THE
Registry December 2009/JANUARY 2010
BAY AREA real estate JOURNAL
2010 PREDICTIONS:
BAY AREA
INDUSTRY
LEADERS ON THE NEW YEAR pg. 14
Data Centers Center Stage pg. 6
Bankers Steadily Shed Housing pg. 8
Story & King Rules East San Jose pg. 10
Mixed-Use Mixed Blessing pg. 12
Vulture Investors Waiting for Godot pg. 24
Fremont’s Long Road to NUMMI pg. 28
Final Offer with Rincon Hill Developer Michael Kriozere pg. 40
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22 Contents Dec 2009 | Jan 2010 4 News Desk
A summary of recent planning events from select cities, news about the industry and people on the move
6 Commercial Market Report
Byte Building
8 Residential Market Report Housing’s Shadow Inventory
10 Hot Lot | East San Jose Turning the Corner
14 Cover Story 2010 Predictions: Bay Area Industry Leaders’ Views on the New Year
22 Design
Finding Clarity
24 Commercial
Wait Training
26 Legal & Government
When ‘No’ Means ‘Yes’
27 Commercial Bargain Hunters Beware
28 Commercial
A 5-Million-Square-Foot Question Mark
30 Rob’s REality Getting In While Gettin’ Is Good
31 REal People The Registry’s Commercial Finance Event
32 REal People City of Hope’s Kickoff Reception
33 Technology Property Management in the Era of LinkedIn
34 Calendar of Events 36 By the Numbers
Cover Story:
Growing Smaller
2010 PREDICTIONS
38 Commercial Lease Report
pg. 14
39 Commercial Sales Report
c o ver ph o t o s B Y C h a d Z i emendorf this page ph o t o by D a v i d W a kel y
40 Final Offer | Mike Kriozere The Sage
THE
Registry
®
P.O. Box 1184 San Mateo, CA 94403 415.738.6434
Contributors Corey Folsom Bargain Hunters Beware, pg. 27
Publisher Vladimir Bosanac vb@theregistrysf.com President Heather Bosanac 415.738.6434 heather@theregistrysf.com Editor-in-Chief Sharon Simonson 408.334.2512 ssimonson@theregistrysf.com Advertising & Marketing 415.738.6434 Creative Director Karyn Charm Photographer Chad Ziemendorf Writers Alfred J. Bru, Robert Celaschi, Michael Fitzhugh, Heather Fox, Gene Gilligan, Broderick Perkins, Sharon Simonson Contributors Corey Folsom, Rob La Eace, Gemma Lim, Scott D. Rogers Send Us Your News news@theregistrysf.com Feedback letters@theregistrysf.com Subscriptions theregistrysf.com/subscription.html Printer Bay Area Graphics www.bayareagraphics.com Mission Statement The Registry is a real estate journal that aspires to fulfill the need of Bay Area professionals for accurate, unbiased and timely news, analysis and information. Ethics Policy The Registry embraces a strict ethics policy for its staff and contributing writers, including columnists and freelance reporters. No person employed by or affiliated with The Registry has accepted or will accept any compensation, monetary or otherwise, in exchange for editorial content. All information that appears in the magazine is selected solely for its informational value to readers.
Correction CM Realty Inc. has changed its name to CM Commercial Real Estate Inc. The November issue of The Registry incorrectly reported the change. The magazine regrets the error.
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Corey Folsom has operated Corey Folsom & Associates as a private building consulting firm offering physical due-diligence and educational services since 2003. The inspections include assessment of condition for acquisition and sale, habitability, cost analysis, problem diagnosis and maintenance scheduling of all building types including retail/mixed-use, warehouse, industrial, low- , mid- and high-rise office and apartment buildings, shopping malls, hospitality and special purpose. Folsom has 10 years experience in the construction trades and is a member of the International Association of Electrical Inspectors and the International Code Council. He is a graduate of the College of Eastern Utah, Inspection Training Associates and the Santa Rosa Ranger Academy.
Rob La Eace Getting In While Gettin’s Good, pg. 30
Responding to emergencies as a firefighter in a variety of uncertain situations and diverse neighborhoods taught Rob La Eace a lot about how people should be treated, not only during a crisis, but also in everyday problems. Today, these same skills are an asset to those who work with this San Francisco native in his career as a broker associate with McGuire Real Estate. The tools he puts to work as a firefighter are what makes the difference to the clients La Eace works with as an agent. While it may help that La Eace is the type of guy with a warm smile and a friendly attitude, his professionalism, organization and drive to succeed are what make him stand out in his career. Working in his fifth year in the industry, La Eace is in touch with his clients’ needs and with the city–putting a local’s perspective to work.
