Bay Area rental rates seem to be moving up quarterly (in some areas, daily). Fully-serviced San Francisco financial district space is now going for $2.65-3.15/sf ($32.00-38.00/sf); San Mateo at $2.75-3.00; Palo Alto at $4.00-6.00/sf (yes, per month); San Jose region $2.25-3.00/sf; Oakland $1.75-2.15/sf; Walnut Creek Downtown $1.90-2.15/sf; Walnut Creek Shadelands $1.35-1.55/sf; San Ramon/Pleasanton $1.85-2.15/sf.

In the hotter markets of Santa Clara and San Mateo counties, I'm hearing about more "as-is" office deals, and if there are too many lease clause changes requested, the Landlord simply passes on the tenant (even credit tenants) and goes to the next in line. Getting "a great deal" on office space, which was the theme of the early 1990's, has transitioned to just "get the space" in the late 1990's. Quote from my August 1, 1981, Issue 8 Newsletter, "1983 will be a major office-building delivery year, with over 10,000,000 sf of new Bay Area office space expected to be completed. I was at a luncheon the other day when Bob Lurie casually remarked $60.00/square foot rents for his 1984 San Francisco office project. Can these rent escalations continue?" It isn't a question of will history repeat itself, only a question of when...

Mitigating factors will to some degree slow the increase in rental rates: 1) Major Bay Area build-to-suits like PeopleSoft, Oracle, Intel, Franklin Resources and State of California may free up large blocks of currently-leased space; 2) As certain industries reach their "pain" threshold, divisions, and even entire companies, may relocate to Texas, Atlanta, Phoenix or other perceived lower-cost regions; 3) New speculative development has begun to sprout up throughout the Bay area, including San Mateo, Walnut Creek, San Francisco, and San Ramon; 4) Creative re-use of existing industrial, retail and other commercial property to office space will add inventory, as will the current conversion plans for Hamilton Air Force Base which call for turning the aircraft hangars into software and engineering offices, and vacant Price Club and other large blocks which may become back office space.

Facilities Of The Future: Today's Facility Manager, February 1997, discusses better use of vertical space by moving equipment off the floor and desktop and putting it on the walls or on the ceiling. "Our workstations look to create more space by using the air rights above the workstation for the mounting of monitors and various equipment...instead of expanding the desktop, we use the flat wall to mount heavy equipment and to reclaim the rights of the actual work surface." Moving equipment to the space above the workstations means the workstation itself can be smaller. Therefore, more workstations can be accommodated in an office and more employees can work in a smaller amount of space.

Where will your Bay Area workforce live in the future? Another new town of 5,700 homes near Danville (Contra Costa) would be next to the Dougherty Valley development, which has 11,000 homes under construction or waiting to come on line. As stated in the San Francisco Examiner, 02/23/97, "Houses should be in demand there (Pleasanton) and in the neighboring communities of Dublin and Livermore as these three cities are expected to add almost 73,300 jobs by 2015, according to a 1996 projection by the Association Of Bay Area Governments. That figure represents a 50% increase over the 1995 estimate."

I was at a recent seminar given by a national lease audit consultant. The percentage of audits yielding significant operating expense pass-through "corrections": 5-10%. Also note: New office projects usually have HVAC, elevators, etc. on first-year warranties which may artificially lower the initial base year, resulting in second year escalation surprises (no, none of us like surprises!). Also, signing tenant estoppels generally required for property refinancing or sale might prevent future recover of operating expense overcharges - check with your legal counsel if you have questions about this subject.

Reported in a recent Commercial Lease Law Insider, "State deregulation of the electric utility industry is just around the corner. While electric utility deregulation could potentially mean big savings for you, it could also cause disputes...over issues such as who selects your building's electric service provider...smart owners in every state should make sure the leases they sign today cover the potential effects of utility deregulation."

Telecommuting...An article entitled "What It Takes To Succeed With Telecommuting" recently appeared in Microtimes, 03/03/97. "A comprehensive survey of companies with active telecommuter programs has revealed a pattern strongly associated with success in

adapting to this new way of working. According to the survey just published by the American Telecommuting Association, only a few organizations have written off the idea of telecommuting or have had severe problems making it work. More importantly, the survey found that the firms reporting the most satisfaction and success with their telecommuters also had four or more of the following elements in place: 1) A designated "champion" of telecommuting, 2) Clear and measurable objectives for telecommuters, 3) Clear policies and procedures, 4) Flexibility, 5) Good screening procedures, 6) Training on basic skills and techniques.

According to the San Francisco Chronicle, 03/07/97, "In another measure of its role as a technology leader, six California cities rank in the top ten of the best places for working from home via computer...The ranking examined the largest 300 cities in the United States..." (The ten cities were San Francisco, San Jose, Los Angeles, San Diego, Seattle, Oakland, Tampa, Orange County, Boston and Atlanta.) Of course, in the same publication on February 16, 1997, four California cities ranked in the top ten most congested urban areas...

