Presented at the February 24, 1998 Pleasanton Chamber of Commerce luncheon meeting by:

Commercial Real Estate Development in the Tri-Valley
or,
From Cows to Cubicles

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

Hello, and good afternoon! I've been asked to spend the next few minutes on today's luncheon topic, Commercial Real Estate Development in the Tri-Valley. This area encompasses San Ramon, Dublin, Pleasanton and Livermore.

Here's what is going to happen. For the next twenty minutes or so we will discuss commercial activity and development, beginning with where we came from 15 to 20 years ago, where we are today, and where we are headed through the beginning of the next century. I will cover the office market as well as retail, and industrial. Then we should have about ten minutes left for questions and answers, so save them up as they come to mind during my presentation.

Back to the beginning. One week after I received my MBA from Cal Berkeley, broke and without a job I was hired by Grubb & Ellis. This was on October 11, 1976, which I always remember because this was my birthday. I asked my new boss what was my territory, and he told me to work the Contra Costa office market because no one else wanted to work it. Back in those days none of the major brokerage houses had offices on the other side of the Caldecott, so we ran back and forth from Oakland. I remember the first two years were so slow in Walnut Creek and San Ramon - just think, 95% of all the office buildings we now have in existence weren't around back then. San Ramon's claim to fame for office space were a few older wood-frame buildings. Both Bishop Ranch and Hacienda Business Park were literally hay fields - those of you who were around in those days can probably remember the bales of hay stacked up waiting for pickup. Sixty-cents a square foot got you fully-serviced office space, including tenant improvements, and most leases were five pages or less, not the forty page monsters we have today.

Then what happened is about 1979 and 1980 the office market in San Francisco took off, and by the early 1980's the vacancy rate in San Francisco was less than half a percent. Rents in San Francisco soared, and by then an increasing number of middle and senior management were commuting daily from their suburban homes in Clayton, San Ramon and Pleasanton.

The way I understand it, Bishop Ranch was originally intended to be a residential development but area homeowner disapproval of this concept forced the project to go commercial. Toyota, and a few R&D companies bought parcels to build facilities, but it wasn't until Pacific Bell and Chevron bought 240 acres for their 3 million square foot office projects that San Ramon and Bishop Ranch was, as they say, on the map.. Other major tenants followed, including IBM, Impell, Solarus, Metropolitan Insurance, and numerous others.

Down in Pleasanton, Joe Callahan had a dream. With Prudential Insurance he had previously helped co-develop two other large business parks, both down south in Silicon Valley which were super hits. Looking at a map back in the early 1980's and envisioning this 800 acre parcel, sitting near the crossroads of two major freeways and providing access to literally all of Northern California might seem like a no-brainer today, but back then it took a true visionary like Joe Callahan to pull it off. They master-planned the entire park and started developing speculative office buildings for lease.

I had a little personal involvement in the early Hacienda days. Back about 1980 I had a call from a real estate manager at AT&T who asked me to put together an overview of the East Bay office market. I followed up, but nothing came out of this. Quite a while later, and totally out of the blue some guy I never heard of called, saying he was a right-of-way specialist for AT&T and needed a little help finding some office space. Okay, I thought to myself, this guy probably wanted 2,000 square feet, so when he asked when we could go out and take a look at buildings, I asked him, how about next week Thursday? He said he was in a hurry, and could I do it any sooner. I then asked, how much space do you need, and he answered, 200,000 square feet to start but it would probably end up a lot more, so I asked him would 8:00 am tomorrow morning be soon enough for us to go out and look at property? True story, and we ended up leasing 700,000 square feet, almost all of which was in Hacienda Business Park, and then we did a joint-venture build-to-suit for 1.1 million square feet for AT&T's regional headquarters.

Spurred on by this type of demand, Hacienda constructed more speculative office projects, setting the stage for what happened between 1986 and 1995.

During the late 1970's and early 1980's Dublin developed a few office buildings like the 100,000 square foot Heritage Office Park, and the Corrie Center and Great Western Building. Livermore was primarily light industrial and distribution with almost no office development.

