' "Murky" is the word that author Park Chapman uses, questioning "whether the brokerages that supply much of the basic data can be trusted to report objectively on market conditions when they are simultaneously using the data to make deals (or withholding information that gives them a competitive advantage.)" '
"Contrary to what some brokers and owners would have you believe, to date few of the Class A deals have a "4" in front of them unless it's a top-tier high-rise, whose prices go up as the elevator rises and the view improves. Subleases are fewer and harder to find fully "plug and play", but they are still very much out there, some 2,000,000 square feet currently on the market."
State of the Market: A financial district Class A office building buying frenzy; a conversion craze from commercial office buildings to residential condos; slow-moving rental rates; strong leasingactivity with restrained growthand net absorption; still too much inventory for most developers and owners but ample choices with great value for most tenants.
Various sources believe that San Francisco office market fundamentals are back on a strong track, citing eight consecutive quarters of positive absorption, falling vacancy rates, increased asking prices, and little new inventory. It is possible to spin numbers almost anyway at all. By some accounts, SF has been "recovered" for 2 years. But recall that San Francisco's first quarter net absorption was controversial-- the range from various sources was as low as negative 26,000sf to as high as positive 1,100,000sf. Second quarter numbers were more consistent, ranging from 371,000sf to 565,000sf. Nonetheless, mid-year net absorption statistics reveal a huge discrepancy of between 514,000 and 1,700,000sf.
On this subject of information discrepancy about which I comment constantly, the June 2005 issue of National Real Estate Investor had an article on the thorny subject entitled, "Drowning in Data". Transparency certainly takes on a whole new meaning in the commercial real estate industry. "Murky" is the word that author Park Chapman uses, questioning "whether the brokerages that supply much of the basic data can be trusted to report objectively on market conditions when they are simultaneously using the data to make deals (or withholding information that gives them a competitive advantage.)"
No surprise, he recommends comparing data from more than one company and asking detailed questions about sources and methodology. However, statistics are tracked so differently database by database that analyzing the results is problematic. For example direct office space additions resulting from, say, Schwab's vacating16 floors in 101 Montgomeryor from Cooley Godward's exiting One Maritime and adding a chunk of almost 150,000sf to inventory will be treated differently by each company. The Cooley Godward deal might be in one company's statistics when the deal is signed and in another's when the firm actually vacates. It gets very complicated--what is leasing activity, net absorption; when to add or subtract space regarding availabilities, etc.etc.etc. Analyzing this information demands a working knowledge of what is going on in order to know what questions to ask to begin sorting out the different results. And this issue is not just about brokerage house market statistics like vacancy and absorption, understandably difficult to quantify. The size of buildings is a very real trouble spot, with public property tax rolls, data bases like Co-Star, and BOMA measurements quoted by owners rarely agreeing on square footage.
Author Park Chapman interviews several companies with a bias toward paying for info, as though this legitimized it. Preferred "independent sources" instead of standard brokerage houses often get the nod (and the big bucks) from institutional clients; but where do these so-called independents get their information from, after all? And how about a company that provides both types of information.... Back to the market that prospers in spite of very little job growth. Statistics notwithstanding, a "sluggish" market in San Francisco is still a dynamic one just because it's here; and the truth is that there are plenty of choices for most tenant requirements and indeed greatvalue to be found. You have only to scroll down the long list a couple of sections below to see that there's no lack of tenants leasing buildings. Statistics on renewals and lateral moves are reported between 1,200,000-1,500,000 square feet for first quarter and replicated in 2nd quarter. Vacancy ranges citywide between 14.5-17.2%, down from previous highs in the 20's. "Asking" rents have been inching up, although a listing agent or owner can "ask" all day long. Class C office space is most at risk in a market like this, usually $14-17.00 fully serviced. Except for view space, Class B properties range from the high teensupto $22-26.00 in prime spots. Class A rates are in the mid $20's to mid $30's, again depending on the particulars of the total transaction. Class C and a $26 deal? Class A for $17? Indeed. Contrary to what some brokers and owners would have you believe, to date few of the Class A deals have a "4" in front of them unless it's a top-tier high-rise, whose prices go up as the elevator rises and the view improves. Subleases are fewer and harder to find fully "plug and play", but they are still very much out there, some 2,000,000 square feet currently on the market.
