ADDRESS MADE TO THE NATIONAL
ASSOCIATION OF INDUSTRIAL AND OFFICE PARKS - JUNE 25, 1997

Presented by:
Jeffrey S. Weil, MCR.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

State of the Market Report

Thank you, Tony Long. Tony and I go back to about 1979 or so, when Tony was Jack DeRegts right hand man. They hired two young kids to be their leasing agents for a warehouse flex project in Concord. Ed Del Beccaro and I had a couple of years under our belt and the market was just starting to come out of a four year slump. As Tony was pouring the slab, the market turned hot, and Del Beccaro and I leased just about the entire 84,00 square foot project to Fortune 500 office tenants like Wells Fargo and Pacific Bell.

So, I'll start out with answering all the critical questions. First, how long can this Landlord's market last? March 3, the year 2000. Where are all the hot spots? Pleasanton, San Ramon, Downtown Walnut Creek.

What's coming on line? About 635,000 square feet in San Ramon and Pleasanton for late '97, early '98 completion, with another 710,000 square feet behind this, for mid to late '98 completion.

Where are rents headed? Up.

How is it effecting the brokerage industry? The 20/80 rule will continue with a handful of us having a lot of fun, the middle group also having fun and the rest wondering why we put up with the stress.

The velocity is incredible. Tenants that think its hype when we recommend a quick decision often have to go to their 2nd or 3rd choice and /or pay an extra dime or two a fact.

Let's put some flesh on this puppy. Office vacancies are down and rents are up all across the country. But along the I 680 Corridor, especially in the Tri-Valley region of Pleasanton, Dublin and San Ramon, our market has been farther pushed by the strength of the software, telecommunications and Internet industries. Buildings that in early 1996 were changing $1.35 a square foot now get $1.85 a square foot. Flex buildings that 90 days ago quoted .90 industrial gross and are now quoting 1.25 to 1.50 industrial gross. So, we have Pleasanton and San Ramon with 3 percent foot vacancies as compared to Concord, Shadelands and Martinez with 12 to 20 percent. That is hot versus not!

Tenants feel that if they have been loyal tenants, never called in to complain during their past five years, paid the rent on time every time, even though they were paying only $1.25 a foot for a building that was originally built and financed based on $2.00 sf rents. When it comes time to renew and the Landlord wants to raise the rate to full market, the tenant feels he should get a special break.

Some Landlords recognize that rolling a tenant over saves a ton of turnover cost and a few Landlords give long-term tenants a break. Other Landlords have the philosophy, the market is the market, you had your great deal when Landlords were getting financially beat to a pulp, if everybody wants what you are selling, that is absolutely not the time to discount your product.

We are seeing a building fertilizer effect. Now, some tenants call fertilizer by a different name, but basically you take an office building in a hot market , add water, fertilizer and an architect, and viola - the building grows in size, it's amazing, and we're seeing buildings left and right grow by 2, 3 and even 5 percent, by having load factors recalculated to the latest BOMA standard.

What's coming up and where? Spieker Partners is supposed to break ground on between 220 and 350,000 square feet this summer at the Pleasant Hill BART Station. Bishop Ranch has a string of 200,000 square feet spec buildings coming on line this and next year. Opus has a 135,000 square feet project under way at Stoneridge in Pleasanton with Erickson already taking down 47,000 square feet. 5050 Hopyard will add another 80,000 square feet, and Brittania has space available in 2 phases. We expect all of these to be pretty much leased up prior to completion. This is nothing compared to the crazy 1980's, where we were adding 4 to 6 million square feet a year.

San Francisco is down to under 4 percent vacancy, and I expect we will see more Tri Valley Growers and Shaklees cross the Bay, not just to save money, but to also get large blocks of office space. Try to get 200,000 square feet of contiguous office space for 1998 occupancy in San Francisco, but out in my neighborhood it's no problem at all.