Gemma Lim Property Management in the Era of LinkedIn, pg. 33
Gemma Lim is the business development director for Westlake Realty Group Inc. in San Mateo. She joined the company in 2002 bringing 15 years of experience in marketing and sales. Lim is responsible for overseeing the corporate marketing efforts for Westlake’s three million square-foot property management portfolio and heads business development for Westlake’s third-party property management services. Westlake’s real estate portfolio has doubled since 2007 and continues to expand. The firm manages properties in Northern California, Arizona, New Mexico and Oregon. In her efforts to strengthen Westlake’s brand identity and online presence, Lim has brought the company’s marketing strategy into the digital age. In so doing, she has overseen the development of a search-engine-optimized corporate Web site and has leveraged Internet advertising and social networking. She is the co-author of the book “Happy About Apartment Management.” Lim holds a bachelor’s of science degree from Ateneo de Manila University and a master’s in business administration from Fordham University in New York.
Scott D. Rogers When ‘No’ Means ‘Yes’, pg. 26
Scott Rogers is a senior partner in the Real Estate, Development, Land Use and Finance Group of Holme Roberts & Owen LLP. Resident in the firm’s San Francisco office, his practice focuses on the representation of institutional and private real estate investors in all aspects of real estate equity and finance transactions. Rogers obtained his bachelor’s degree in economics from the University of California-Irvine and his law degree and master’s in business administration from the University of California-Los Angeles. He is the immediate past chair of the Executive Committee of the Real Property Section of the State Bar of California and an executive editor of the California Real Property Journal. n
Letter from the Publisher Dear Reader, Another year comes to a close and a fresh one starts. I can say with certainty that many in the industry could not wait to put 2009 behind them. For us at The Registry, the year had exhilaratingly successful moments and healthy challenges. Overall, it was a year to remember, and one from which we have learned about real estate and running a modern media company. Learning about this business is what I really enjoy. I do not learn by doing what our readers do, but I am fortunate to get their perspectives and opinions. While this method may not always provide depth or technical knowledge to a topic, it paints a broad picture of where things are and a continual flow of ideas. This is one of the main reasons we have a diverse Editorial Board and conduct the Outlook issue at the beginning of each year. What better way to get a true sense of the market than from the very leaders of this industry, people who interact with all aspects of real estate on a daily basis. So, just as we began the last two years, we start this year too with invaluable foresight from prominent industry insiders (page 14) in our 2010 Predictions issue. I think you will find what they have to say as insightful, intelligent and compelling as I have. Two points, as it were, were interesting to me, and I believe both will be subjects of intense discussion in the near term. One points to the fact that residential supply levels are diminishing (Rob La Eace in his column on page 30 confirms as much), which should give values buoyancy as soon as the supply of money eases. This is interesting also because it relates to stories that we have reported on our Web site recently (www. theregistrysf.com) that speak of budding homebuilders eagerly snatching up available land around the Bay Area for future residential development. The other interesting point is related to a topic that we covered recently in our Green Issue. Infill redevelopment seems like a logical place where we should concentrate our future construction ambitions. Few, however, bring up the fact, as Kofi Bonner, Lennar’s top executive in the Bay Area, did, that this can be quite cost prohibitive and not economically viable. It’s going to
be an interesting topic to observe, and a very political one, too. In this issue we also examine mixed-use development, a topic that has gained tremendous currency in the last decade as a formula for urban vitality. As you will see from our article on page 12, it has had limited success in some areas, and as a result municipalities and developers are re-evaluating their position on the future of mixed-use space. On another front, data centers are a singular bright spot in the commercial real estate universe (page 6). I attended recently Salesforce.com’s Dreamforce Conference in San Francisco. It is an annual event that the company puts up for its clients, vendors, prospects and anyone interested in helping Salesforce. com scale its customer relationship management platform into new areas. There were over a hundred companies exhibiting their wares and capabilities, which revealed a rich ecosystem this one cloud computing company has created around the idea that information should reside on servers outside of the corporation’s walls. Others, notably Google and Apple, are also on the forefront of this evolution globally, which provides exceptional opportunity for data centers and those companies that specialize in this space. Finally, we take a look at the expanding expectations for opportunistic property buyers in the year ahead in Sharon Simonson’s story on page 24. Lots of folks have raised money in hopes that the upside of this economy’s ugly downside will be the chance to buy cheap. But there is emerging uncertainty about how wide-scale the devastation will be, particularly in the most desirable markets like the Bay Area. As the year turns, I wish you all a happy change of years and a transformative 2010. Thank you for your continued support of The Registry. We welcome feedback anytime.
