1999 and Beyond - An Analysis and Forecast of the East Bay Corporate Real Estate Market

Presented at the February 24, 1999 International Association. of
Corporate Real Estate Executives luncheon meeting by:

Jeffrey S. Weil, MCR.h, CCIM, SIOR,
Senior Vice President
COLLIERS INTERNATIONAL
1850 Mt. Diablo Blvd. Suite 200, Walnut Creek, CA 94596
Phone: 925.279.5590 Fax: 925.279.0450
Email: jweil@colliersparrish.com website: www.officetimes.com

1999 and Beyond
An Analysis and Forecast of the East Bay Corporate Real Estate Market

Good afternoon! 1999 is going by so quickly it almost feels mid-year already. During the next 12 minutes, I will be covering an overview of the East Bay office markets of Alameda and Contra Costa. We’ll talk about who moved from where, the types of industries we are seeing and discuss a design features of new office product. We’ll review vacancy and rental rates, talk about where all the Bay Area new housing is expected to be built during the next 20 years and give a birds-eye view of where office development is going in the future. Lastly, we’ll spend a moment on great internet web sites for corporate real estate directors and professionals so you can stay up-to-date between now and next year’s NACORE forecast. All in 11½ minutes, and as best as I can, without any boring numbers because you are all getting handouts full of the details.

Okay, who recently moved to the East Bay? Downtown Oakland is cooking, with hundred of thousands of feet relocating out of San Francisco to much cheaper rents, Class A product, and close BART access. GeoMatrix, Koret, California Bank, and Providian are the first wave to cross the Bay, and more are in the works. In the Emeryville-Berkeley area I moved Roche Diagnostics from Pleasanton into an old Langendorf Bakery which was converted by Wareham Development to one of the top bio-research facilities in the country. From dough to bio. We couldn’t find any suitable labs in Pleasanton or Livermore, and the synergy of all the biotech's in the Berkeley-Emeryville area is intense. I also relocated a large State Farm Insurance group to a warehouse in Emeryville being converted into modern office space by Ellis Partners. We needed a ton of parking and this is where we found it.

Up in Concord, IT Corporation is consolidating its Pleasanton and Pacheco operations and Basic Vegetable is the first and almost only tenant in the new Treat Towers at the Pleasant Hill BART Station. In Walnut Creek, I helped lease the University of California Genome space in a former Dow laboratory park, and also helped California State Automobile Association move a large call center out of San Francisco to Walnut Creek Shadelands. Shadelands has seen a ton of call center activity with its high parking ratios, open layout, and low rents. The vacancy there is just about zero.

In San Ramon, Aetna and TCI just relocated from Walnut Creek to Bishop Ranch and last year I moved Enron, also out of Walnut Creek to Bishop Ranch.

East Dublin, which is transforming into a real sharp area, just signed Allstate Insurance and Microgenics, both moving across the freeway from Pleasanton for cheaper and more available space. Two years ago these 700 acres were just scrub/brush, but now have hotels, office buildings, and shopping centers.

Over in Livermore, Bechtel Nevada will be moving from Pleasanton to a Speiker building I leased them on Vasco Road and in Pleasanton, Kelly Clark, consolidated operations from San Ramon and Fremont, American Baptist moved from in Oakland and Robert Half moved another group in from Menlo Park.

The industries we are seeing a lot of activity are call centers who don’t want to go to Idaho or Nebraska but still want relatively low-cost space and lots of parking, software companies like ProBusiness and Documentum who just exploded last year, internet-related industries, back office banking and insurance, and tele-communications.

Some design and facility trends we’ve noticed. Floor plates range from 20,000 to 50,000 sf. , with 25-40,000 sf seeming the most popular size. Wiring costs have skyrocketed, with 6 or 7 dollars a foot not unreasonable just to install electrical, phone and data cabling. Parking – the more the better, and ratios less than 4 per 1000 will eliminate a portion of the prospect market. HVAC and electrical – beefed up is better because Corporate America is stuffing a lot of bodies and equipment into less space, raising the electrical and heat loads and straining buildings not properly set-up for this.