Let me place the next part of our commercial history into national context.

During the early and mid-1980's we experienced a phenomenon unlike any ever experienced. Office development was on fire. This was caused by a number of factors. Banks and savings & loans were flush with cash, and they earned large fees to get money out on construction and permanent real estate loans. Rental rates were going up 10 to 30% per year so analysts had no problem projecting a compounded 10 or 15% rental appreciation when calculating how much to loan. Uncle Sam, before 1986, offered huge tax breaks on vacant buildings - losing money - no problem, just write it off against your other income until things got better. Lines of credit were handed out like candy to eager developers - I remember clients who had million dollar unsecured no-questions-asked lines of credit to use to tie up new development projects. And, developers were large machines that needed more development projects to keep going. After all, with all these property analysts and acquisition specialists on salary we'd better keep building, especially when the bank was willing to make 125% loans without personal guarantees.

So we blew it, big time, around the country, and in a ten year period built more office space than we had built during the past fifty years combined. Our Tri-Valley region was no exception. We were giving two years free rent on a five-year lease, and on a building that broke even at $2 a square foot we were leasing it out for $1 a square foot. You know, lose on each sale but make it up on volume. Well, eventually 25 to 30% of all our office and flex buildings throughout the Tri-Valley went into foreclosure. Take Heritage Office Park for example. This 100,000 square foot two-story Dublin project is located right on I-580 at Foothill, and at the height of the market was valued at $150 a foot, and had a $100 a foot mortgage. After it went into foreclosure the lender was lucky to sell the project for only $43 a square foot, because 5 or 6 years ago no-one wanted anything to do with office buildings. Some industry experts back then predicted we had a forty-year supply of office space already sitting vacant, and with all the major corporate downsizing going on we wouldn't have to build another office project until the year 2030.

In Hacienda the office market was so depressed, land originally master-planned for corporate users was sold for residential, Wal-Mart, other assorted uses, and prices were so low land which sold for $8-10 a square foot twelve years prior, reportedly sold for fifty cents a foot plus assessments, which was cheap enough to justify distribution and warehouse, so that's how Unisource was fortunate to end up in Hacienda.

In San Ramon projects like the eighteen building complex called Crow Canyon Park were foreclosed along with Class A buildings such as ADP Plaza.

The whole country's commercial market was doom and gloom. San Francisco rents which had gotten up to $3 a square foot in 1984 were down to a buck and a half, and most developers and tons of savings and loans went out of business. The Tri-Valley and Silicon Valley both had a 35% vacancy rate.

Shift forward to about three years ago. Silicon Valley began to stir. Internet became more than a passing fancy. Having a computer at work was not enough, now you had to have one at home, and if you had kids maybe even two or three at home. Cell phones were not just for doctors or real estate agents, but affordable and practical for everyone. These three interrelated industries exploded- Internet, telecommunications, and software. The Tri-Valley has been affected for two major reasons. The first was we already had a strong inter-tele-software presence, with GTE in Hacienda, Pacific Bell in San Ramon, and PeopleSoft unable to expand in Walnut Creek and transitioning to Pleasanton. The second reason - we have an awesome labor pool, and if you stand on the Sunol grade any commute morning you wonder why more businesses don't relocate or expand in the Tri-Valley. So during the past few years PeopleSoft has absorbed hundreds of thousands of square feet, GTE expanded to 125,000 square feet at Bishop Ranch, and Pacific Bell leased building after building for various expanding components of its business. ProBusiness just went from 40,000 square feet last June to 130,000 square feet, and is rumored to be taking an additional 84,000 square feet on top of that, and the list goes on and on.

Then we had regional relocations, like Robert Half coming over from the Peninsula, Fireside Thrift relocating from Newark to Pleasanton, and many others. We've had regional corporate expansion, like ENRON whom I recently helped lease 50,000 square feet for their regional headquarters up at Bishop Ranch. Let us not forget we are also the capital of food brokerage and food industry corporate offices, exampled by Safeway moving their corporate offices from Oakland to Stoneridge, and Tri-Valley Growers moving their headquarters last year from San Francisco to Bishop Ranch.