An inevitable trend given the high price buildings are selling for and/or the need to fill high-vacancy buildings is free rent. I can remember commonly doing 18-month free rent deals in the East Bay suburbs in the mid-late 80's and being scoffed at by the Big City brokers with owners who would never (and didn't) "drop to such levels" like we did in order to lease those over-financed and undercapitalized see-through buildings at the BART stations in Walnut Creek and Concord. Can you name a SF building currently matching those numbers for some 10-year deals? Anonymous once said, "It is far better to lease a wonderful building at a fair price than a fair building at a wonderful price."
"More Moves: The S.F. Giants, not into offices, but into a warehouse at 424 Townsend for 14,600sf. Then watch the games on Taiwan electronics firm Hannspree's plasma televisions from its retail showroom at 400 Sutter Street."
"You would have to be comatose not to know that the stem cell research funding agency, the California Institute of Regenerative Medicine, won the contest to locate the new facility in San Francisco, to an office condo on one floor (above Borders) at Mission Place."
More On the Move:(numbers may differ slightly from actual square footage leased and usually exclude renewals): FYI, leasing references are to (some) first and second quarter dealsin this issue. SBC gobbled up 62,000sf at 795 Folsom and another division 67,800sf at 525 Market. McKenna Long & Aldridge left Spear Street Tower to head across Market Street into25,630sf at 101 Cal. From Jackson Square to 1 Cal and 15,620sf, Hinshaw & Culbertson. Robert Half to 19,000sf in 50 Cal.Three firms committing to 580 Cal, each approximately 14,000sf: Atkin Gump Strauss Hauer; Bryco Funding; and MFORMA.Office furniture firm AllSteel will be leaving Pine Street and opening a very expanded new showroom at One Maritime in some 15,000sf. Colliers replaces Two Embarcadero Center with 50 California and 19,400sf, as will First Albany Companies, although to One Montgomery Tower and leasing 19,600sf. Into Two Embarcadero, White & Case at 32,300sf and Montgomery & Company at 13,525sf. Finaplex moved into 26,600sf at 601 Montgomery. From Ghirardelli Square to Union Square, Sasaki Associates will occupy some 12,500sf at 77 Geary.
(Mostly) South of Market: Sedgwick, Detert, Moran and Arnold is taking more space (16,000sf) in One Market, while Pay By Touch exits the building to expand into 29,580sf at 101 2nd Street. (The company's technology uses "tokenless biometric authentication", or to translate, with a scan of your finger instead of a credit card or check, you can pay for things.) Hanson Bridgett is leaving 333 Market to move next summer into some 79,000sf at 425 Market Street. Count SBC Communications in 525 Market, taking some 68,000sf (and moving out of town countless others) and include BRE Properties, leasing 28,330sf. 555-575 Market Street continues its torrid pace, as owner DivcoWest Properties leases 12,700sf. Pacific Maritime Association took 20,280sf and Bradshaw & Associates, 11,750sf. Bought something on eBay and dispute the results? Square Trade, 12,100sf in the 575 building, does online resolution. Same building, attorneys Bradshaw Associates and court reporting and transcribing firm LegaLink, both taking about 12,000sf. At 560 Mission, Citco Funding has leased 22,000sf. Critical Path will be moving across the Embarcadero into Hills Plaza, 23,000sf. McCann Erickson abandoned the south financial district entirely, for Levi Plaza and 53,000sf. Marathon Plaza grabs 3 tenants: Grey Advertising, 35,000sf, will have a new address at 303 2nd Street, as will Hewlett-Packard which will occupy 30,000sf, and Adteractive for 36,370sf.Tek Systems heads over to 201 3rd Street to join another new tenant, San Francisco Health Plan, both in approximately 19,000sf. Schools have been busy: UCSF took more space in 185 Berry--40,000sf--while University of California's Center for AIDS Prevention Studies (CAPS) took 57,401 in 50 Beale. And 250 4th Street finally leased, with Olivet Theological College & Seminary, previously in 631 Howard, occupying22,600sfin the building. Webcor moved its interior construction group to 14,000sf in the Glassworks building on Townsend.
More Moves: The S.F. Giants, not into offices, but into the warehouse at 424 Townsend for 14,600sf. Then watch the games on Taiwan electronics firm Hannspree's plasma televisions from its retail showroom at 400 Sutter Street.
