Intro:

What Will Happen In the East Bay Office

Markets During 2008 and 2009

Trends, Predictions and Crystal Ball Secrets

Presented to Building Owners & Managers Association

Eastbay Chapter

January 10, 2007

Presented by:

Jeffrey S. Weil, MCR.h, CCIM, SIOR

Senior Vice President

Colliers International

1850 Mt. Diablo Blvd., Suite 200

Walnut Creek, CA 94596

Ph. 925.279.5590 Fax 925.279.0450

jweil@colliersparrish.com

www.officetimes.com

My comments may sound different than most office brokers as I specialize only in exclusive tenant representation, with no landlord leasing representation whatsoever. Thus I have no bias towards painting a picture any rosier than reality as I have no hidden agenda to keeping office rents up or making the market look better than it really is.

We will start out with a contest, and that is, please guess the total available office and office/flex space in excess of 10,000 square feet, all building types, direct and sublease, in Oakland/Emeryville, Tri-Valley including Pleasanton, Livermore, Dublin and San Ramon and the I-680 Corridor from Danville north to Martinez. At the conclusion of this presentation I will tell you the correct answer.

Greater Bay Area Big Picture

Santa Clara is hot, vacancy rates still dropping.

4 years ago 70 million square feet availables, now 40 million square feet.

San Mateo rents have doubled during the past three years, The Peninsula is still on fire.

San Francisco rents are up to the mid $40’s per year.

Two million square feet of new office construction in the pipeline.

Boutique high-end office space as much as $80-$100/square foot per annum.

East Bay

Oakland Class A office vacancy rates were 5.8% one year ago, now up to 7.9%

I-880 vacancy rates up 10%, rents up as well.

Pleasanton Vacancy up, rents up.

I-680 same, 10% increase in the vacancy rate.

Blackstone – Equity Office – A Short-term Phenomenon with long-range implications.

Buy at 4% cap, then forced to increase rental rates to substantiate why you paid so much.

Asset Managers & Job Security – Must maintain performa they based their purchase on.

Optimism imagination - sure we can raise rents!

Perception vs. reality – But is it truly reality?

What is market? Market is the effective rents tenants actually pay.

Taxi Cab example:

Taxi cab – all drivers drive $25,000 Chevy Malibu’s and charge same fare. One driver goes out buys a $90,000 car, doubles his fare. If passengers don’t know, they get in, and get taken for a ride literally and figuratively and then get charged double. If all the cab drivers either raised their rates the same or all bought new $90,000 cars and doubled their fares the first guy might get away with charging way more than before. The problem is if some of the drivers with less expensive cars don’t raise their fares and the customers find out, these lower-cost guys will capture the market.

With minimal tenant demand how far can rents be pushed?

Cost to build new Class A office buildings, mid-rise including land, parking structure, soft costs, and tenant improvements

$450-$500/square foot

Break-even fully-serviced rents required $4-$5/square foot per month

Land shot up 300% during residential hey day, never went back down, we were selling 4 and 7 acre headquarter sites for high land values, bulldozing the offices and putting up new homes.

Cost of TI’s – thank you India, China and the price of fuel, minimum wage – it is expensive!

East Bay Warm Shell $50/square foot (HVAC, restroom in building).

San Francisco Warm Shell $80/square foot

Subprime Meltdown – Worst Might Be Yet To Come

Citi Group, Morgan Stanley

Get fired & leave with $150 million, not a bad CFO gig!

Who wasn’t severely impacted

SF – almost not at all

San Mateo

Oakland, Emeryville for most part not affected

Where did the subprime bombs actually hit?

Concord – Wells Fargo, Fremont Investment, Countrywide

San Ramon – Irwin Home Equity, ADP spinoff

Pleasanton – e Loan

Stealth Bomber Space – It’s out there, just can’t see it right now. Huge blocks of unoccupied plug & play Class A office space not yet “officially” on the sublease market.

Future Bombs – 1.8 million mortgages going from teaser to taser between now & next year. Hope for a government workout – forget it! Maybe some will be saved but let’s say just 1 million go into nuclear meltdown.

Take one house – Pool service. Paperboy. Phone Service. Home insurance. Local beauty parlor, restaurants, and the domino effect goes on and on.

Take the entire industry – think red ink is about to stop running - Forget it!

Bankers – huge write offs, maybe lag to layoffs? When you write off 5 or 10 BILLION DOLLARS there has to be thousands or tens of thousand of layoffs not too far behind.

Want to buy a house at a bargain price? Let’s see, bad now, worse to come, should I buy now or wait?

Buy now at a bargain and then lose part of my equity or wait until next year when it’s a steal?

Remember the old days, open a new account, get a free toaster?

Buy a new toaster, get the house free.