So where are we today? Vacancy rates for the Tri-Valley region are about 3%, most of the new construction is leased before the buildings are finished, and rental rates have shot up about 20% per year. As an example, two years ago I had an offer from a Landlord to renew a 15,000 square foot client for five years at $1.35 a square foot, but my client decided not to renew early, against my advice of course, and just last week the Landlord offered, same space, to renew for $2.15 a square foot, an eighty-cent a foot increase. Of course, over five years this will cost my client an additional $720,000 in increased rent. Ouch!

And don't forget that one the largest factors that fueled our last big boom is just beginning to stir again, and that is major corporate relocations out of San Francisco. San Francisco office rents for Class A space, if you can find it, now run about $3 to $4 a square foot a month plus $300 a month per parking stall. I've recently heard of upper-end office rents at $5 a monthly square foot. Business employee payroll taxes can cost a 50,000 square foot San Francisco office user over $90,000 per year more than if they were in San Ramon, which over ten years is almost a million dollars just in excess business taxes.

This is a good place to mention my web page, which is www.officetimes.com. On it I have a comparison of business taxes for Pleasanton, San Ramon, Oakland, San Francisco and elsewhere. I also have a number of other articles, like The Art of Subleasing Office Space, The Time and Process of Office Relocation, lists of my favorite commercial contractors, space planners and office furniture dealers, tons of materials and links on office hoteling and home officing, and even listings of East Bay golf courses, hotels and extended stays. Please check out www.officetimes.com Also, this entire speech will be posted on this web page probably by next week.

OK, back to where we are now, and more importantly, where we are going in the future. Industry-wide, there are several issues which are important. Telecommuting is up from 3% a couple of years ago to maybe 7% today, and this is expected to continue to slowly increase in popularity. This will still have a minimal effect on office space demand.

Corporations are learning how to get more out of less. It used to be we averaged 250 square feet per person, then the ratio went down to 180 square feet per person for office space, and now I have a few clients who through team officing and interesting furniture layouts are able to provide 100 square feet per employee. This means companies can run operations more efficiently and at a much lower overall cost.

We are seeing more and more double-shift operations, where desks are shared and the entire operation runs for two or even three shifts. This is especially true with call centers, which is one major growth sector of the office industry. Running multiple shifts not only provides major cost savings by maximizing the building, equipment and furniture, but with our global economy you and I might be asleep at 4 am but one-third of the rest of the world is awake and at work.

With all of this, demand is still fierce.

Class A rental rates in San Ramon and Pleasanton are now running about $2.10 to $2.30 a monthly square foot, full-service which means the property taxes, property insurance, sewer water garbage, utilities and janitorial are all included, and I'll stick my next out and predict $2.50 by the end of 1998 and $2.70 a foot by the 3^rd quarter of 1999.

Face it, folks, we don't really have a lot of vacant land left in San Ramon, Pleasanton, or even Dublin, and most of the vacant land in Livermore will take a while to get utilities and public approval before it can be developed.

Lets start with San Ramon. Bishop Ranch built 800,000 square feet spec, and even before total completion it is 81% leased. They have another 100,000 square feet going up for late 1998 completion, and then about a million square feet for the years 1999 and 2000 once they get the rest of their approvals. Bedford is building 40,000 square feet on Crow Canyon, and that basically is it for San Ramon.

In Pleasanton we have 70,000 square feet going up at Stoneridge, and a 110,0000 square footer under construction at Bernal Corporate. Figure another 400,000 at Bernal and then that's gone. We do have a couple of major development sites available, and if you know of anyone who needs a 600,000 square foot office site, just call me and we can put them on the 28 acre piece at Stoneridge alongside I-680, and if this isn't big enough we may be able to get them into 1.7 million square feet on the 80 acre Kaiser parcel at the Sunol exit.

