continue to be taxed the way they have for decades, but almost all commercial properties would be reassessed to be taxed based on the current market value.
“I think there’s going to be some real pressure on local governments that are seeing their property tax and their sales tax not come in this fiscal year … to push for that (measure) as a backfill,” Baker said.
But as business and real estate experts wait to see the true fallout of the coronavirus and the shut-downs that are expected to last for weeks more with a gradual loosening on restrictions, many are trying to stay optimistic.
“It’s taken a global pandemic to basically slow the growth rate down in real estate,” Cottle said. “I think since the economy is stronger now than it was in 2008, I’m cautiously optimistic that it will be a V-shaped curve (to recovery), or if it is a U-shaped curve, I hope it will be a shallow U-shaped curve.”