Significant Renewals and/or Expansions (Also last two quarters): At One Embarcadero Center, Severson & Werson renewed its 38,600sf and Steefel, Levitt & Weiss ditto for 49,200sf; Two EC. Townsend & Townsend & Crew renewed and expanded into 86,650sf;in Three EC, Bingham McCutchen same story but bigger--144,100sf. American E&S Insurance renewed 13,570sf at 101 California, as did consulting firm A.T. Kearney and RREEF in 25,600sf. Finaplex renewed in 601 Montgomery for 26,600sf. Business Wire, at 44 Montgomery, keeps 45,600sf. Venture One and Marketwatch, under the umbrella Dow Jones, leased 46,630sf at 201 California, a renewal with expansion. Sutter Health renewed at 345 Cal in 17,350sf. At One Sansome, anchor tenant Citibank re-upped in 46,750sf; Lumetra in 29,700sf; and Knobbe, Martens, Olson & Bear in 15,600. The venerable Commonwealth Club will host many more talks at 595 Market Street in 13,825sf. Case Central kept 23,000sf in 760 Market. Hemming Morse cpa's renewed and expanded into 28,750sf at 160 Spear Street.PG&E at 123 Mission took another 28,600sf.Snapfish signedin 30,240sf at Marathon Plaza and an WPP Group (aka Hill & Knowlton;Young & Rubicam, et al), 54,600sf. Jackson Square's Westlake Building retains Blum Capital Partners in 26,500sf. At Levi Plaza two very huge companies expanded, Interpublic Group of Companies into 53,200sf.and publicly-traded Diageo North America (may well own your brand of choice--Smirnoff, J&B, Bushmills) to 26,500sf. 77 Geary Street retained American Conservatory Theater in 48,000sfwhile State Compensation Insurance renewed its 18,000sf at 1640 Mission.
Biotech Basin: It is hard to keep up withUCSF's leasing activity at China Basin Landing, much of which is medical labs, although with the latest 40,000sf announcement it appears they are pushing 225,000sf and the catalyst for owner McCarthy Cook to position the buildings to accommodate even more life science tenants via its pending application to add 145,000sf to the complex. Most of the biotech's have offices there, even if you do need only two hands so far to count every one in the whole town . Besides those mentioned in previous newsletters, Sirna Therapeutics moved in, with 5,000sf to start and plans to be at 200 plus people over the next couple of years. Count the non-profit company Public Library of Science and check out their website at www.plos.org. Even the 3700sf space that Hamburg-based artus Biotech USA Inc. will move into is significant in San Francisco. Not to be outdone, NYC publicly-traded Keryx Biopharmaceuticals, with a name bigger than its initial space, will occupy 2500sf as it forays out West to grow its business. You would have to be comatose not to know that the stem cell research funding agency, the California Institute of Regenerative Medicine, won the contest to locate the new facility in San Francisco, to an office condo on one floor (above Borders) at Mission Place. And although re-locating within the financial district, with less hoopla but with funding in hand, nonprofit pharmaceutical company Institute for OneWorld Health moved to some 19,000sf in 50 Cal.
"Thenever occupied 280,000sf building which Gap leases in Mission Bay will finally see tenants, over 1000 people from the Old Navy division, among which will be some 130 New Yorkers from NYC. The rest will be consolidating from 3 or 4 buildings here in the City."
" 'Coup of the First Quarter' goes to Boston Properties, which sold the historic old Federal Reserve building at 400 Sansome (at Montgomery) for $283 per square foot-- empty."
"Turns out this is the developer who wants to construct 600 mini-condos at 1028 Market Street but is bogged down in City planning, as controversy swirls over how to deal with the concept of 300 square foot condos--the suggested selling price sounds dirt cheap at $300,000 each, but do the numbers and that's $1000.00 per square foot. Makes $450.00 per square foot prices that top-tier downtown office buildings are commanding seem down right reasonable."
Importing Tenants: Thenever occupied 280,000sf building which Gap leases in Mission Bay will finally see tenants, over 1000 people from the Old Navy division, among which will be some 130 New Yorkers from NYC. The rest will be consolidating from 3 or 4 buildings here in the City. From Oakland back to SF: engineering firm Rutherford & Chekene moves back to the City, this time into 55 2nd Street, 20,200sf. Another Oakland loss and SF gain: Spear Technologies (15,000sf) will be moving into 595 Market Street. Digital Realty is deserting the peninsula to take 9,650sf at 560 Mission. Then there are all the biotech companies mentioned above, like Sirna Therapeutics, artus Biotech, and Keryx Biopharmaceuticals.
