“After three years of steady increases, asking rates have started to jump at an accelerated rate in the first quarter of 2007, according to market reports.  As of a week before the end of the first quarter, landlords in San Francisco’s central business district ratcheted up average asking rates from $40 to nearly $42.75.  If the trend continues for the rest of the year, the downtown core could see a 30 percent increase in 2007, with average asking rates hitting $50.  The asking rates are the most aggressive in the most coveted portion of the 3.9 million-square-foot portfolio that Morgan Stanley is in the process of buying from the Blackstone Group, which bought it from Equity Office Properties.  This includes the Accenture space at One Market St., which can be taken for $90 a square foot, and the top of One Maritime Plaza, offered at $100.  Tove Nilsen, market research director at Colliers International, said she is preparing a study on whether owners are getting what they are asking.  ‘The asking rates and the effective rates are two very different things,’ Nilsen.  ‘But so far it seems like they are getting close to what they are asking.’  The Equity Office sale to The Blackstone Group resulted in the sale of pieces of the portfolio at significantly higher prices.  ‘New owners likely will increase rents to justify purchase price … But once the tower flipping stops, the office tenants most likely will end up creating the value for the new owners through higher rents. … Bob Safai, a principal with Madison Partners, expects rents to increase by 20 percent to 25 percent within 18 months on the Westside in Los Angeles to pay for the recent transactions.  Those companies are not getting cash-on-cash returns until they increase the rents.  In certain cases, in some submarkets, they can increase rents 30, 40 or 50 percent.”  California Real  Estate Journal (April 30, 2007) I’ve also heard of building remeasurements for portions of this portfolio which have “grown” existing buildings by 10 percent or more, and will additionally increase tenant occupancy costs … SF Business Times (March 30, 2007)

Commercial Real Estate Bubble?  “There is a cap rate disconnect from interest rates caused by global liquidity, which is magnified by favorable debt terms.”  Brian Newman, who most recently co-ran Global Capital Investment, Merrill Lynch’s multi-billion-dollar proprietary real estate investment vehicle, said.  “You can manufacture a relatively high equity return.”  He pointed to real estate investment trust mergers and acquisition activity that has pushed real estate investment trust share valuations to all-time highs and capitalization rates that have dropped to an average 6 percent for all property types after averaging 8.5 percent for two decades.  Newman said that many investors base their decisions on replacement-cost analysis, which is problematic as the cost of land, construction materials and labor have skyrocketed in recent years.  “We’ve seen periods like this, where people justified high real estate with high replacement costs, and people have been disappointed,” he said.  California Real Estate Journal (May 7, 2007)

Going Green:  According to the U.S. Green Building Council (USGBC), there are currently 5,562 LEED–registered projects and 735 LEED-certified buildings in the Country; that compares to just 635 registered developments and 38 certified buildings a mere five years ago … One of the most recent and widely referenced studies in the field, Capital E (a clean energy advisory firm based in Washington, D.C.) 2003 “Green Building Certs and Financial Benefits” reported the average premium to build green was slightly less than 2 percent, or $3 to $5 per sf … Now there are over 35,000

LEED-accredited professionals … cost keeps coming down … the earlier green building features are incorporated into the design process, the lower the costs … Nationally, the average premium on standard LEED certification is between zero and 0.5 percent, LEED Silver is between 1 and 2 percent, LEED Gold is around 2 percent, and LEED Platinum is somewhere between 3 and 7 percent.”  The federal government’s Energy Policy Tax Act of 2005 provides tax deductions for commercial developments and renovations designed to reduce energy costs by 50 percent or more; Maryland, Nevada, New York and Oregon all have some form of tax breaks for sustainable commercial development.  Washington, D.C. and Boston have proposed mandates requiring adherence to sustainable design methods.  Florida, California and Washington promote green building through the accelerated expedition of permit applications.  Real Estate Forum (April 2007)

Commercial Color Trends for 2007:  Buildings will look and feel more like home (comforting colors that feel truly warm, but never hot); “Green” Rules – softer botanical greens, blues the color of sky and water, neutrals like beiges, browns and tans, and bright accents, like deep, rich ethnic reds and warm glowing oranges.  For more info, go to www.colormarketing.org.  Buildings (December 2006)

Ralph Witherspoon, who is a security consultant, wrote two excellent articles, Office Building Security and Parking Lot and Garage Security, which are linked by clicking the title or going to Security.