Jobs: What is Hot and Jobs That Are Not

Hot

Tech Emerging IT – wireless gismos

Biotech & Medical Devices Database Administrators

Tech

Eco

Solar Renewable Energy Engineers

Healthcare Lawyers

Tech Corporate Sustainability Manager

Network Security Accountants

Not

Most banking, mortgage brokers, residential agents, new car salespeople unless you sell Prius, landscapers, pool service, subdivision engineers, weak mom and pop retailers in the sub-suburbs.

At random, over a ten day period I jotted down new Eastbay office sublease

space back in December 2007.

Concord 7,002 square feet

Oakland 35,287 square feet

Pleasanton 1,550 square feet

Pleasanton 92,000 square feet

WC 3,795 square feet

WC 3,582 square feet

143,000 square feet

And actually office leases done in the Eastbay are far and few between – My newsletter, OfficeTimes, documents all of these every 60 days.

Issues In Subleasing

Usually way more complicated, time consuming & overall pain in the you-know-where than many folks would admit.

Term – Short & why usually under three years as most tenants sign five-year leases and it takes a couple of years before something happens that puts their space up for sublease.

Compete against landlord – TI, term, lease, options

Weak Sublandlord? Just think of all the mortgage brokers trying to sublease space.

Weak Subtenant? Many credit tenants won’t do subleases or terms less than 5 years, which leaves you with a smaller prospect pool to work with.

Marketing Disadvantages

Broker open-house - Nope

Fancy brochure - Nope

Broker incentives – Unless sublessor savvy

Cost to demise –

Life safety, ADA could be triggered by subdividing space or alterations.

Hire space planner upfront – What, why now is what the non-savvy sublandlord usually says.

Restoration – Do you have to put everything back the way it was at the end of the term?

Brokers make 3 to 4 times more doing direct – Look at it this way, instead of a 5 year term at full rent subleases are usually 2-3 years at low discounted rents.

Brokers on retainer – Best way to get a sublease listing brokers attention & energy.

Low Ball offer comes in at the beginning almost always best deal in the long run.

Office Buildings & Sustainability

Rooftop Turbines

Net Zero Carbon Footprint

Recycle everything

Remember Kevin Costner in opening scene in Waterworld?

Practical ideas page

See - www.officetimes.com

Practical Office Tenant Sustainability Ideas

Easy-to-use paper, can and bottle recycling system

Approved battery disposal

LEED lighting whenever possible

PC’s and electronics on power strips that are turned off at end of day

Lights on timers or motion-sensors so off when no one there, off when office closed

When recarpeting or rewiring, recycle used carpet and wire

Janitorial – use environmentally safe cleaning products

Use green caterers

Use recycled-content paper

Use refillable water bottles instead of landfill plastic disposables

As much as possible, review documents on-line versus printing everything

When possible, print double-sided

Opt-out at the office and at home for mail-order catalogs you don’t want, do this

free at www.catalogchoice.org

Global Warming & Office Buildings – Big Picture, even if we all drove Prius & all our buildings had carbon neutral footprints, China is building huge pollution – emitting coal plants, 25% annual increase in car ownership, and we are all in trouble – but hey if you live in Walnut Creek maybe you’ll be closer to the ocean

Offshoring December 2007 Business Facilities

2003 315,000 jobs 2007 1.1 million jobs by 2015 3.4 million jobs

Telecommuting – Fairly stable

Workstation Design – White, mobile, teams, morale, cool

And just imagine in the not too-distant future

Oil at $200 Barrel

Gas at $7/gallon (or more)

- Change in commute patterns

The Future

OfficeTimes.com past newsletters, 26 years of written predictions out there and no where to hide.

Scenario One

Residential melt-down gets way worse, bank blood flowing down the street, between this year and next one million foreclosures, bankruptcies up the wazoo, more layoffs from lenders so they can fire more CFO’s with $150 million dollar severance packages.

Residential homebuilders follow the Darwin Theory of Evolution; the strongest absorb the weakest, bargain land, bargain homes and layoffs galore.

Tech, bio, healthcare, IT & renewable energy keeps rolling along, expanding, taking more space, like giant Pillsbury Doughboys.

Houses that originally sold for $600,000 in 2005, were appraised at $800,000 in 2006, and were reappraised at $500,000 in late 2007 go back to the lender, and get dumped on the market later this year or into 2009 for $300,000 or $350,000.

Hey, I remember back in the early 1990’s after our Savings & Loan meltdown when lenders were trying to sell Class B 90% leased office buildings with 90% financing at $45 a foot and there were almost no buyers – and Class A BART office buildings went for as low as $67 a foot!

So rents stagger slowly upward, not spiking like 2005 and 2006 and in 2011 rents start to look like they just might support new office construction within a few more years, then BAM, new construction, the GTPS’s get busy - Global Tenant Positioning Systems – us brokers, then at some point overbuilding, vacancy goes back up and the cycle starts all over.

There is no Scenario Two unless my predictions are wrong, in which case that would have been Scenario 2!

Oh, and by the way, there are 267 – 10,000 square foot and up available office and office/flex spaces in the areas I mentioned at the beginning.