Dublin will be the shining star for the next few years, and I have to give a lot of credit to Alameda County and the City of Dublin for really getting their act together. East Dublin will be transformed from the ugly frog into a beautiful princess in under three years. Who kissed the frog? Humphrey Instruments is relocating 140,000 square feet out of San Leandro, Micro Dental will be building a 100,000 square foot dental lab, there are several R and D buildings now going up which are generating a lot of leasing interest, and PeopleSoft should be able to work it out with the City of Dublin for a two million square foot office campus. Talk about putting Dublin on the corporate map!

While we are talking about East Dublin, Regal Cinemas is putting up a twenty-one screen state-of-the-art movie complex, even with cupholders and a seven-story I-Max screen. General Motors will be building three dealerships on fifteen acres alongside I-580, and AutoNation will be building a 200,000 square foot used car showroom. Other new retailers might include REI, Barnes & Noble and Claim Jumper.

Next door in Livermore, Triad Park Lincoln is almost finished with its 145,000 square foot first phase flex. What flex means is it can go office, lab, research and development, warehouse or a combination thereof. They still have 114,000 square feet available, but proposals are out to over 300,000 square feet worth of prospects. Also in Triad Park, Reynolds and Brown has a 108,000 square foot flex building which will be ready this Fall. Speaking of Triad, TKG International has entered into a purchase agreement to develop product, sell land and do build-to-suits.

Okay, let's spend a few moments discussing industrial development, and for the following information I would like to give credit to Mark Dowling of my office. For San Ramon, Dublin and Pleasanton, forget it. The land is just way too expensive. All the industrial action will be in Livermore. Ellis Partners Livermore Gateway with 150,000 square feet is 50% leased, and they preleased 70,000 square feet to Polystar. Prudential is putting up a quarter of a million square feet of distribution space. Circuit City has 650,000 square feet which will be finished this May, and expansion potential to take this to one million square feet. Spieker, Pacific Union, and Pell will add another 350,000 square feet of flex, warehouse and distribution space between now and next year. Again, if you want any more details please call Mark Dowling at our Walnut Creek office.

Joe Callahan, Alex and Masud Mehran, along with the Pleasanton and San Ramon city planners and officials had a dream, and I bet you just about everyone here today knows someone who is an employee or resident of Bishop Ranch or Hacienda, or sells services or product to companies based there, so we all owe a great deal of gratitude for these pioneers who stepped forward and turned vision into realty. Joe was about ten years ahead of his time, but just drive around Hacienda on a clear evening, with the corporate office lights, the beautiful Boeringer Mannheim lab complex, the retail, hotels, housing, and in my opinion the finished results came out terrific.

So what will happen between now and into the early part of the next century?

We will continue to have corporate downsizing and realignment so expect major blocks of space to pop up.

I believe that at least for the rest of this year and on into next year almost all office and industrial product will be leased prior to or shortly after completion.

During the next several years we may begun to see reuse of existing, less valuable properties such as a single-story warehouse on a piece of real estate that might be better suited for a Class A five-story office building. Those more industrial functions will end up in Livermore or over the hill in the Tracy/Stockton region.

Expect the traffic to get worse way before Caltrans and other public agencies figure out how to get it better. Remember back when we had a 35% office vacancy rate, your stock portfolio was worth only a fraction of what it's worth today, and everyone knew someone who had been laid off and was having trouble finding a replacement job? Well, it was sure a lot easier getting around our highway system back then, and finding close-by parking was a real breeze with the high vacancy and unemployment , so the next time your stuck in traffic remember what the alternative is

Our Greater Bay Area population will continue to grow, with long-range affordable housing located in Solano, East Contra Costa and San Joaquin county, middle-management housing in Danville, San Ramon, Dublin and Livermore, and upper level homes in exclusive enclaves like Ruby Hill.

The commercial real estate boom at some point will go bust again, nowhere as severe as we experienced in the late 1980's but my industry is always cyclical. Just know that everyone wants office space when the rents are high, and it seems no one wants to lease space when the market is in the tank. Enjoy life in spite of this and like Richard Carlson's great book is entitled, "Don't Sweat the Small Stuff…and it's all small stuff."

You've been a fantastic audience, I want to thank you for your being here today, and now I'd like to open the floor up for questions and answers.

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