Someone asked me once, why don't companies move to Phoenix or Texas like they did the last time we hiked our rents. First, some will, most won't . Rents are only 10-20% of most corporations expenses, and we have a lot of companies making a ton of money in spite of high and getting higher rents, traffic headaches and whatever else we complain about. If you rely on brain-power if your people are critical to your success, you're not going to jeopardize your corporate earnings by moving to Wyoming, to save on rent.

Some changing trends.

To paraphrase Tony Long,

The only concessions will be in tenant expectations.

We've had a change from the gun-slinging "do the deal" developers of the '80's to number crunching analysis munching institutions and REIT investors.

The Brokerage Industry - We had it made before but we didn't even know it. When there was a 30% vacancy rate and commissions were 150% landlords even called us once in a while to see how we were doing. Of course, tenants were few and far between and one out every four office buildings foreclosed. During the past six years 40-50% of the office leasing agents left the business, and your average agent now has over 8-10 years experience.

One reason Grubb & Ellis stock went from $4 a share only a few months ago to over $12 a share this week-- more and more corporations are outsourcing to the Grubb & Ellis and CB Commercials, and we are handling Fortune 5000 companies from lease renewal, built to suit, sale-leaseback to managing the entire companies real estate portfolio. If its not a core business, outsource and focus on the core. It will be increasingly prevalent to have one of your existing tenants, whether it be a 20,000 square foot or just a

1000 square foot field office show up at renewal time represented by a broker, possibly even one from Pokitsika Kansas, and that tenant will probably relocate if the broker is told to take a hike.

Also, companies still growing need us for build to suit, to plan long-term room for growth, to help in their decision process, should they continue to lease space in three different ten-year old building at $1.85 a foot, or maybe it makes sense to consolidate into a $2.20 a foot new building and leverage productivity.

Tenant Improvements: No more Taj Mahal, and in some areas the $15 to 20 a foot from prior years is now $8 to 15 a foot. It takes five bucks just to carpet and paint and even Pleasanton is not like Palo Alto or Santa Clara where space is leasing on an "as-is" basis.

Lease clauses: No more every 3 years kickout clauses without penalty, but most tenants are not foolish enough to sign a Landlord lease without any changes, and if you find a tenant who does, you might wonder if they run the rest of their business the same way. I mean, what tenant with any intelligence would sign a lease indemnifying the Landlord for any hazardous problems ever caused for any prior reason, or the one I really like is a five year option at 150 % of then market rent , which some Landlord got by blending an renewal option with a holdover clause.

A few other trends, four years ago when the market was flat out in the tank, we saw Class B and C tenants move into Class A office buildings because the rents were so cheap. These folks are having the biggest sticker shock, when the $1.25 a square foot suddenly turns into two bucks a foot. What, they don't read the papers? All these mailers all the brokers have been sending them, and they're surprised? Some of these Class B tenants will move back into Class B or flex buildings or go at out to Livermore or move into sublease space.

A lot of your Class A tenants will just bite the bullet. Some of your national tenants may bite it harder because their downsized real estate department doesn't have the staff to deal with it, unless it's outsourced. They might just want to get your file off their overloaded desk and renew at any "reasonable" rate.

I'll leave you with these last comments. Overall in the Bay Area there are tens of millions of square feet of new office space either under construction or in planning for Oracle, Sun, Franklin Systems, Chiron, Pixar, PeopleSoft, Shaklee and others. This will create change and opportunity. We have rents getting back to where new building makes sense, and this is creating opportunity. Along the I 680 and I 580, we have tons of acres just waiting for corporate build to suit, and this is opportunity. Those of us who started in the 1970's, when 60 cents a square foot got you the best office space in town, fully serviced, saw that same building rent for $2 a square foot. In the early 80's, we watched the market collapse and that building go into foreclosure. Now we are witnessing rents run rampant. Remember, it's a long game, appreciate and grab tight to opportunities. Opportunities keep flying into our face. It's up to us to recognize, hold on tight and make the most of these opportunities during the next few years of this Landlords office market.

For further information on almost any aspect
of Bay Area office properties, please contact me.

 

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