Companies interested in leasing, subleasing, purchasing or selling office space in the Bay Area

Overview of commercial real estate in the major California metro regions for CREW

by Jeffrey S. Weil, November 19, 2015

San Diego – What is hot there? – Creative office development where industrial buildings are being repurposed into multi-tenant, multi-media, tech and start-ups. GoPro just took 44,000 sf and I heard another 177,000 sf, and San Diego has 300,000 sf of available life science space – Apartment rents have skyrocketed, 2-bedroom units downtown are going for $3,200 a month.

Los Angeles – lots of different sub-markets, downtown flat lined, Santa Monica had a number of out relocations, retail – lots of demand for restaurant locations, everybody is eating out, from Ruth’s Chris to Chipotle. Industrial all over is tight, the Inland Empire has a sub-3% vacancy. Netflix has leased hundreds of thousands of feet in Hollywood.

In Sacramento, retail has improved with a 10.5% vacancy rate. The Sacramento MSA unemployment rate is 5.7%, down from 7.4% a year ago. The apartment market in Sacramento is strong, with market occupancy at over 97%. Average monthly rent is $1,082 and very little new apartment houses being built – multi-family permits for the last quarter was only 186 issued. The average cap rate on sales is 5.4%.

Fresno, which our folks there say can reach 98% of California overnight which makes it an excellent central distribution hub, has a lot of new warehouse space being developed. A few deals, Joanne Fabrics took 700,000 sf, BTS took down a million square feet. New projects are 36 foot clear height.

What has hit Fresno hard, with the year after year after year drought, is the impact this has had not just on the farming economy, but on all the businesses and industries that feed on farming. Big tractor sales are way down, and so is a lot of other related businesses – a farmer worried about hanging onto his farm might put off buying a new truck or big screen TV.

The California high-speed rail project is already impacting Fresno, with buildings being knocked down and lots of traffic disruption.

Oakland – wow, that region is on fire! The industrial market along the I-880 corridor has been tight for years, sub-5% vacancy, land is almost non-existent and too expensive for industrial. A lot of industrial product is obsolete, with 12 foot or 16 foot clear instead of the 30 and 36 foot clear clients are looking for.

Apartment rents in non-rent controlled 2/3 buildings have shot up, and with Oakland office rents of what San Francisco is, there have been a number of recent announcements of office relocations out of San Francisco to Oakland. The biggest was Uber’s announcement to move their 330,000 sf headquarters in 2017, and the Sierra Club just signed a 38,000 sf lease to move their head office to Oakland.

Oakland is almost out of decent office space, so the landlords in Pleasanton, Concord, and Walnut Creek expect to see the next wave reach them.

Let me touch on the Contra Costa and Tri-Valley commercial real estate markets. In the Pleasanton / Dublin / San Ramon region there are several million feet of vacant Class A office buildings, with Class A rents in the $2.35 to 2.85/rsf range, full-serviced. A few projects offer as much as 200 to 800,000 square feet at Class A office space. The overall class A vacancy rate is 14%. Other than huge expansions by Workday, we have seen large downsizing by SAP and Safeway and no influx, as of yet, from Silicon Valley or Peninsula Tech companies.

Retail is strong, and where out in Livermore, get this name the San Francisco Premium Outlets just expanded to 134 Factory outlet stores, TripAdvisor recommends you plan on spending at least 2 to 3 hours, and the huge parking lots fill up and it can take you a half an hour just to find a parking spot.

Retail in Walnut Creek is unbelievable, and the Broadway Plaza Shopping Center, which is undergoing a huge remodel, just this morning announced 45 stores. Downtown parking meters operate 10 AM to 8 PM seven days a week, and downtown prime retail space is leasing for $10 to 12 a spare foot net net net.

Apartment rents in this area are now hitting $3,900 for two-bedroom units in the new complexes, there are seven apartment over retail projects currently under construction, and apartment house cap rates can be as low as 3 ½ percent!

Downtown Walnut Creek Class A office rents are in the $3.50 to 4.00 a square foot range, while five miles north in Concord they go for $2 to 2.35 a square foot.

Santa Clara and Silicon Valley expect to lease combined warehouse, flex and office in 2015 of over 25 million square feet of deals, which is huge. Tech is still the major driver, but Tesla Motors just by themselves leased one million square feet of research and development, office, and industrial space.

Apple is taking a 760,000 sf planned office development from Wolfe and Central, super cool architecture, on top of their 2 million foot spaceship headquarters which will be done by 2017. Google has a 2.5 million foot Shoreline development and another 2 million feet at Moffett Field. LinkedIn at Mountain View took 400,000 sf and will build 1.6 million feet. Facebook bought a third huge campus and will have employee housing as a component to attract and retain its workers. Palo Alto Networks is building one million square foot data storage facility. Who says California is too expensive?

San Francisco is the epicenter in the entire world right now, with many of the top tech firm headquarters – Salesforce, Twitter, Instagram, on and on, currently over 5.2 million square feet of new office buildings being built; most of this is preleased, and almost 18 million square feet of additional office development pending. However, San Francisco has a Prop M growth moratorium which starts next year and will limit new development to 850,000 sf per year, and there are political forces trying to shut down development, increase rent control and otherwise stifle growth.