During the past five to ten years, there has been a significant shift beyond traditional "Dilbert"-style cubicles towards an even more flexible work environment. Office furniture on wheels, screens and tables with dual functions and take-apart conference tables that turn into multi-mini tables are some of the flexible furniture designs. Increased socialization through meeting oasis areas spread throughout large floorplates, as well as strategically placed meeting or informal conference areas allow easy idea-sharing and people-connectivity.

Deals And Rumors: Fremont has been a busy business destination these past few months, with Versicor relocating 55,000 sf from South San Francisco to Ardenwood Business Park, Sunnyvale's Avanti agreeing to take 300,000 sf at Bayside Technology Park, Office Depot consolidating its distribution and office to 375,000 sf at Pacific Commons, and Network Equipment Technologies rumored to be relocating about 700 employees from Redwood City to Ardenwood Technology Park. InVision will be moving from Foster City to 95,000 sf in Newark's Bridgeway Technological Center in Hayward, and the County Of Alameda took 16,000 sf at Courthouse Square. In Berkeley, Powerfoods leased 30,000 sf of office space at 2150 Shattuck Avenue. Over in Walnut Creek, Aiken, Cramer & Cummings is looking for 10,000 sf, Spieker Partners leased 10,000 sf at 1331 North California, Shapiro and Miles might be out for 10,000 sf, and Covance may be signing for 30,000 sf at California Plaza. Also in Walnut Creek, I helped lease Silicon Valley College 21,000 sf at 2800 Mitchell Drive, across the street from where I just leased PG&E almost 10,000 sf at Walnut Creek Executive Park. Bank Of The West is rumored to be leasing 25,000 sf at 401 Lennon Lane, The City Of Walnut Creek might be purchasing the 15,000 sf Contra Costa Board Of Realtors building on Wiget Lane, and All Pure Chemical may be taking 17,000 sf at 2175 North California Blvd.. In Pleasanton, LaSalle is reportedly buying a 400,000 sf package of office buildings, including Chabot Center/Hacienda Lakes/Amador, all located in Hacienda Business Park. Also in Pleasanton, Genstar is rumored to be looking at two properties for a 60,000 sf relocation out of San Francisco, and Fireside Thrift is close to signing for 40,000 sf, relocating from Newark. I assisted ReloAction's expansion to 13,000 sf at 7901 Stoneridge, and Remedy is rumored to be taking the 47,000 sf Viacom building in Hacienda. In San Ramon, Ramos & Assoc. is looking at 35,000 sf at Bishop Ranch 15. In San Francisco, Times Direct Marketing leased 15,000 sf at 510 Folsom Street; Sapient took 65,000 sf at 101 California Street; United Healthcare is rumored to be looking at 115,000 sf at 633 Folsom; Pacific Stock Exchange and friends are back out for 355,000 sf; and C-Net is looking to double in size to 100,000 sf.

I just did a Bay Area regional business comparison for a 30,000 sf client. Many city taxes are based on formulas relating to annual payroll, or payroll/rent/utilities/telephone, or based on some percentage of annual sales or receipts. Ballpark, the differential just for business taxes for a company relocating from San Francisco to Walnut Creek or San Ramon is approximately $87,000 per year, or $870,000 over a ten-year lease term. That's a lot of wigets or life insurance policies to sell, but someone has to pay for the 23,000 City/County of San Francisco employees...

National office vacancies continue to decline, while effective rental rates correspondingly increase. Major office buyers are building up prime (and not-so-prime) office buildings, with most purchases still well-below replacement cost. Anticipated major rent upside in 3-5 year lease expirations offset sinking initial cap rates. Also look for an increase in the sale of corporate headquarters to help feed the voracious REIT appetite for quality product. An extra bonus to investors purchasing high-tech facilities: Many of these buildings are loaded with upgraded electrical, telecommunication and HVAC systems, making it more costly for the existing tenant to relocate, and if they do, adding value to the re-leasing process. As reported in the Contra Costa Times, 02/10/97, "Real estate is attracting a big chunk of pension money. According to a study by Greenwich Associates, 'pension fund investment in real estate is expected to increase by $38 billion in the next three-year period to $127 billion.' "

The office market reached a perfect balance in early 1996 before transitioning from a tenants' market to a landlords' market. It was for one day only, and on a Sunday at that! Almost no one anticipated the last office boom of the early 1980's or its subsequent drop during the late 1980's/early 1990's when we were in the depths of despair. Three years ago, few investors would touch an office building, and now they are among the most sought-after real estate investment.

What a predictably unpredictable business!

Sincerely,

Jeffrey S. Weil
Senior Vice President

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