Ritchie: Straightening out the canyon

I have a quip that I have used on occasion when found stuck on a vexing matter or facing a difficult client:

“I can guide the raft down the river, but I cannot straighten out the canyon.”

Obviously, this refers to the fact that certain matters of business physics are not changeable and eventually we all navigate around the same twisting river turns. I might be a bit influenced by the trip of a lifetime rafting down the Colorado River-Upper Grand Canyon last month, watching 1.4 billion years of earth unfold like a sideways rock library. The bottom of the canyon walls are all pre-life on earth, it makes you feel a bit small on the time and worries scale.

The current existential crisis for office buildings around the world, but especially in our treasured Bay Area, will unfortunately require us to break the laws of physics and, in fact, straighten out the canyon. As we float deeper and deeper into uncharted waters by every statistical measure of office space vacancies and value declines, it is clear that a sea change on the purpose and use of central business districts is coming, or has to come. The effect of all this on the service providers in commercial real estate is equally profound.

A few headlines of the last two weeks:

• Billionaire Sternlicht Sees ‘Category 5 Hurricane’ Spurred by Fed Rate Hikes
• JLL Earnings Drop 99% As Sales, Leasing and Financing Decline
• Cushman & Wakefield Plans More Cost Cuts As Earnings Drop 95%

If you read into the above articles you will see that all the correspondents hold hope for the mid-term future. But the domino effect of foreclosures and what will surely be mass layoffs in the commercial real estate industry are unavoidable no matter how fast the good times return.

A reminder that I am always an optimist as well. So are others, for example the industrial developer genius Hamid Mogahdam of Prologis buying all 112 acres of land under Great America amusement park last week for $310 million with a leaseback that expires in 11 years.

So, what will be the cataclysmic change, like the shifts in the earth’s crust that reshaped the Grand Canyon several times?

Our current reliance on artificial intelligence startup office leases and pickleball may not do the entire job. And certainly the tech giants will eventually start to rehire at scale, but don’t we all have this creeping feeling that thanks in fact to AI, they will likely never hire at the pre-pandemic scale again? My own theory is that the mass hiring that may save office buildings again will be the AI security industry, protecting us from having replicants cheerfully clear out all our savings accounts.

Yet in so many ways our downtowns have not changed in basic form and function since the invention of the elevator. The worst result being downtown SF due to the fact that is the purest office-only downtown. Diversity of uses on a new scale will be part of the solution.

For one, we will be rebuilding most of the world’s infrastructure as we shift to an all-electric planet with unprecedented energy and data demands. We see this already on some of the interesting local developments of late:

• Core Site Adds 240,000 SQFT Data Center in Silicon Valley to Meet Growing Capacity, Power Demands
• Energy Company Eyes Big New Electricity Center In Downtown San Jose

Then add this to the upcoming complete obsolescence of parking assets in the self-driving near future. This is coming much faster than we all can imagine, we are already swarmed with zero-human Cruise cars all over central SF. Once inner cities are humming with few or no private autos, garages and parking lots will be useless objects.

So, we will in effect have massive development sites to add huge amounts of square footage… of what? Gigantic self-driving infrastructure demand itself perhaps, helicopter drone landing sites, package nuclear fusion plants to power it all. Floors of plant-based protein farms and cultivated chicken vats within cart distance from restaurant tables perhaps.

Think of what goes on in Las Vegas for example, with that brand new $2 billion garish arena globe that twists the mind when you see it. Entertainment in central cities will probably look more like Vegas and Times Square with a dash of kinder Blade Runner.

Maybe the next Burning Man centers around Union Square or Plaza de Cesar Chavez, not 350 miles away in the desert.

Whatever it is, it will be different, and hopefully better.

San José Spotlight columnist Mark Ritchie is the owner of commercial real estate brokerage firm Ritchie Commercial, and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Mark at [email protected].