Regards, Vladimir Bosanac Please provide feedback at letters@theregistrysf.com.
dec 2 0 0 9 | jan 201 0
theregistrysf.com 3
News
Desk
M onthl y S u mm a r y
By Heather Fox
Planning News from around the Bay San Francisco
4093 Cadwallader Avenue
6600 3rd Street
The planning commission has approved a re-zoning to allow up to 38 singlefamily detached homes on 18.5 acres on the west side of Cadwallader Avenue at Prunetree Lane.
The planning commission has approved a conditional use permit for a planned unit development at 3rd Street and Le Conte Avenue. The project would demolish the existing 43-bedroom residential hotel and parking lot to construct a four-story over basement garage residential building containing 73 affordable housing units, ground-floor residential services and a 21-space basement-level parking garage. The project is to be included in the Third Street-Le Conte Avenue Affordable Housing Special District, which would allow additional density.
1415 Mission Street A preliminary recommendation has been awarded to certify the final Environmental Impact Report as well as the approval of a draft motion adopting the CEQA findings for the mixed-use development on the southwest corner of Mission Street and Tenth Street. The proposed project would demolish a onestory, 18-foot tall, approximately 5,000-square-foot commercial building as well as a paved, surface parking area. In its place, a new 130-foot high, 14-story, mixed-use residential-commercial building would be constructed with approximately 2,700 square feet of ground floor commercial space. It would have up to 117 dwelling units and a three-level subterranean garage with either 46 independently accessible residential parking spaces or 101 valet-service, residential parking spaces.
2218 Quimby Road The planning commission has approved a general plan amendment to change the land use/transportation designation on 69 acres of mixed designations. The applicant is the city of San Jose, and the property owner is Arcadia Development Co.
675 North 6th Street First Community Housing received an approval to rezone a site from light industrial to a planned development. First Community plans to develop up to 77 affordable senior housing units on roughly half an acre.
Palo Alto 2180 El Camino Real
5075 3rd Street
Approval has been granted to change the classification and land-use designation of the property from Neighborhood Commercial District to Planned Community for a mixed-use project. The planned project will have nearly 58,000 square feet of floor area for a grocery store, office space, other retail space and eight affordable residential units. It will also have two levels of below-grade parking and surface parking for the College Terrace Centre.
The planning commission has approved with conditions the construction of a 10,600 square-foot, single-story public library.
801 and 841 Alma Street
1880 Mission Street The planning commission has approved with conditions another two-year extension for a planned-unit development consisting of up to 194 dwelling units, 9,000 square feet of ground floor commercial space and 221 off-street parking spaces.
A public hearing was held to adopt a resolution certifying the final environmental impact report and approving the architectural review application for the demolition of an existing 9,740 square foot building and construction of a fourstory, 50-unit affordable housing development on this site.
Walnut Creek Almond Bungalows
San Jose 2112 Monterey Road The planning commission has approved re-zoning to allow the development of a 102-unit multifamily housing project, 100 percent affordable, at Monterey Road near Tully Road. Charities Housing is the applicant. Emergency Housing Consortium is the property owner.
Sent to us Doyle Drive Replacement Begins Federal Highway Administrator Victor Mendez joined House Speaker Nancy Pelosi, San Francisco Mayor Gavin Newsom and others at a commencement celebration to announce construction on the Doyle Drive replacement project. The project will greatly reduce the risk of an earthquake severing a key commercial corridor for the Bay Area. The project is to replace the 73-year-old Doyle Drive, which is located on the southwest side of the Golden Gate Bridge. The project includes structural and seismic improvements to the neighboring Presidio Trust in the Golden Gate National Recreation Area. Doyle provides access to San Francisco from the Golden Gate Bridge and is the primary link between the city and San Mateo and Santa Clara Counties to the south and Marin and Sonoma Counties to the north. Construction is expected to be completed by 2013.
