Opportunity

Central Business District
Central Business District

California has the largest and most diverse commercial office market in the U.S. with 1.3 billion ft2 of commercial office space. Of this space, 10% is owner-occupied. The remaining 90% - about 1.17 billion ft2 - is leased.1 California’s market is comprised of several distinct sub-sectors.

  • Central Business Districts (CBDs) are characterized by large Class A office towers and occur principally in the large urban areas of Sacramento, Oakland, San Francisco, San Jose, Los Angeles and San Diego.

  • Suburban Office Parks. Outside of the main CBDs are dense clusters of suburban office parks, usually comprised of ”mid-rise” offices (5 to 10 story buildings) or “flex” buildings (a hybrid of research and development and office space). Silicon Valley, Orange County and the northern markets of San Diego are examples of these markets.

  • Fragmented Markets. Outside CBDs and their surrounding markets, the office market is highly fragmented, consisting of various product types of all classifications.


Most Class A office space in California is clustered in large CBD markets. Lower quality or aging building stock is more prevalent in secondary and tertiary markets.

Commercial Office Space Distribution in California

Source: CoStar Market Data, April 20092

Less than 10% of California’s office buildings are presently certified “green”. Those that are either LEED® or ENERGY STAR certified are typically premium Class A buildings concentrated in the major real estate markets. There is a severe scarcity of Class B certified buildings in secondary markets and Class C green certified buildings in all markets. This lack of inventory creates significant challenges to green-minded businesses that are not candidates for Class A buildings.

Green Office Space Distribution in California

Source: CoStar Market Data, April 20092

1. Navigant Consulting using CoStar market data

2. 'Other' denotes smaller commercial office markets in California including Marin/Sonoma, Salinas, Bakersfield, San Luis Obispo/Paso Robles, Stockton/Modesto, Santa Barbara/Santa Maria/Goleta, Fresno, and Santa Cruz/Watsonville.

Class A office towers

Investment-grade properties built after 1980 and typically greater than 10 stories that command the highest rents or sale prices compared to other buildings in the same market. Such buildings are well located and provide efficient tenant layouts as well as high quality one-of-a-kind floor plans. These buildings contain modern mechanical systems, and have above-average maintenance and management as well as the best quality materials and workmanship in their trim and interior fittings. They are generally the most attractive and eagerly sought by investors willing to pay a premium for quality.

  • Green Building Toolkits

  • Green Building Features

  • Green Leasing Report

  • Green Building Toolkits

    The California Sustainability Alliance has developed several toolkits and other resources that aid local governments in planning and implementing sustainable initiatives. These include:

    • Green Leases Toolkit
    • Energy Efficient Financing Calculator
    • Class B Office Improvement Toolkit

  • Green Leasing Report

    In May 2009, the Alliance released the results of a study examining the current state of green commercial buildings in California and challenges and opportunities for the accelerated adoption of green leasing in California’s existing office space.


    Titled Greening California’s Leased Office Space: Challenges and Opportunities, the report provides information to policymakers and market participants about the pivotal role green leasing plays in achieving the resource efficiency, environmental, and societal benefits of green buildings. The report outlines the constraints on green leasing and recommends changes that need to be made to policies, programs, and practices in order to establish green leasing as standard practice in California.

    Challenges

    90% of California’s commercial office space is leased, and the greening of this space is constrained by several challenges, notably:

    • Real estate owners not economically motivated to invest in building retrofits as the financial benefits flow to tenants;
    • Tenants may be less inclined to adopt conservation measures as financial benefits can accrue to other tenants and/or the building owner;
    • Imbalanced benefit distribution or ‘split incentives’ on core and shell retrofits, between the building owner and tenant. These retrofits (usually the responsibility of the owner) often have long financial payback periods. These costs, if they cannot be passed to tenants, discourage the building owner from making such capital investments; and
    • The ever-growing range of standards, concepts and protocols requires negotiating a unique balance of benefits and burdens for each leased property, which consequently adds time and complexity to the lease transaction.


    Opportunities

    Green leasing can be a key strategy for greening existing office space. In order to boost the market adoption of green leasing, the report concludes that owners and tenants who are motivated to find mutual benefits can collaborate to significantly improve the resource and environmental performance of California’s existing building stock.

    The Alliance, in consultation with its Green Building Advisory Committee, recommends a broad range of strategies for accelerating green leasing in California – from establishing consistent statewide standards and definitions of “green”, to documenting and publicizing the costs and benefits of green buildings (also known as the green building value proposition), implementing building labeling, and modifying state and local policies, ordinances and utility programs to recognize the different needs and interests of landlords and tenants under various types of lease structures.

    Green buildings are a growing segment of California’s overall building stock. In late 2008, LEED® and ENERGY STAR rated buildings accounted for 10% of California’s total office space. 6 months later, they comprised 13% of the state’s total office space – a 30% increase. They feature prominently in class A buildings (35% of all class A buildings in California), but implementation in lower grade properties is more limited (class B and C, at 3.6% and 0.2% respectively).

    To download the full report, click here.


    2017 Update

    The 2017 update serves as an addendum to the 2009 report, with special focus on the mixed-use sector and recommendations for achieving natural gas savings via green leasing. It contains a discussion of several important topics in 2017, including the rise of corporate sustainability policies driving green leases, the prevalence of green building certifications and standards, examples of tenant engagement strategies, the impact of new reporting standards such as the Global Real Estate Sustainability Benchmark (GRESB), and the increase in energy disclosure laws, among other topics. The update also continues the ongoing conversation on the split incentives challenge. To download the 2017 update, click here.

    Image source: Thomas Properties Group

    Office space maximizing natural daylighting
    Office space maximizing natural daylighting