One of the scariest, but most fun parts of writing this newsletter (and the next issue will start the 35th year) is I get to stick my neck out and make dramatic predictions. All of my past predictions are still out there in writing, and for the most part, during these 34 years, all have come true. It is my feeling today, April 1, 2015 (and not an April’s Fool joke), many submarkets may have reached the peak of commercial real estate pricing. While there may be a varying lag effect depending on the particular submarket, we will now begin to see prices level off and then start falling. Super-frothy prices with 3.5% reported cap rates, lower for prime San Francisco multifamily, based on a continuum of sharply-increasing rents is just not sustainable, Janet Yellen temporarily squelched imminent interest rate increases, but we all know they are just around the corner. Please do not get me wrong – regions like San Francisco, The Peninsula and Santa Clara should remain robust and sizzling the rest of this year and on into 2016, but the rate of rent increase may start to slow, and it might only take one world calamity or interest rate increase to initiate this. The stock market is sizzling, there are tens of thousands of new multi-family units under construction, tech companies are taking down office space by the hundreds of thousands of square feet, retail rents just hit $10/sf triple net per month in downtown Walnut Creek, and prime investment properties are routinely getting dozens of offers and astronomical overbid prices. As one senior investment broker told me, “It can’t get any better than this”.
For the past few years the Federal Accounting Standards Board (FASB) has been working on developing accounting rules for lease transactions and equipment leases. These rules are still to be set, which could occur later this year or in 2016, and may be retroactive. This will create a huge need for accounting and lease administration. All leases, both capital and operating, will be on the balance sheet. According to Bob O’Brien, a partner at consulting firm, Deloitte, “The vast majority of tenants are going to focus on the economics of the lease rather than the accounting for it when coming to conclusions on what they want to do.” (National Real Estate Investor, November 2014)
Three key tenant complaints when office buildings get totally full of tenants:
- 1) If there is on-site parking, it can get more difficult to find a space and you begin to notice the compact cars that park in the full-size spaces
- 2) There may be longer waits for the restroom
- 3) Landlords usually start jacking up rental rates.
According to the National Association of Realtors, the national office vacancy of 16.2% will drop down by the end of 2015 to 15.7%, and then to 15.6% by the end of 2016, with rents expected to increase by 3.3% this year and 3.6% in 2016. (RealtorMag, November 25, 2014)
Save a tree, catch a cold… “Hand dryers spread bacteria in restrooms.” New research from the University of Leeds shows that the space surrounding jet dryers is more contaminated than the air near paper towel dispensers … The amount of germs recorded near jet air dryers was 4.5 times higher than around warm air dryers and a full 27 times higher than the air surrounding paper towel dispensers. (Buildings, January 2015)
Houston has over 17 million square feet of new office buildings currently under construction, but with the steep decline in oil prices, as a result, tens of thousands have been laid off in Houston. The silver lining is there should be some awesome tenant deals available for those still needing office space. (The Wall Street Journal February 10, 2015)
Food for office employees near the top of the list…. “In a survey of IT workers conducted in 2014 by Forbes, “Good Eats” was voted second in a list of favorite employer-provided amenities, right behind “Game Rooms” and ahead of “Physical Health.” Food is a new workplace perk and not just in the tech world. Clients across all industries are building amenity spaces that provide food or support of café and cafeteria spaces. It is a great way for companies to leverage their real estate. (National Real Estate Investor, December 2014)
According to a report in the SF Business Times, the median price of a one-bedroom San Francisco apartment is now $3,410 per month, while a two-bedroom is now $4,690 per month. The report also mentioned that 114,000 new jobs were created in the Bay Area during the past year. (SF Business Times, February 3, 2015)
Deals and Rumors: We’ll start in San Ramon, for a change, where SAP (formerly Sybase) is rumored to be relocating 150,000 sf, downsizing from its current 400,000 sf in Dublin. Dorris-Eaton will be moving its elementary school campus to 40,000 sf of former office space at Two Annabel Lane. In Dublin, iTrade Networks is reportedly taking 43,000 sf at Dublin Corporate. In Livermore, Gillig, the bus maker, is leaving Hayward and moving its corporate headquarters and manufacturing to Livermore’s Oaks Business Park. In Walnut Creek, HDR Engineering leased 19,000 sf at 100 Pringle Ave. Up in Concord, Chevron is selling its soon-to-be-vacated 30-acre 600,000 sf office complex on Diamond Blvd., alongside I-680 freeway. In Oakland, Lewis, Feinberg, Lee, Renaker & Jackson leased 12,000 sf at 1333 Broadway. In Emeryville, Stanford University is rumored to be leasing 90,000 sf at 5800 Hollis St., and RelayHealth signed for 50,000 sf at 2100 Powell St. Across the Bay in San Francisco (can you believe San Francisco leased 8 million feet of office deals in 2014?), Nektar Therapeutics may have expanded by 20,000 sf at 455 Mission Bay; Uber may be taking 40,000 sf to expand to 113,000 sf at 685 Market St. and might also be leasing 175,000 sf at 555 Market St. In case you were wondering, Uber and Twitter each have 750,000 sf of office space leased or preleased in San Francisco, and Salesforce is the leader with 2.5 million square feet. Goodwill purchased a 35,000 sf office building for its headquarters at 295 Bay St. and WeWork took 90,000 sf at 535 Mission St. The Business Times helped me with the following firms rumored to be looking for San Francisco office space: Pinterest 250,000; Stripe 250,000 sf; Castlight Health100,000 sf; Citrix 100,000 sf; Marin Software 50,000 to 70,000 sf; GoPro 60,000 sf; Dropcam 60,000; Thumbtack 60,000 sf; BitTorrent 30,000 to 50,000 sf; and Advent Software 90,000 sf.
