THIS IS EXCERPTED FROM A SPEECH GIVEN TO 280 REAL ESTATE PROFESSIONALS ON JANUARY 28, 1997 AT THE CLAREMONT HOTEL IN OAKLAND REGARDING THE FUTURE OF COMMERCIAL REAL ESTATE.

THE SAN FRANCISCO EAST BAY OFFICE FORECAST - 1997 AND BEYOND

by:
Jeffrey S. Weil, MCRS.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

Ladies and gentlemen, Good Afternoon. We will be spending a few short minutes on one of the strongest segments of the Bay Area commercial real estate market -- office properties.

Lets first look at the big picture to get a handle on why this market segment is so hot.

The Bay Area is the Internet, telecommunications, and software hub for the entire world.

The Bay Area is the leader in high tech venture capital and high-tech new company formations.

The Bay Area has one of the best BSP's in the world. Okay, what's a BSP? Brain Supply Pool, thanks to all our Universities and one of the world's best overall places to live.

It's embarrassing. The Bay Area represents 2% of the population, but attracts 35% of U.S. venture capital, has the largest number of major research centers per capita, and the highest percentage of college educated adults in the United States.

What does this mean for Alameda and Contra Costa office rents and availability? Contrary to popular myth, office hoteling and virtual offices only impact the market 3 to 4%, and most of these brains need a physical space to hold the rest of their body. As we will see, the brain spill-over is heading into Alameda and Contra Costa County.

Santa Clara is hotter than hot. We have yet to see substantial office migration to Pleasanton and San Ramon, but more and more Santa Clara workers are buying homes in Danville, Pleasanton, and out in the Tracy/Modesto area. Expect, as some of these management folks get promoted or leave to start new companies, that some of them will opt for Pleasanton and San Ramon.

Palo Alto is hot, with under 2% vacancy and full-service rates over four bucks a square foot. Ouch, and one reason Robert Half and others have relocated tens of thousands of feet to Pleasanton.

San Mateo -- 2% vacancy, close to three dollar rents, and expect migration or expansion to the I-680 Corridor, as well as to Oakland and Alameda.

San Francisco -- Vacancy rates are down from 11% two years ago to 5% today and rents heading back towards $30 to $45 per annual square foot. This triggered the last East Bay boom of the late 1970's -- we expect less dramatic, but still substantial, trans-bay relocation. A 50,000 square foot office user can easily save over five million dollars in only five years by relocating from San Francisco to Walnut Creek, based on rent and parking savings. Numbers talk and tenants walk.

1994 - 1996 VACANCY RATES:
DOWNTOWN OAKLAND/EMERYVILLE/ALAMEDA

So what's happening past, present, and future in Alameda and Contra Costa? Oakland City Center's sale of over one million square feet to Walter Shorenstein and the almost 500,000 square foot debt sale of 2101 Webster were highlights during 1996. During the next two years, the State of California, The University of California, City of Oakland, and Blue Cross will vacate over one million square feet of space in Downtown Oakland. This will provide "opportunities" for users of large blocks of office space. We expect most of this will be re-tenanted as it comes onto the market. Our office just listed 2101 Webster with 120,000 square feet available, and during the first week of the listing, responded to over 350,000 square feet of inquiries. Mr. Shorenstein will be able to deliver a new Class A office tower at Oakland City Center in only two years, versus the five years it would take to build in downtown San Francisco.

Emeryville and Alameda have been the two bright spots for the past several years. Biotech and software firms are flourishing, and new office construction is on its way for both submarkets.

1993 - 1996:
I-680/DOWNTOWN WALNUT CREEK VACANCY

Out along the 680 Corridor, the North end from Walnut Creek to Martinez has slowly improved, with rents up about 10% during 1996. We predict Walnut Creek Shadelands to make a comeback this year, as there are several almost 100,000 square foot blocks of space at a relative bargain price of $1.50 a square foot, full-service.

1993 - 1996:
SAN RAMON/PLEASANTON RENTS

Last year most of the action was focused in the Tri-Valley region of San Ramon and Pleasanton. Rents went up 25%, vacancies are now about two percent, and this area is hot. Companies are pre-leasing proposed projects twelve months in advance just to reserve space. Buildings that were leasing at $1.40 a square foot in 1995 hit close to two bucks by the end of last year.

1993 - 1996:
SAN RAMON/PLEASANTON VACANCY

There is currently 635,000 square feet under construction for 1997 completion and still available. This will all be leased by the end of this year. This is in addition to the over 1 million square feet of campus owner-user projects slated for 1997 and 1998 completion by PeopleSoft, MicroDental, Ultradata, and Boeringer-Mannheim.

The office market in San Joaquin County is finally getting better, with Class A space almost totally absorbed. Build-to-suits with some spec space are currently under construction in North Stockton, and our Stockton office expects build-to-suits in the Brookside and Spanos office parks this year.

Up in Solano and Napa Counties sit over 4,000 developable acres just waiting for future office build-to-suits. These may occur in the Vacaville and Fairfield region in planned business parks like Busch Campus and Vacavalley Business Park.

This next chart, which evaluates all the vacancy and rental rates, occupancy levels, and delta factors shows how our advanced compilative trend analysis gives us a clear, concise picture of where the market is headed.

Okay, up and coming trends. No surprise, but a long time ago free rent went the same direction as the 8-track tape. In Pleasanton, we are starting to see annual CPI adjustments, diminishing tenant improvements, and for some new projects, ten-year minimum lease terms. Companies want flexibility and flat rent, but landlords want tenant stability and financial upside. In a landlord's market, guess who will win this battle?

Our five projections for 1997:

In summary, 1997 will be the Year of the Squeeze. Expanding companies will try to squeeze people into existing facilities as they scramble to find affordable and sufficient space. Landlords will gently, or maybe not so gently, squeeze tenants with rental increases, and land owners will squeeze developers by raising the price of dirt.

If you're a tenant, plan early, budget high, and develop alternative strategies. Consult with your broker well in advance. If you're a landlord, be optimistic, aggressive but fair, and don't squeeze the poor corporate goose too hard. And remember, in the 1980's, those of us in the real estate business had the saying, "Please God, give me one more real estate boom and I promise I won't blow it all this time". This is it! Thank you.

Office Market Leading Indicators

by Jeffrey S. Weil

No surprise, but some time ago, free rent went the same direction as the 8-track tape.

Companies want flexibility and flat rent, but landlords want stability and financial upside. In a landlord's market, guess who will win this battle?

This may be the first year in a decade where we see subleasing at a profit.

Recapture clauses will be of increasing concern.

The year of the squeeze.

Expanding companies will try to squeeze people into existing facilities as they scramble to find affordable and sufficient space. Landlords will squeeze tenants with rental increases while land owners will squeeze developers by raising the price of dirt.

Jeffrey S. Weil, MCRS.h, CCIM, SIOR, is a Vice President with Colliers International. Prior to this, Mr. Weil was Senior Vice President and consistently one of the top producers nationwide for Grubb & Ellis. He specializes in the sales and leasing of East Bay office properties. Weil's designations include Master of Corporate Real Estate Services (MCRS), Certified Commercial Investment Member (CCIM), and Society of Industrial and Office RealtorsÒ (SIOR). He can be reached at (925) 279-5590.

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