CORPORATE OFFICE PERSPECTIVES | FEB. 1, 2014

What makes a healthy office market?

When vacancy rates begin to dip below 10 percent, construction cranes show up to alleviate future space scarcity, and when rates hover higher than 20 percent, the Grim Reaper of Foreclosure waves his evil staff over underwater over leveraged properties. With the San Francisco East Bay vacancy rate around 10 to 16 percent, are we healthy or unhealthy? Most corporate executives would much rather pay more rent in a robust rising economy as compared with getting bargain-basement rents in a layoff-laden depressed business environment. Who cares if your office costs are low if your business is losing money? So I define a healthy office market as one where there is sufficient supply for almost all size and types of office users, where both tenants and landlords are making tons of money, and when companies can expand and not worry about forced relocation due to lack of expansion space. So both San Francisco and Walnut Creek are healthy, as are many of our nation’s cities and towns.

FIRE and ICE

Traditional office markets can be predominantly FIRE, Finance, Insurance and Real Estate, which is what the I-680 Corridor and a lot of American cities and towns were back before the 2007 Great Recession Cliff of Doom, where tens of thousands of mortgage companies, banks, as well as real estate development and sales, title companies and the like, literally fell over the Cliff of Doom and disappeared. At least in my region, there is little sight of any return other than a few cautiously expanding residential developers. Banks have shrunk, been acquired, and moved their back offices to India and elsewhere.

ICE, which can stand for Innovation, Creativity and Entrepreneurship, is symbolized by the Googles, LinkedIns, Salesforces, Twitters and Facebooks of the world. “Several years ago, Colliers coined the term “ICEE” to describe metropolitan areas with large concentrations of Intellectual Capital, Energy and/or Education industries. During the current recovery, office markets in these metros have been outperforming those which depended on the more traditional drivers of office absorptions — the finance, insurance and real estate or “FIRE” industries — and are poised for continued growth.”

Last week I gave a one-hour presentation sponsored by RINA Accountancy and Chicago Deferred Exchange on The Bay Area Commercial Real Estate Market- What’s Hot, What’s Not and the entire speech and tons of handouts can be found here.

Around The Web

The largest net-zero energy building in the world is the Phoenix regional office of DPR Construction. The LEED-NC Platinum facility features an 87-foot solar chimney that enables a passive cooling system, releasing hot air out of the building while drawing cooler air in and 90 operable windows work in tandem with the energy monitoring system to open and close based on indoor and outdoor temperatures. Solar optical tubular daylight devices harness light from rooftop domes and bring it into the workspace; A “vampire” switch cuts off 90 percent of plug loads at night; photovoltaic-covered canopies cover half of the parking lot, generating enough power to offset the building’s annual energy needs. The solar array moved the building from net-zero to grid-positive performance. (Buildings 2013)

Commercial real estate financing — the Colliers Commercial Mortgage Group report indicates there is much available capital for acquisition financing and refinancing. Non-recourse, assumable and at fixed loans are priced about 2 percent over U.S. Treasury for 10-year term. For more information please visit The Colliers Commercial Mortgage Group Website.

A recent article published in the National Real Estate Investor, October 2013, predicts that tech office growth will eventually spread outside the current core areas of San Francisco, New York, Chicago and elsewhere that have lower labor costs and rents and where there are more incentives for business … whether this occurrence remains to be seen, there are a lot of suburban landlords to whom this will be music to their ears.

In the San Francisco East Bay, we have a number of 500,000 square foot big blocks of class A office space at full-service turn-key rental rates under $30/rsf per year. Of course you should call me if you need this size of office space!

Office collaboration through open design — the Big Ass Fan Company (BAFC) designed its new 80,000 square foot headquarters with an almost total open plan. Only one executive office, fabric cubicle walls, a cantina, clinic and meeting rooms, and an acoustical deck that absorbs and dissipates sound. Six conference rooms and 15 breakout rooms allow for a wide variety of meeting functions. (Buildings October 2013)

How will the aging boomer population affect the design of office space as well as change the types of occupancy? “Today, 10,000 Baby Boomers reached 65. The same thing happened yesterday and the same thing will happen tomorrow. In fact every day, for the next 15 years 10,000 Baby Boomers will reach that age milestone.” What does this mean for the many two-story smaller office buildings without elevators, both for the aging CPAs, lawyers and insurance agents housed on second floor offices still unable or unwilling to retire, as well as their aging clientele, an increasing number who may be arriving with a walker or wheelchair? What does this mean even for Class A buildings with inconvenient disabled parking or less accessible public transportation for aging customers?

A company called Blueseed wants to park a boat full of start-ups in international waters 12 miles off California’s Half Moon Bay. Foreign entrepreneurs who want to come to Silicon Valley would use Blueseed to make an end run around immigration laws! A 30-minute ferry ride lands them in Silicon Valley for meetings where they need an easier-to-obtain tourist or business visa. A different spin on office space….(Wired 2013)

According to National Venture Capital Corporation (reported in Business Facilities Oct. 2013) , of the top five centers for tech startups, San Francisco ranked number one, San Jose number two and Los Angeles number five out of all U.S. cities. And according to the San Francisco Business Times, December 20, 2013, in the third quarter, $3.6 billion of venture capital was raised in San Francisco Bay Area companies, 49 percent of the total amount invested in all United States companies.