New Affordable Homes Open in San Francisco’s Mission Bay Mission Walk, the first below-market-rate, for-sale homes in the new Mission Bay neighborhood, has opened. The condominium and townhome development was completed by Berry Street LLC, an affiliate of the nonprofit BRIDGE Housing Corp., and the San Francisco Redevelopment Agency. Mission Walk provides 131 for-sale condominiums and townhomes (25 one bedrooms, 82 two bedrooms and 24 three bedrooms) in two five-story buildings; each building features a parking garage and landscaped courtyard. The homes are priced to be affordable to households that earn 80 percent to
An application has been submitted for the approval of a 9-unit, multi-family, detached residential project on a 0.53-acre vacant site east of I-680 along Oakland Boulevard and south of the Walnut Creek BART station. The project requires Planned Development Rezoning; adoption of a Mitigated Negative Declaration; tree removal approval from the City Council; tentative map approval from the Planning Commission; and Design Review approval from the Design Review Commission. n
100 percent of the 2008 area median income (up to $94,300 for a family of four) and are part of the SFRA’s Limited Equity Program. Sales prices range from $159,000 to $303,000 in a neighborhood where market-rate condos are priced from $500,000 and up.
555 12th St. in Oakland City Center Earns LEED Gold Shorenstein-owned 555 12th St. in Oakland has become the first building in the company’s commercial real estate portfolio to be LEED Gold certified through the U.S. Green Building Council’s Existing Building Operations and Maintenance (LEED EBOM) program. Green building consultant firm Simon & Associates coordinated the LEED certification process for the building.
Food Broker Moves To Jack London Square Ellis Partners has signed a five-year lease with Aiello-Coyle Blaschak, a food brokerage that serves Northern California. Aiello-Coyle is to relocate its headquarters from Oakport Street in Oakland to 2,600 square feet at 70 Washington St. in Jack London Square. Aiello-Coyle represents food manufacturers whose goods are sold at Safeway grocery stores, Costco, Lucky Supermarkets, Andronico’s Markets and others. Jack London Square is undergoing a $375 million redevelopment to include a public market, restaurants, entertainment space and Class A office space.
Oakland Company Wins $430 Million Hospital Contract Oakland-based Clark Design/Build of California Inc. has been awarded the Highland Hospital Acute Tower Replacement project by Alameda County. The team, led by Clark, includes SmithGroup as lead architect and Ratcliff and Shah Kawasaki Architects as associate architects. The $430 million contract includes continued on page 35
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PEOPLE on the move BOMA-San Francisco Names Hines’ Kruggel Board President; Elects Board Members The Building Owners and Managers Association of San Francisco has selected Thomas Kruggel, a senior vice president for international real estate firm Hines, to be its latest board president. Kruggel oversees the operational activities of more than 30 million square feet of real estate throughout the western United States. As head of the BOMA-San Francisco board, Kruggel will be responsible for guiding an organization that represents most large commercial buildings and property owners in San Francisco, Marin, Sonoma and San Mateo counties. Kruggel pledged “to build better bridges with policy makers, to assist decision-making to positively impact our industry.” He also said he would strive to generate innovative solutions to today’s challenges for the industry’s most valued asset, its human capital. BOMA-San Francisco has also named Anne Stephens president-elect of the board of directors. Stephens is the area asset manager and general manager for Paramount Group Inc., headquartered in New York City. She is responsible for the oversight of day-to-day operations, financial reporting, capital projects and tenant relations at One Market Plaza in San Francisco. Meade Boutwell was elected to the office of treasurer. A senior vice president and LEED accredited professional with CB Richard Ellis in San Francisco, Boutwell is a 25-year veteran of the commercial real estate industry, specializing in office leasing. Boutwell has sold, leased or subleased more than seven million square feet of commercial space in the San Francisco Bay Area. Margot Crosman becomes BOMA’s immediate past president. She is the general manager of 100 Pine St. in San Francisco’s Financial District. Crosman has more than 20 years of property management experience. She was an early proponent of recycling and has led her team to win numerous awards for the best office-building recycling program in San Francisco. BOMA Executive Vice President and Corporate Secretary Marc Intermaggio continues as a member of BOMA’s Executive Committee.
General Contractor Retains Business Development Director Bay Area-based Skyline Construction has named Aimee Hallgrimson its director of business development. Hallgrimson will be based in Skyline’s Santa Clara office and will serve as a resource to Skyline project teams throughout the Bay Area. She will identify and develop future prospects for construction, promote Skyline in the marketplace and ensure the company’s continued growth and success. Prior to joining Skyline, Hallgrimson was development director for Pivot Interiors and a director of corporate communications for the Data One Corporation. She has a bachelor of arts degree in interior design from Purdue University.