It’s amazing – it was only a few years ago when everyone thought the office market industry was as good as dead. Talk about life and death – what about the age-old question, when does life really begin? A Catholic father, a Jewish rabbi and a Mormon priest were debating this. The Catholic father said, life really begins at conception. The rabbi said, no, no, life begins at birth, when the baby takes its first breath, and the Mormon priest jumped in and said, no, no, you’re both wrong, when the kids move out and the dog dies, that’s when life really begins!

I’m not going to throw a bunch of boring numbers at you- they are all in your handouts – just overall, we have low vacancy in San Ramon, Pleasanton, Berkeley and Emeryville, and lots of space available in Downtown Oakland, the Pleasant Hill Bart Station and Dublin.

Rental rates are in the $2 to $2.50 square foot range all over, and again the specifics are in your handouts. Office building sales are still strong, with multiple offers still predominate.

Long-term housing- if you care how far your future employees will have to commute, there is not a lot planned for Marin or San Mateo, there is a decent chunk projected for San Francisco and surprisingly a large amount for Santa Clara, but remember that since 1992 there have been 200,000 new jobs created just in Silicon Valley. As expected, there is significant new housing projected for Alameda and Contra Costa.

Current and future office development – that California State bird, the construction crane, which we thought was extinct has been spotted all over the East Bay and is busy putting up a million foot of speculation office development for 1999 delivery, and maybe another two million feet for next year, with most of this centered in the Tri-Valley Region of San Ramon, Pleasanton and Dublin. Unless we have an economic meltdown, long-term expect to see moderate new office development in Oakland, Emeryville, Concord and Walnut Creek. By moderate I mean 200 or 300,000 sf at a time. For large future growth San Ramon and Pleasanton are close to being tapped out of land, so look to Livermore to put up the next Hacienda Business Park type of development, and also expect creative reuse of existing buildings along the I-880 corridor.

A few questions you might be asking yourself is the market getting overbuilt, will rental rates begin to level off or even start to go down, what are the odds of Steve Young going to the Super Bowl next year, and what are the chances of an office industry meltdown like we had in the 1980s?

First, I exclusively represent office tenants, and my clients can’t wait for more office supply to come on line. Nothing against Landlords, but I have a number of clients coming up at lease renewal facing a 50% or even 100% rental increase. Some landlords have put in a special parking stall right next to the row of handicap by the front door, labeled Brinks Armored Car, there is so much cash flow right now.

I think rents will go up at a much more moderate pace. The 25% per year annual increases are gone. I currently represent about 600,000 square feet of assorted office users, and especially for larger, credit tenants during the past 4 months there has definitely been much more use of the word "aggressive" by developers in their proposals. It’s scary, with so many folks stating they will be the most aggressive in the marketplace.

Just imagine you’re at the San Francisco Zoo, and if animals could talk, the lion yells out, come into my cage, I’ll be the most aggressive, and then you hear the 300lb gorilla yell out, no, no, come into my cage, I’ll be even more aggressive. Well, give me a warm and fuzzy non-aggressive Panda Bear developer any day.

In the heyday of the mid 1980s, we were building spec five million feet a year. Now, may be one or two million feet. Lenders today make sure the developers are strong, have a lot at stake, and are much conservative than the cowboys we had fifteen years ago building with 125% financing, and offering tenants two years free rent on a five year lease. In mid-last year, July I believe, Wall Street pulled the plug on most of the commercial real estate financing. That has moderated new development. REIT's have curbed their huge appetites. In summary, moderate rental increases, no overbuilding until at least the year 2000 or 2001, and definitely no chance for an industry meltdown anywhere on the East Bay horizon. So far, we have been leasing almost everything as fast as it goes up. Case in point – two weeks ago I toured the new 250,000 sf Bishop Ranch 3 project, and just the 5^th floor was gone. Yesterday, I toured with another 30,000 sf user, and in addition to the 5^th floor being leased, the 50,000 sf 1^st floor and 50,000 sf 2^nd floor were also now off the market. This building won’t even be done until late summer.

I’d like to spend just a few seconds on a topic I gave a presentation to at NACORE, "Harnessing the Power of the Internet for Corporate Real Estate Directors." There is a ton of information on the Internet, available free and 24 hours a day.

You’ve been a great audience, we’ll have a few minutes for questions and answers, so thank you!

To see slides from the Presentation, click here.

Jeffrey Weil is a Vice President with Colliers International specializing in tenant representation and office building sales in Alameda and Contra Costa Counties.

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