Exporting Tenants: The purchase of S.F.'s Providian Financial by Seattle's Washington Mutual will have a negative impact on jobs here, although by how much is yet uncertain. Add thesale of thevenerable Pacific Exchange and follow the fate of at least 200 employees. Other hidden pockets of struggling companies, such as Indus' recent announcement that it will cut 75 jobs in San Francisco, overshadows positive news that San Francisco certainly has its share of. Even though the news that Wonder Break and Hostess Bakery is closing affects over 600 blue-collar workers rather than white-collar office jobs, it is still a loss to the City. Rumors of continued softness persist at Lucas Arts, as it continues to shed employeeswhile the company prepares to move into (less and less ) spacein the Presidio; nobody seems to knows just how much is for sublease in its four buildings.A division of GMAC, Pacific Union Residential issubleasing 30,000sf in one of the buildings for a December occupancy. No, luckily our commercial group is not moving from 601 Cal, just the residential divisions consolidating..
The City For Sale:(Note that the total size of buildings here usually includes garage and basement areas andthereforemight create discrepancies of price per square foot paid for rentable area. Be aware that few databases agree on the size of a property; rather often, the sale of a building suddenly results in the size of that building increasing. Regarding the accuracy debate, make sure you check several sources for comparison information.) For a reported $184 million,Pacific Resources PCX Development sold 801- 823 Market Street, more commonly know as the Palomar Hotel (with Old Navy below) and 22 4th Street, the office building portion--both totaling 430,000sf plus a 200 car City garage to Atlanta-based Jamestown Pacific Place. 500-520Montgomery, recently purchased by RREEF, is reported to have sold for over $400/sf--this is actually 3 buildings, the Class A 505 Montgomery of 329,732sf; 640 Sacramento St, Class C, with 21,864sf; plus 642 Commercial Street, Class C and 5,000sf. Two major properties were purchased by American Assets, both thehistoric Landmark @ One Market and 160 King Street. The latter is a Class A newish building near Mission Bay aka 153 Townsend, 167,983sf plus covered parking for 350, for $69 million, which almost hits the same numbers as BofA pricing last year. The 400,000sf Landmark at One Market, purchased from TMG Partners, will exceed it, at $190 million. Are these building worth such lofty prices? That's another issue, but know that replacement cost is estimated at $450-500/sf in San Francisco; and that may be conservative given the political climate here.
Coup of the First Quarter goes to Boston Properties, which sold the historic old Federal Reserve building at 400 Sansome (at Montgomery) for $283 per square foot-- empty. That is $46.8 millionfor 165,000 square feet of offices plus two floors of basement vaults. Bentley Holdings now has it is on the office market for lease.
More Stunning Numbers: Flynn Properties moved 225 Bush (575,600sf including basement parking)out of its portfolio, to top bidding German firm SEB Immobilien-Investment GMBH, for a breath-taking $178.5 million. One Sansome, aka Citicorp Center, at 550,000sf, sold by RREEF/Bayerische Landesbank to Beacon Capital Partners for $214.5M. Beacon also bought 50 Beale in first quarter '05 for $150 million (660,000sf including garage). And reportedly has 100 Cal under contract. 580 California and 201 Mission are no longer 100% owned by EOP, since it sold a 75% equity position of the two buildings, 796,404sf in total, to London's Prudential Property Investment Managers via La Salle Investment Management for a reported $163 million. More sales by EOP, to Hines: 120 Montgomery (420,310sf); 301Howard (307,396sf); and 405 Howard, in the Foundry Square complex aka the Orrick, Herrington Building (492,409sf and $121.7 million for the latter.) Another beauty, One Montgomery Street, the 76,000sf landmark leased to Wells Fargo Bank, changed hands to First States Investors, an affiliate of REIT American Financial Realty Trust for $34 million(that's over $450/sf ). 350 Sansome, from McCarthy Cook and Blackstone Real Estate Advisors to Litke Properties, for $23.1 million (115,481sf plus garage with parking for 230). 160 Spear sold to Ellis Partners and Cargill Value Investment by Hill Companies and ING Realty, office building and parking garage of 288,308sf for approximately $57.6 million. Excludes the ground lease with 33 years remaining. Major tenant there, Wells Fargo Bank, will be leaving, perhaps to occupy yet another building the bank gobbled up, this time from SPI Holdings, for a reported $110 million. The project is comprised of two towers, 653 Sacramento at 78,000sf and 550 California at 262,000sf, plus basement parking.
On the smaller side, 230 California, at 51,051sf, sold for $9 million, by TransAsia Development Company to Metrovation Development, the price reflecting the need for some tlc to equal the prime location. The previous owners of 88 First Street, having bought it in 2001 for $6.1 million (24,907sf and almost empty then), can stop throwing any more money at it after selling for $4.2 million. The very successful nonprofit Homeless Prenatal Program whichoccupied 12,800sf at 995 Market recently moved into newly purchased 2500 18th Street, where it will be able to expand into 26,806sf. The renovated, three-story building sold for $4.65 million.