Commercial Brokerage Expands Investment Team Cornish & Carey Commercial/ONCOR International has added two regional professionals to its investment sales team. Russ Sherman has joined as a senior vice president and will be based in the firm’s San Francisco office. Sherman brings to Cornish nearly 35 years of commercial real estate experience. Most recently, he was a senior director of Cushman & Wakefield’s Capital Markets Group in San Francisco. Since 1994, Sherman has sold more than 20 million square feet of office, industrial, retail and hospitality properties representing $3 billion in value. He earned his bachelor’s degree from the University of Southern California. Allison Gorelick has been named a vice president and will be based in the San Francisco office, as well. Gorelick is LEED accredited and a chartered financial analyst. She brings more than 15 years of development and financial leadership. Prior to her appointment, Gorelick was a vice president with the Sares Regis Group. Before that, she was vice president of business development with Stonepath Group, a publicly traded venture capital company funding earlystage technology start-ups. She earned her bachelor of science in business administration from the University of Vermont.
Global Real Estate Services Firm Names Americas Chief Operating Officer, Regional Research Director Jones Lang LaSalle Inc. has appointed Ann Sperling its chief operating officer for the Americas region. Sperling succeeds Bill Thummel, who held the posicontinued on page 35
commercial market report
Byte Building Even in recession, the growth in Internet traffic is fueling the construction of data centers. By Robert Celaschi
G
For companies that lease out data-center space, national revenue is growing at 15 percent to 20 percent a year. Tier1 Research, New York City
6 theregistrysf.com
oing into 2010, one class of Bay Area commercial real estate remains in good shape: Data centers. Unlike every other sector of the commercial market, demand is strong for the buildings that house the Internet’s electronic guts. In Silicon Valley, the locus of data center development in the Bay Area, data center vacancy rates are well below 10 percent, and much of the remaining inventory is not state of the art. A handful of developers are even pursuing speculative construction. Brokers say faster growth is just out of reach. Clogged credit markets, skittish lenders and the inordinate expense that data center development requires have kept projects that might otherwise proceed from going forward. But at least one developer of one of the largest proposed data centers in the region says his company hopes market conditions will change enough in 2010 to warrant the project’s rebirth. “From the demand perspective, it is the only shining light in commercial real estate” today, says Joe Hamilton, a senior vice president at Cornish & Carey Commercial and a listing broker for a 50,000 square-foot speculative data center developed in Santa Clara by The Carlyle Group, a global private equity firm based in Washington, D.C. “There has been an underlying demand growth for data centers that is much stronger than economic demand generally because more and more business is taking place over the Internet,” Hamilton says. The Carlyle project, to be delivered in March, is the first of a proposed three-phase development to include 300,000 square feet with 50 megawatts of power. Construction on the second phase will start when the first phase is leased, he says. Meanwhile, Foster City-based Equinix Inc., whose clients include Los Gatos-based Netflix Inc., is adding a fifth Bay Area co-location data center in San Jose. The publicly traded company, whose third quarter revenue rose 24 percent year on year, already has four South Bay centers totaling about 520,000 square feet. The new one, at 170,000-square-feet, would go up in two phases for a total cost of about $145 million. The first phase is to open in the third quarter of 2010. “This project will be close to $100 million of investment in just the first phase,” said Howard Horowitz, senior vice president of global real estate and facilities. At the same time, Silicon Valley developer Les Pelio is building a 40,000 square-foot data-center shell, also in Santa Clara. Pelio, who has specialized in data center development in Silicon Valley for a number of years, is posi-
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tioning the project to appeal to users who want to control the build-out of their data-center space. Washington, D.C.-based DuPont Fabros Technology Inc. is also looking to re-start construction sometime this year on the first 300,000-square-feet of the huge, data center complex that it has sought to build since August 2008 in Santa Clara adjacent to the Mineta San Jose International Airport. After letting the project sit idle for more than a year, the company’s chief executive officer told The Registry that a start depends on getting the project at least 40 percent pre-leased. Completion would take about a year. The company halted the $270 million development in October 2008 after it couldn’t secure sufficient credit to pursue the Santa Clara development as well as two others in New Jersey and Virginia. About $30 million of the Santa Clara project is done, said Hossein Fateh, president and chief executive for DuPont Fabros. For companies that lease out data center space, national revenue is growing at 15 percent to 20 percent a year, according to Tier1 Research in New York City. The recession did not blunt growth. “We saw a little bit of a dip in the first couple of quarters this year as enterprises went into their turtle shells and slowed down their decision making, but it is picking back up,” said Jeff Paschke, a Tier1 senior analyst. Data centers are expensive propositions, often $1,000 a square foot to $1,800 a square foot to develop, Paschke said. The expense includes heavy-duty power systems, including backup generators, automated switching gear and miles of high-voltage copper.