“Two years after its founding in Boulder, Colorado, Sirna Therapeutics Inc. picked up and moved to San Francisco in 2005.  While most CFOs might have balked at the idea of relocating to one of the most expensive real estate markets in the country, Finance Chief Greg Weaver saw the move as critical for Sirna’s growth.  “What we need to drive this company forward is to attract and retain the highest quality talent,” says Weaver.  “We needed a large, biotechnology-specialized employee and executive pool.”  According to a 2002 Brookings Institution Study, five metropolitan areas, Boston, San Francisco, San Diego, Seattle and Raleigh-Durham, accounted for 75 percent of the new venture capital invested in biopharmaceuticals between 1995 and 2001.  Likewise, those areas received 74 percent of the value of research contracts from pharmaceutical firms, and 56 percent of the new biotech businesses formed during the 1990s … Tempting as incentive (state allocated) packages may be, they are rarely the deciding factor in where a biotech business decide to locate.  A highly skilled labor pool is the most critical element in choosing a location, say many industry experts.  “We could tell our scientist that we get a better deal to move to Iowa, and they say ‘Great, but I’m not going.’  Because certain locations have a 30-year head start in developing talent and financing networks, aspiring biotech meccas may be unable to close the gap.”  CEO (December 2006)

North American Office Real Estate Highlights—First Quarter 2007, vacancy rates, rental rates, changes from last year, for 55 U.S. cities from Atlanta, GA to West Palm Beach, FL and everything in-between, at North American Office Real Estate Highlights.  Another “hot of the press” report is the National Association of Realtors The Commercial Real Estate Market Report.

Deals and Rumors:  In Walnut Creek, I represented UFCW in the expansion and long-term lease for 30,000 sf at 1277 Treat Blvd., and next door at 1255 Treat Blvd. Portal Group Holdings sublet 16,000 sf.  In Concord, Pipeline Systems expanded from 14,000 sf to 30,000 sf at 5099 North Commercial.  Along the I-680 Corridor, currently there are a number of bargain-priced Class A 50-100,000 sf Plug & Play office subleases thanks to the subprime meltdown (please call me for details).  In San Ramon, Novartis Pharmaceuticals leased 14,000 sf.  Down in Livermore, Alloptic just inked a 27,000 sf lease at Shea Center.  In Downtown Oakland, Bechtel leased 24,000 sf at 1111 Broadway, and in Richmond, the California Department of Justice leased 25,000 sf at 1003 Cutting Blvd.  Crossing over to Marin at Novato’s Hamilton Landing, Disney ImageMovers Digital is looking at 90,000 sf, and at the same project, Activision is reportedly looking at 12,000 sf, while Kaiser Foundation Health Plan leased 16,000 sf at 7200 Redwood Blvd.  In San Francisco, Anshen & Allen Architects expanded by 12,000 sf to 43,000 sf at 901 Market St.; Bloomberg may have a LOI for 35,000 sf at One Maritime Plaza; The City and County of San Francisco might be purchasing the 508,000 sf One South Van Ness and the 132,000 sf 1650 Mission St. properties;  Seismicom leased 15,000 sf at 525 Market St.; Babcock & Brown will be relocating to 155,000 sf at Presidio Letterman Digital Arts Center; Riverbed Technologies expanded to 80,000 sf at 199 Fremont St.; Cox, Castle & Nicholson sublet 29,000 sf at 555 California St.; Marsh & McLennan may have recently signed a LOI for 125,000 sf at 345 California St.; Majestic Insurance leased one floor at 101 California St.; Lockton Insurance is expanding into 25,000 sf at Two Embarcadero, and Hellman & Friedman inked 21,000 sf at One Maritime Plaza.  In Brisbane, Shopping.com expanded by 14,000 sf to 37,000 sf at 8000 Marina Blvd.  In Redwood City, Broadvision signed for 25,000 sf at Pacific Shores, and across the Bay in Fremont, Semicat, Inc. leased 22,000 sf at 47540 Seabridge Drive and Volterra Semiconductor Inc. is expanding into 57,000 sf on Fremont Blvd.

Churn – “The process of moving employees and assets – as individuals or as large groups.  IFMA (International Facility Management Association) defines churn rate as the number of moves in a year expressed as a percentage of the total number of offices occupied.  In the 2002 IFMA Project Management Benchmarks report, the main churn rate across the surveyed organizations was 41 percent.  For example, if an organization has 2,000 occupants on site and a churn rate of 50 percent, this equates to moving 1,000 people each year at the site.  If the average cost per move is $300 that is an expense of $300,000 per year.  But there’s more.  That cost per move only takes into account direct costs.  What about the indirect cost of the moved person’s interrupted productivity?  With a conservative estimate of four hours downtime and an average fully loaded cost of $50 per hour for an employee, this adds another $200 to the move.  The cost rises to $500,000 per year, along with nearly Two person years of lost productivity!  There are really two ways to combat the impact of churn: better strategic planning to reduce churn rates or better move coordination to reduce the financial and productivity impact of each move.  Reducing churn rates is the best bet, since no move costs less than the move that is avoided through better planning.  The problem is that most facility professionals get too caught up in the day-to-day challenges of managing moves and their other duties to produce and maintain a usable strategic plan.  According to the 2002 IFMA Benchmark report, only 54 percent of organizations have a current, written strategic plan.”  Today’s Facility Manager (March 2007)

I’m blessed to be able to specialize in tenant representation and commercial real estate, blessed to be with Colliers International, blessed to be living and working in the San Francisco Bay Area, let alone the United States, and blessed by my wife, two kids, my family, my friends, and you, who took the time out of your day to read this newsletter.