In Gensler’s latest “Top Trends Shaping Design” report, “70% of global financial services firms believe space impacts their employee productivity,” and “Future law offices will be smaller, adaptable, more collaborative, and technology-rich.”
City and county windfall, but huge negative impact on tenants –frothy commercial property sale prices, in some areas, as much as $800 to 1,000 per square foot or more, has brought in huge, unexpected tax revenue to cities and counties, but in triple net and pass-through leases, this can be a giant shock to tenants who have to pay this increase.
The I-680 Corridor retail vacancy rate went down from 4% last year to a current rate of 3%. Downtown Walnut Creek retail rents are as high as $10/sf per month, triple net. Tri-Valley is recording the most new development with a number of retail centers currently under construction.
Google reportedly just leased an entire apartment house complex just to be able to house its interns.
The Colliers Mortgage Group is reporting more all-cash buyers for investments, with cap rates in the hottest areas as low as 3.5%, such as apartments in San Francisco. Life insurance lenders have the ability to lend up to 65% LTV on prime assets while CMBS lenders are lending up to 75% LTV even in tertiary markets.
New development through California may force more stringent requirements from various governmental agencies for new water usage, and we are starting to hit a “zero water footprint” where the new development can’t use more water than whatever it is replacing. The drought saga continues…
Too much residential construction in the San Francisco region? Two headlines in The Registry tell the story: “Redwood City to Consider Altering Precise Plan to Allow More Office Less Residential Development” and “New Incentive Aims to Spark Office Construction in Downtown San Jose”.
Facebook just purchased a 56-acre industrial park near its Menlo Park headquarters, with the company now owning or leasing 200 acres on the San Francisco Bay. (Silicon Valley Business Journal, February 10, 2015)
Washington D.C., which only a few years ago was one of the strongest U.S. office markets, has been hit with a double whammy in recent years. Federal austerity measures has diminished demand and put excess space back on the market. Boeing and Northrop Grumman moved out and in the Rosslyn-Ballston submarket, the vacancy rate went from 10% in 2011 to 22% at the end of last year. A 31-story office tower with 575,000 square feet has been waiting since 2013 for its first tenant. (The Wall Street Journal February 10, 2015)
An interesting new work concept, Co-Working on Vacation, with new centers of co-working spaces being set up in exotic locations around the world – where creative types can combine vacationing and synergistic brainstorming with like-minded others from all over the world. “The high-speed Internet, fully stocked office, access to a kitchen and camaraderie of other guests at barbecues, biking trips and other planned group activities, all contributed to productivity. (New York Times, January 19, 2015)
It was just a matter of time before major tech companies begin providing subsidized housing as a way to attract tech employees. In the super-hot Bay Area where companies throw amenity after amenity at employees to get them to join, the concept of nearby apartments loaded with the best amenities and in close proximity to the tech campus makes a lot of sense. Back in 1880, the Pullman Company, which built sleeper cars for trains, constructed housing, grocery markets, a library and a church on 4,000 acres to house 12,000 company employees and dependents. Facebook is teaming up with an apartment development to build a 394-unit complex in Menlo Park, just a short bike ride to one of its campuses. (The Registry, March 16, 2015)
Jordan, who turns 18 this May, applied to 16 colleges and universities and, hopefully, this month will be deciding where to go. At the end of February, he had his Boy Scout Eagle ceremony with David Henderson and Aaron Coleman, two Eagle Scouts who Jordan has known since they were five-year-old Cub Scouts. The mayor of Danville, Mike Doyle, and Assemblywoman Catherine Baker made special presentations to the young men, and Senator Dianne Feinstein and Congressman Mark DeSaulnier sent beautiful certificates of accomplishment to them. Jordan is also having a blast as one of his Monte Vista Varsity lacrosse team’s key defenders, #28. His younger sister, Madison, also wears #28 on her girls’ lacrosse team, The Scorpion Stingers. For both kids, the weeks are filled with numerous lacrosse practices punctuated by two weekly games apiece. Their recent photos can be seen at kid’s page.
A number of years ago, I supported a close friend by attending Al-Anon meetings, and while I didn’t and still don’t have any true “qualifiers,” there were powerful and invaluable concepts learned. One was, “One day at a time,” as we really can’t do anything about the past, and while we can prepare, worry and fret about the future, it is only what we do today that counts. You just can’t do tomorrow today. Another concept I constantly remind myself about is we can’t really, change another person, but only how we act and react in dealing with others. Then there is the age-old saying, of which part is, “Please give me the courage to change the things I can.” I do a daily gratitude journal, so I try never to forget to be grateful for the good things I have in life. Lastly, and there are many more, of course, regardless of what religion you may be, that belief in a Higher Power can bring serenity, whereas not letting go might have brought anguish and despair. When one has done all they can do, sometimes amazing things can happen by just believing in something greater than we, as individuals, are.
Keep calling me with your commercial real estate questions and requirements, and enjoy the spring!
Jeffrey Weil, MCR.h,SIOR,CCIM
Executive Vice President