Santa Clara is the locus of data center development in Silicon Valley because its electrical power is cheaper than that of PG&E, the electricity provider for much of the area’s other markets. That said, companies have also built data centers in South San Jose, presumably to be close to another large industrial concentration of Silicon Valley companies. The price tag of new development is a main reason new construction isn’t going forward in the face of evident data center demand, says Jerry Inguagiato, a senior vice president at CB Richard Ellis in San Jose who specializes in the segment. “We can all agree that capital is very difficult to get right now especially for speculative construction,” Inguagiato says. “It becomes even more of a challenge with data centers because the commitment is so significant.” Silicon Valley currently has five million square feet of existing data center space, the broker estimates. Only about 5 percent, or 250,000 square feet, is available for lease. San Francisco-based Digital Realty Trust expects to spend $345 million to $375 million on development and redevelopment in the coming year. But it has no specific construction plans, said Pamela Matthews, director of investor relations. It has one undeveloped parcel in Santa Clara. The San Francisco company, the largest wholesale data center provider in the world with 79 properties and 14 million rentable square feet, announced in November it paid $90.5 million to buy two fully leased Santa Clara data centers totaling 185,000 square feet. The credit crunch is creating more customers for leased data centers because it is easier for companies to justify a lease than the capital outlay of building their own, Paschke said. Companies that lease space tend to want it nearby—what the industry calls “server huggers.” Silicon Valley startups fit that bill. But sometimes location is a matter of performance. Even at the speed of light, data needs more time to travel long distances, and a single task may require many trips. Financial firms want data centers within 60 miles of their trading desks, Fateh said. Again, the fiber infrastructure around San Jose makes the South Bay a big draw. Strong demand also is proving a boon to construction companies with the expertise to build data centers. “Right now we are doing about $140 million in data centers in Silicon Valley,” said John Assunto, special projects division manager for Turner Construction in San Jose. In the past seven years Turner built three data centers. Now it has four in the works. Demand for data center space is likely to grow as fast as the Internet grows, Fateh said. While it is tough to predict the growth of such things as digitized medical records or iPhone applications, the trend has always been to create new uses as connection speeds increase. About 28 percent of people online in the United States have high-speed connections, Fateh said. He compared that with South Korea at 90 percent. “What happens [to data center demand] when the U.S. goes from 28 [percent] to 90 [percent]?” he said. n
An inherent sense for the wants, needs and details that impact the lives of the people who will ultimately live and work in a space. It lies at the foundation of everything we do. With it, we’ve set a standard that keeps us among the Bay Area’s most accomplished and respected
interior builders structures interiors sustainable san francisco | palo alto | www.bcciconst.com
residential market report
Housing’s Shadowy Inventory 1000
1000 000
500 500
250 250
0 0 y January July January 2009 2007 2007
y
July July 2007 2007
July 2009
75 75
50 50
25 25
0 0 July January January 2009 2007 2007
July July 2007 2007
July 2009
175 175 150 150 125 125 100 100 75 75 50 50 25 25 0 0 July January January 2009 2007 2007
500 750
500 500
250 500
250 250
0 250 January January 2007 January 2008 0 2008 January 2007
July July 2007 July 2008 2008 July 2007
January January 2008 January 2009 2009 January 2008
July July 2008 July 2009 2009 July 2008
By Broderick Perkins Alameda County
0 0 July January January 2009 January 2009 2007 2007 January 2009
July July 2007 2007
July 2009
100
100 100
75 100
75 75
50 75
San Francisco County
25 50
Cumulative REO 1,292 25 25 Total Resold 784 0 0 July July January July508 January January Outstanding
0 25 January January 2007 January 02008 2008 January 2007
July July 2007 2007
750 750
500 500
125 175 100 150 75 125 50 100 25 75 0 50 January January 252007 January 02008 2008 January 2007 1000
Cumulative REO 14,589 January July January July January July January July 2008 Resold 2008 2009 2009 Total 11,379 2009 2008 2008 2009 Outstanding 3,210
July 2008 July 2009 2009 July 2008 Mateo
July July 2007 2007
July July 2007 July 2008 2008 July 2007
January January 2008 January 2009 2009 January 2008
July July 2008 July 2009 2009 July 2008
50 50
January 2009 2007 2007
2009
January 2009
175 175 150 150 125 125 100 100 75 75 50 50 25 25 0 0 July January January 2009 January 2009 2007 2007
500 750
500 500
0 250 JanuaryCumulative July January REO January July January 2007 2007 2008 January July January 2008 Total 2008 2009 Resold 0 2008 2008 2009 January July January Outstanding 2007 2007 2008
July 10,805 July 2008 July 2009 8,705 2009 July 2,100 2008
January January 2008 2008
July July 2008 2008
January January 2009 2009
July July 2009 2009
San Mateo County
July July 2007 2007
January July 2009 2009 1000 1000 750 750
Santa Clara County
July July 2007 2007
July 2009
750 1000
250 500
250 250
July 2009
January 2008 January 2009 2009 January 2008 San
150
July 2009
0 0 y January July January 20072009 2007
July 2007 July 2008 2008 July 2007
175
1000 000
y
750 750
San Francisco
100 00
y
1000 1000
Alameda
750 1000
750 750
Little evidence that Bay Area banks are withholding foreclosed homes to prop up prices and delay recording losses.