Traffic is ridiculous, and the commute now begins at 4 AM. Bart is packed, San Francisco downtown parking is $35 a day or more and even the sidewalks are filled to capacity with pedestrians.

Apartments are renting, two bedrooms for $6,000 a month, more expensive than even New York, and people are doubling up, renting out closets for bedrooms – they have 280 square foot micro-condos for $400,000, but it comes furnished with a Murphy bed that converts to a dining room table.

Many millennials in San Francisco are attracted by six-figure starting salaries, don’t own cars, use Uber and local bus and Bart, eat out a lot, and don’t have home ownership on their wish list – and they are having the times of their lives, working hard and playing twice as hard.

An article by Michael Storper published on October 23 of this year titled “Why San Francisco’s way of doing business beat Los Angeles”.

From 1910 to 1970 greater LA multiplied its population 21 times, and was the center for movies and aerospace. Since 1970, when San Francisco was ranked #1 and Los Angeles #4, today the five-county Los Angeles region is ranked 25th on the income scale while the 10-county Bay Area region remains No 1. Per capita, workers in the Bay Area make 30% more than those in greater Los Angeles.

Biotech, Amgen was established in Thousand Oaks while Genentech started in South San Francisco. By 2010 there were 214 biotech start-ups in the Bay Area compared with 55 in greater LA. $8 billion in VC financing vs. $551 million in greater LA.

The overall vacancy rate for retail in the Los Angeles Basis has dropped to 6%. Unemployment for LA is 6.9% as compared to Orange County of 4.5% and the Inland Empire, at 6.8%. For product types, single tenant buildings had vacancy rates of 2.6%, super regional malls of 4.3%, and neighborhood shopping centers at 8.6%. Industrial space within the Los Angeles County region is down to a miniscule 1.6%.

Even if Prop M San Francisco growth moratorium with its 850,000 square foot annual cap slows down, San Francisco the humongous campus expansions and land acquisition by Google, Facebook, LinkedIn, Apple, Salesforce and other tech giants could provide office space for another 100,000 Bay Area jobs over the next five to ten years. As one example, Apple has 25,000 employees in the Santa Clara Valley, but enough facilities planned to allow this figure to double.

North Bay Shore Google campus expansion – 17,000 employees to 48,000.

Quote from Contra Costa Times November 4, 2015 “Starting with a rental deal in mid-2011 that added 373,000 square feet of office space west of DeAnza College in Cupertino, Apple has leased or bought enough office space, developable land and sites within a 10-mile radius to accommodate roughly 9 million square feet of office and research space.”

At a 10 per 1000 density this represents space for 90,000 employees, so maybe we can add 200,000 workers just for the big tech, and just here in the Bay Area. Wow!

Cynthia Kroll, chief economist with the Association of Bay Area Governments, stated, “How much housing we build will influence the jobs that are created here.”

Strictly my opinion, but as long as Bay Area office developers believe they can make a substantial profit in constructing new office buildings, regardless of how much housing is or will be available.

  • Google Mountain View campus expansion – new general plan rejects housing as an allowable use in the area.
  • Facebook $120 mil 94-unit housing walking distance to offices, sports bar, doggy day care, bicycle repair shop, on-site storage, café, convenience store, spa, pool, park.
  • By 2040 2 million more jobs, 30% population increase, 7.2 mil to 9.4 mil. 800,000 new housing units.

Five Great Things About Being In A Recession:

  • Way less traffic, less gridlock, easier to get around
  • Much easier finding a parking space
  • Retail and office rents lower, much more landlord concessions in doing a deal – great for Tenants only, of course.
  • Contractors actually call you back
  • Way easier to get restaurant reservations.

Referred sources:

The Bay Area in 2040 by ABAG and MTC
Emerging Trends in Real Estate by PwC
Central Los Angeles Office Market Report Q2-15
Central Los Angeles Industrial Market Report Q2-15
Greater Los Angeles Basin Retail Market Report Q2-15
San Diego County Office Market Report Q1-15
San Diego County Research and Forecast Industrial Market Report Q2-15
Fresno / Clovis Metro Area Office Market Report Q1-15
San Jose / Silicon Valley Research and Forecast Market Report Q2-15
Silicon Valley Market Statistics Q2-15
San Francisco Research and Forecast Office Market Report Q2-15
Oakland Research and Forecast Office Market Report Q2-15
Oakland Research and Forecast Industrial Market Report Q2-15
Tri-Valley Research and Forecast Office Market Report Q2-15
Tri-Valley Research and Forecast Industrial Market Report Q2-15
North I-680 Research and Forecast Office Market Report Q2-15
North I-680 Research and Forecast Industrial Market Report Q2-15
Sacramento Research and Forecast Office Market Report Q2-15
Sacramento Research and Forecast Industrial Market Report Q2-15
Sacramento Research and Forecast Retail Market Report Q2-15
Sacramento Research and Forecast Multifamily Market Report Q2-15

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