Jeff Fredericks, managing partner with Colliers, was optimistic in his commercial real estate outlook for the Silicon Valley in 2013. The greatest optimism was centered on Silicon Valley’s office market. “2013 looks very good for office product, thanks in large part to done deals in the absorption pipeline,” said Fredericks. “Building on our 2012 momentum we think you’re going to see a minimum of eight million square feet of gross absorption in the office sector in 2013, with positive net absorption above two million square feet.” The prospects of a good net absorption year are partially owing to less supply coming on the market. Fredericks added, “We have a lot more users taking space than leaving space today. Space coming back onto the market is near an all-time low, and we don’t see that dynamic changing in 2013.”
The event included a panel of speakers – John B. Kilroy, Jr., President and Chief Executive Officer of Kilroy Realty, and Chris Zlocki, Managing Director of Strategy and Innovation for Colliers International. Finally, keynote speaker Gregory Valliere, veteran Washington analyst and chief political strategist with Potomac Research Group, spoke on key Washington issues for investors regarding the fallout of the 2012 Presidential election.
Chris Zlocki of Colliers remarked on how technology is changing the way people approach work and the effect that this new mindset will have on the future of commercial real estate. “75% of all applications by 2015 are going to be hosted in the cloud, and just two days ago, Microsoft announced that their Windows platform and all their office products are going to be cloud-based. What that really means is that you are not going to have to be tethered, due to IT security, to the confines of that desk you’re in. It’s going to create a lot more opportunities to be mobile, to be interactive and to use space differently.”
John B. Kilroy, Jr. was asked by Zlocki about the trends he is seeing in the Silicon Valley. “Y Generation is about 80 million people, think about that, 80 million people who don’t want to go to work at eight o’clock in the morning. What does technology do? It’s change. Change at its very essence, right? Now we have to respond facility-wise and locationally to what it is the workforce wants and what companies must do to attract and retain 80 million people who don’t want to go to work at 8 o’clock in the morning.” Kilroy commented that the Silicon Valley has what it needs in terms of resources “but,” he added, “it must rethink where it is downstream to be competitive with the rest of the world. Locationally, people are much more geared towards urbanization, diversity of living choices, amenities, and better public transportation. Workplaces must embrace this. We can’t ignore the demographic trends. Mixed use is where it’s going all over the world. If we don’t allow our companies to grow in the way they want to, what’s their alternative?
Gregory Valliere, the final speaker for the event, discussed current economic conditions and the state of affairs in Washington. “First and foremost, virtually everything I’m going to look at in the U.S. is pointing upward.” Valliere spoke about the resurgence of manufacturing and the explosion of energy in the U.S., noting that the nation is close to becoming energy self-sufficient.
“Everywhere I look I see things pointing upward for GDP,” Valliere noted. “The fourth quarter GDP report was a fake-out; there were a lot of one-time factors in there. I think that the (national) unemployment rate, which is 7.9 percent, a year from today will probably be closer to 7.0 percent. There’s no real sign of inflation. Interest rates will stay ridiculously low. And believe it or not, the budget deficit is falling, falling dramatically. So when we look at all of these big themes, I would argue that the negativity of the press is way overdone and investors should try to ignore the background noise that CNBC has just to generate ratings.”
Speaking on taxes, Valliere commented, “We’ve pretty much gone to the well much as we ever will on taxes. I do not see another big effort to raise taxes. There were quite a few increases and obviously in your state as well, but I think both parties realize that’s an area where you can’t get too much more blood out of that stone. I can’t rule out them going after carried interest. I’m surprised carried interest has prevailed for as long as it has. There may be an attempt to take a little haircut for the oil and gas companies.”
With regards to the national budget deficit, Valliere added, “People always ask me, ‘Why can’t Washington have a dramatic deficit reduction deal?’ There are three big reasons. The first, quite simply, is that there is not the political leadership. The second is that there is no catalyst for the markets; there are no angry bond markets, you don’t have that angst. I’ve been following the Fed for over 30 years and I can say without hesitation this is the most dovish Fed in my career. The third is that there are no agreements on the specifics; no one can agree on the prescription. If Congress is too chicken to reform the Post Office, what makes them think they can reform entitlements?”
Valliere concluded his monologue with international affairs. “Let me talk for just a minute on what investors have to be worried about. Although I think this year has the potential, economically, to be a pleasant surprise there are some things that I’d worry about. The first is the sleeper issue of the decade, and that is cyber security. The fact is that the Chinese are hacking into our Fortune 500 companies with impunity. At some point there is going to have to be a serious discussion about retaliation. Second, an explosive growth in regulations is going to be an irritant for a lot of U.S. companies. A second drought year in a row could drive up food prices. The big story, the real concern continues to be Israel and Iran. The Mideast remains the one wildcard that could turn a pretty good year to a very choppy year if the Israelis finally decide they can no longer wait for negotiation.”