Cumulative REO 2,795 Total Resold 2,1 2 5 Outstanding 670 January July January January 2008 2008
July 2008 2008
January 2009 2009
July July 2009 2009
January January 2009 2009
July July 2009 2009
Santa Clara
250 250 0 0 July January January January 2009 2009 2007 2007 January 2009
Cumulative REO Total Resold
July 2009
July July 2007 2007
January January 2008 2008
July July 2008 2008
Source: ForeclosureRadar.com
B
anks active in the Bay Area have begun to sell more homes than they are foreclosing, undercutting fears that overwhelmed lenders could swamp housing markets with more unwanted inventory, causing prices to plunge. “There were breathless reports assuming 100 percent of all properties that went back to the bank, that the bank would flush the market with them,” says Rick Sharga, a senior vice president for RealtyTrac.com, the online real estate marketplace that specializes in foreclosed properties. “That was the least likely scenario of all time. If they (banks) flooded the market, the collateral damage to prices would be devastating to their portfolios and take down the banking industry.” An alleged shadow inventory of foreclosed homes held by banks to support pricing by keeping properties off the market does not appear to exist in the Bay Area. In special research for The Registry, Discovery Bay-based ForeclosureRadar. com tallied bank foreclosures and bank-owned housing sales from January 2007 through September 2009 for four of the largest Bay Area counties: San Francisco, San Mateo, Santa Clara and Alameda. The findings do not show that banks are withholding repossessed housing, either to defer recognizing more losses or perhaps to sell later at a better price. Rather, the data show that banks have been selling properties aggressively for the last year. Only in San Francisco does the data suggest that banks may be selling slowly. “By looking at the number of foreclosures the banks have taken back and subtracting those that have since resold, we are able to show the number of foreclosures the banks have held as inventory over time,” said Sean O’Toole, founder and chief executive officer of ForeclosureRadar. From January 2007 to September 2008, banks did repossess more homes than they then sold in the four counties, perhaps giving rise to the shadow-inventory fears. However, since October 2008, the opposite largely has been true: Banks are selling more homes on a monthly basis than they are taking back. The result is a continuing backlog of foreclosed homes on banks’ books; however, the backlog is shrinking. “Banks have a declining inventory,” O’Toole said. Plus, given “the time it takes to do a foreclosure, we’ll get a big heads up” well in advance if a wave of foreclosed homes is coming down the pike, he said. At the end of September, banks had 3,210 Alameda County homes on their books, 670 San Mateo County
homes and 2,100 Santa Clara County homes, according to ForeclosureRadar. In the 33 months of the study period, lenders sold nearly 11,500 foreclosed homes in Alameda County, or 78 percent of the homes they foreclosed on in the same time. They sold more than 8,700 foreclosed homes in Santa Clara County, or 81 percent of all foreclosed homes. Only in San Francisco have lenders held on to more than a quarter of their foreclosed inventory. At the end of September, they held 39 percent, or 508 homes of the 1,292 they had foreclosed. “It doesn’t serve anybody to dump homes on the market. There is not going to be a big wave anytime soon. The gap exists because there are so many new programs, and there are more options before going into foreclosure,” said Dustin Hobbs, spokesman for the California Mortgage Bankers Association. Beth Mills, spokeswoman for the California Bankers Association, says the foreclosure process has gotten longer, up to 10 months. “Banks do try to move inventory as soon as they can,” Mills says. “Regulators don’t look favorably on banks with high REOs.” “If you look at the timeline regulations require, I think you’ll find banks are just following regulations and doing what they can in this environment,” she said. Still, while there’s little, if any, evidence of banks hoarding Bay Area foreclosures to buoy housing prices, there remains plenty of trouble in housing markets. RealtyTrac’s Sharga says that nationwide, banks own 900,000 homes but less than 50 percent are listed for sale. Beyond those are another 1.1 million homes currently in the foreclosure process—a notice of default issued or an auction date set—but not yet bank-owned. Only about 20 percent of those homes are listed for sale. And, beyond those are some 5.5 million home loans in some state of delinquency. These are loans that are from one day late to 180 days past due, but lenders have not issued a first notice of default. “And the majority are not on the market,” Sharga says. That means there’s a total of about 7.6 million home loans that are either delinquent, in the foreclosure process or bank-owned. In California, ForeclosureRadar.com estimates that a million households aren’t making mortgage payments but only 300,000 of those mortgages are in some stage of foreclosure. “The FDIC is not forcing banks to foreclose. They are giving them incentives not to foreclose. And there’s nothing on the horizon that changes that dynamic. We don’t have the political will to kick people out of their homes, and the banks know if they start foreclosing, they are going to get a solution they don’t want,” O’Toole said. At least two million California homeowners also are underwater on their mortgages, O’Toole says, meaning that the value of the homes is less than the debt against them. All of the people in the underwater limbo but not in foreclosure represent latent or potential for-sale inventory down the line. “The danger is, we’ll be in the same situation five to six years from now,” O’Toole says. n
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hot lot | san jose
Turning the Corner An East San Jose intersection once best-known for crime is standing up well to the recession’s onslaught.