I’ve seen reports about the San Francisco office leasing during the past 18 months with positive leasing of more than 4 million square feet. Broker quotes predict substantial rent increases for 2014, and while bets might be off for 2015/2016 when millions of square feet of new office inventory hits the market (much of which is now in preleasing stages), as one broker said about this year, “All hell is going to break loose in terms of rental rates.”

While San Francisco may boast of single-digit vacancy rates, out in the East Bay region of Walnut Creek and Concord, the office vacancy rate in fourth quarter 2011 was 17.5 percent; fourth quarter 2012 16.5 percent; and hold onto your chairs for this exciting announcement, the fourth quarter 2013 vacancy rate is down to 16.2 percent! Basically no change, but several Class A landlords in prime submarkets like Downtown Walnut Creek have raised rental rates 15 to 20 percent during the past 12 months.

Deals and Rumors:

A lot of recent office leasing activity in the East Bay, where in Emeryville, NMI Holding leased 23,000 sf and Art.com took 72,000 sf, both leases at 2100 Powell St. Next door in Oakland, Public Health Institute leased 35,000 sf at 555 12th St,; AC Search & Media signed for 82,000 sf at the same building; Self Aware Games leased 21,000 sf at 1999 Harrison St.; and University of California Press grabbed 25,000 sf at 155 Grand Ave. In Alameda, All Cells took 28,000 sf at 1301 Harbor Bay Parkway. Over the hill in Walnut Creek, Wells Fargo leased 12,000 sf at 2001 N. Main St. and Yapstone may be leasing 35,000 sf at 2121 North California. In Pleasanton, Home Street Bank leased 13,000 sf at 7701 Koll Center Parkway and next door in Livermore, Aero Precision signed for 44,000 sf at 30 Lindbergh Ave. Across the Bay in Brisbane, Hyperion Therapeutics leased 20,000 sf at 2000 Sierra Point Parkway, and further north in South San Francisco, Vista Gen Therapeutics signed for 10,000 sf at 333 Allerton Ave and Prothena Biosciences expanded to 14,000 sf at 1650 Gateway Blvd. In San Francisco, Pacific Crest Securities expanded to 11,000 sf at 201 Spear St.; Ameriprise Financial leased 10,000 sf at 333 Sacramento St,; Twitter leased 313,000 sf at One 10th St,; Practice Fusion is taking 100,000 sf at 650 Townsend St.; Pinterest, Trulia, and Dropbox rumored to be out looking for big chunks of office space, and combined with the LinkedIn requirements totals 700,000 sf of requirements. Eventbrite leased 100,000 sf at 155 Fifth St,; Intuit leased 200,000 sf for a renewal and expansion at 22 Fourth St:, and is also rumored to be searching for another 200,000 sf; Esurance took 91,000 sf at 650 Davis St., Swirl expanded to 24,000 sf at 385 Moraga St.; and Techscape leased 27,000 sf at 71 Stephenson St.
Downtown San Francisco Class A office buildings are routinely selling for $600 to 800 per square foot or more, with full-service annual rental rates in the $55 to 65/sf range. Contrast this with a 380,000 square foot Class A office building directly across the street from the Walnut Creek BART Station which just sold last month for $269/square foot. The 10-story with a multi-story parking garage with about 1,150 parking stalls and annual rents that went from $33/rsf per year prior to sale to $36/rsf after the sale.

ZNE buildings – a term you and I will be hearing in increased velocity during the coming years. Zero Net Energy, which means the building itself is able to produce at least as much energy as it uses. Air conditioners, heat, electricity, lighting, computers, printers, coffee-maker and refrigerators all soak up less power than is produced by a building’s solar panels, wind turbine and energy-efficient design.

Madison, who is 11 12 and showing signs of preteen girl balancing homework, sports, and lots of friends on phone and text, just made the Red Division for girls’ softball. So the past few months of no sport practices or games is about to end. Twice a week games, and as her past softball coach, I am always amazed at each year’s physical prowess progression from the strong throwing arms, game awareness of where to make the play, and increased percentage of actually catching a fly ball. I remember seasons where the 5- or 6- or 7-year-old girls could go half a season before one actually snagged a fly ball during the game. Jordan, who at 6’1 towers over his dad, is working on his Boy Scout Eagle Project and if you want to donate new or slightly used shoes he will be sending to third-world countries through Soles for Souls, just let me know. Now to find a place to store 1,000 pairs of shoes ..

Click Here to view Jordan and Madison’s recent photos.

A few weeks ago, parts of our nation was frozen in sub-zero blizzard weather, while other parts were in drought conditions. We have tech companies hiring as fast as they can find qualified employees, and brick and mortar retailers wondering if they just experienced their final holiday season. Depending on whom you ask, we in the United States either have one of the best educations systems in the world, or one of the worst, yet overseas students at U.S. universities is at a record number. Our children today may be over committed with too much homework, sports and activities, too “entitled,” expecting support and benefits from parents and society unheard of in past generations, yet, they are still our future. Just 30 years ago, predictions were made that by today we should have run out of oil and made gasoline cars obsolete, we have had fears of ozone-layer depletion, Global Warming, massive terrorist attacks, water shortage, and the total collapse of our banking system, yet we still survive, strive and thrive. I trust our children to continue fixing problems we weren’t able to solve, and I dedicate this issue to my and your children. Have a safe rest of winter, call me with all your commercial real estate needs, and please let me know your thoughts on this!

Sincerely,

Jeffrey Weil, MCR.h,SIOR,CCIM
Executive Vice President