Presentation of the Current and Future State

of the East Bay Office Market

Jeffrey S. Weil

Speech for IMF October 7, 2008

Presented to The Investment Marketing Forum

Orinda Country Club

Interesting quote about the current financing market in Commercial Property News by Morgan Stanley Realty managing director Peter Spies “However illiquid it is today, it may get worse. It certainly won’t get a lot better very soon.” This was in my April 1991 OfficeTimes newsletter. Of course, way back then you could have bought a 100,000 square foot office building on the I-680 corridor for $43 a square foot, with seller Financing. What is the good news? I’ll get into that later?

What is happening that will directly affect office building sales values and office leasing? Bank Failures: 12 so far, 100+ to go. Credit Unions: May be ugly.

Headlines San Francisco Business Times Oct. 3, 2008

Solar Firms Lament loss of “tax equity” buyers.

Hey, this is supposed to be our growth industry!

Headlines Credit Crisis Bears Down on Hospitals

Construction projects halted

Headlines Wachovia deal empties more space

100,000 sf in San Francisco, more in East Bay

WaMu has 497,000 sf of Bay Area office space

Christmas Holiday sales this year expected to be worst in 24 years. Car dealers are going out of business on a daily basis – New York Times – 600 new car dealerships have closed so far this year. HP, GMAC, Wachovia, Merrill Lynch, Mervyns, Lehman Brothers, 100,000+ job layoffs.

So what does all this doom and gloom mean for us involved in selling and leasing East Bay office buildings? Sale prices down and headed lower, cap rates up 7% to 8% and headed higher. Office rents softening and will continue downward, more so in certain areas than others. Downtown Walnut Creek Class A vacancy had no change last quarter but Class B went from 8.8% to 14.16%. Pleasant Hill BART vacancies went from 19% to 27%. There are few tenants, and those out looking kicking tires over and over and over – some doing one-year lease extensions when in the past they’d done five years.

So just imagine with me for a moment, that there are super-powerful aliens who are able to brainwash millions of people at the same time without anyone realizing they are doing this. First they brainwash the Federal government to not overly regulate Wall Street, securities or mortgage brokerage – then they brainwash the big institutional investment banks into thinking they could package, bundle and sell off billions of dollars in mortgages. Then they brainwash tens of thousands of mortgage brokers and lenders to think they could actually loan folks way more money than they could ever qualify for, not ask for proof of income or even a down payment, and got millions of folks to think their 2% teaser rate wouldn’t be a future problem. They brainwashed us into thinking housing prices of course could keep going up and up – we were rich, let’s all buy new cars and flat screens, this is America where everyone can be a millionaire!

So whether you know it or not these pesky Aliens still brainwashing us – the Federal Deficit is now 10 trillion dollars. The Federal government spends $61 billion a year on education, but $406 billion a year on interest payments. This is $33,000 per man, woman and child – just like we thought housing prices could never go down, we think we don’t have to pay this back someday?

City, County and State

Less prop tax revenue

Less sales tax revenue

- One of the biggest tax sources for some cities

Car Dealers

Layoff lag effect: First you have the Merger Announcements, then at some future point employees get severance packages… some time after that they start dipping into their savings, then trouble, then foreclosures.

Three years ago office rates were going up and up and vacancies down, with the possibility that if office rates got high enough we’d start building more office buildings – Rents would have to double. Office buildings get obsolete, and at some point, maybe 2011 or 2012, if the office market bounces back. Class A Pleasanton $2.00 or San Ramon or Concord should be $4 or $5/sf to justify new construction. There may be huge rent spikes. If you are a seller, find a buyer who is brainwashed and thinks a 7 ½ cap rate is an awesome return – If you are a seller, don’t unless you have to. If you represent office tenants and they can sign long-term leases at bargain rates do it. Market may go down more – so what – TI’s might dry up.

Office building financing – many lenders out of market, those still in picky, picky, picky 30% to 40% down payments, the building better be mostly leased with good lease terms and decent credit tenants – and no projecting future rent increases to justify today’s values. Some lenders are pulling the plug on funding TI”s – Have and have nots. Landlords who can do tenant improvements for good tenants, and those who might be stuck with old as-is space which might be deep-discounted.

Commercial foreclosures – just starting, more on the way. Heard of one office broker in Reno did a big office lease and then the Landlord went bankrupt and the broker had to sue to get his commission. Can you see that, tenants asking the landlords for their financials?

If you're an office tenant, it's just great

To be out in the market in 2008!

Office tenants should still feel fine

Renewing their lease in 2009.

Rents might be up, vacancies down, Landlord market again

Tenants who waited too long may not like 2010!

Finally, office landlord heaven

For those still around in 2011!

And if you have new office plans up on your shelve,

Dust them off in 2012.

For those who haven't seen new office space cause the market was lean,

Might be lots of new construction in 2014.