60 Federal Street sold out of foreclosure to the insatiable Academy of Art, by Preferred Bank of LA, 92,507sf with surface parking (40), reported at $9 million. SF landmark the Warfield Building, both theatre and office building of 69,515sf for $12 million moved from the Fangs to another Atlanta-based buyer, Fair Market Properties. Turns out this is the developer who wants to construct 600 mini-condos at 1028 Market Street but is bogged down in City planning, as controversy swirls over how to deal with the concept of 300 square foot condos--the suggested selling price sounds dirt cheap at $300,000 each, but do the numbers and that's $1000.00 per square foot. Makes $450.00 per square foot prices that top-tier downtown office buildings are commanding seem down right reasonable.
Totaling 112,000sf and completed in 2003, the Fed Express distribution center at 1875 Marin Street sold for approximately $35 million to a Miami Beach group. There are 110 covered and 269 surface parking spots included for that $312/sf price, not to mention Fed Ex's 15 year lease for the property.
Catellus is not only selling its land holdings but its entire company: $4.9 billion in cash and stock for approximately 36 million square feet. of assets to the largest REIT on the NYSE, ProLogis. Already the top industrial owner in the U.S. with 224 million square feet, in the bay area ProLogis will develop what little land remains at Mission Bay in S.F. and finish redeveloping Alameda's Enterprise Landing and Fremont's Pacific Commons. Unfortunately, this will probably mean a loss of jobs--over 100 people work in San Francisco--since ProLogis is based in Colorado.
And Yet More Sales: Will Pacific Gold Equities really spin the BofA building for $700 per foot? Is the Gap building in Mission Bay also worth that much to hungry buyers? Probably, but stay tuned, as there are at least a dozen other major (one way or another) San Francisco properties either for sale or in escrow.
"If you're not already underway, you might want to stay away!" From condo conversions, that is...."
PPR NEWsletter of 5/23/05 suggests to investors and developers, "If you're not already underway, you might want to stay away!" From condo conversions, that is, both existing apartments purchased for conversion to condos for sale (aka "rondos") and also ground-up construction. Miami, Palm Beach County, Las Vegas, San Diego, and Fort Lauderdale head the top spots, where more than 46,000 such units are coming to these five markets alone in 2005.
"By January 1,2006, the benefit vanishes, supposedly, and it's back to depreciating a demising wall for 39 years even though most leases are for 10 years or less."
Faster Tenant Improvement Depreciation: The deal tenants and owners make usually hinges around what new work will be done in the premises, and just how who pays for what. Generous tenant improvement allowances are standard in negotiations, especially important since the market tanked in 2001. If you are the beneficiary, whether tenant or owner, remember that time is running out to use the benefits. Last October Congress passed the American Job Creation Act of 2004, giving commercial real estate owners the ability to depreciate leasehold improvement over a period of 15 years instead of 39 years, the previous time period allowed. By January 1,2006, the benefit vanishes, supposedly, and it's back to depreciating a demising wall for 39 years even though most leases are for 10 years or less. According to a recent BOMA report, the Joint Congressional Committee on Taxation expects over $1.5 billion in tax savings for commercial real estate in 2005. One caveat: it can be tricky navigating the tax rules and regulations because who "owns" the improvements is key but complex; so as a tenant, especially, consult a tax attorney when starting negotiations and before finalizing the transaction.
"....I am especially pleased to announce that Mary Huss, publisher of the San Francisco Business Times will be honorary chair of our WIRE'D FOR SUCCESS 2nd annual scholarship fundraiser."
As President of the Board of Directors of commercial Women In Real Estate (W.I.R.E.) and founder of the scholarship fundraiser for (two so far) graduate students at Fisher Center, Haas School of Business at UC Berkeley, I am especially pleased to announce that Mary Huss, publisher of the San Francisco Business Times will be honorary chair of our WIRE'D FOR SUCCESS 2nd annual scholarship fundraiser. Mark your calendars for Wednesday, November 2nd, from 5:30-8:00pm, at the beautiful Kimball Office furniture showroom, 456 Montgomery, and go to the Women in Real Estate website for more information. If I call to ask if you would donate to the silent auction-- a weekend at your vacation house in Tahoe, that 1985 Lynch Bages, a foursome for golf at Spyglass--don't be surprised. Say yes and come to the party.
Thank you for subscribing, reading, and sending feedback. Have a wonderful end of summer and enjoy those vacation days with family and friends.
Janine Watson
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