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n the midst of the worst downturn for American retail in a generation, there is one corner of the world faring surprisingly well: Story and King roads in East San Jose. Once the focus of nasty, expensive lawsuits between the city and one of the area’s major property owners, the intersection today is anchored by three retail centers filled with tenants aimed at the predominantly Hispanic and Asian shoppers who live nearby. City sales tax revenues are up and sky-high vacancy rates are down. New, private-sector investors are coming in. San Jose-based Imwalle Properties is completing a shopping center at the southwest corner with 10,716 square feet. On the southeast corner, PDSJ PAD Street Wise Investments LLC of Los Angeles is building a 7,200 square-foot building and already has Verizon as a tenant. “I never saw such a sure thing. Here you have great density and a lot of people that spend a lot of their income on goods, food and services,” said Don Imwalle Jr., president of Imwalle Properties. “We’re actively seeking new projects in that area.” Despite the struggling retail market, the company commenced construction in April 2009 and is already 100 percent leased to Bank of America, Digicom Wireless, Nubi Yogurt and Fox’s Pizza Den. This is the same corner where, for decades, only brave or unsavory souls would venture after dark. And, to be sure, problems remain. The city also has invested millions of redevelopment agency dollars, defended lawsuits and provided subsidies to get the results it has achieved. Still, the intersection and its transformation offer one illustration of how public and private sectors should—and should not—work together. Not so long ago, the southwest corner of Story and King was plagued with 130,000 square feet of vacancy and boarded-up buildings, said John Weis, assistant executive director at the redevelopment agency. “It had the highest
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vacancy rate of any area in the city. The former Home Base and Pak n’ Save stores were all boarded up, and the neighborhood had a horrible feel to it.” In 2001, the City of San Jose officially sought to condemn the Tropicana Shopping Center at Story and King roads. They city claimed the center was blighted under California law and launched a campaign to seize it using eminent domain. Its owner, Dennis Fong, does not deny that the center needed work, but he fought the condemnation and eventually won. In the meanwhile, he plowed $3.3 million along with $250,000 from the redevelopment agency into the center to build two 11,000 square-foot retail pads, both of which fully leased. He also converted a former Newberry’s five-and-dime shop into La Placita, a Mexican-style Mercado. The agency’s intervention expanded in 2002 when it acquired 13 acres on the southeast corner across from the Tropicana with an eye toward redevelopment there. The city later sold the site to Danville’s Blake Hunt Ventures whose principal, Jerry Hunt, took a personal interest in making the San Jose corner a success. He traveled to central Mexico to research colors and architectural styles because RDA research showed that the Northern California Latino community was largely from that region. He learned from surveys of the area’s residents that they wanted a tenant mix that included traditional Mexican products leavened with more traditional American fare. Armed with a $39 million investment from the RDA, Blake Hunt developed a 195,000 square-foot shopping center at the site beginning in 2004. Plaza de San Jose features an expansive, wide-open outdoor public plaza and pedestrian friendly, 40-feet wide paseos, or walkways. Target anchors with 125,000 square feet, along with a Walgreens and a Famsa, a Mexican department store chain that specializes in selling products and services on credit. Starbucks, Wells Fargo, Ritmo Latino, Jamba Juice and El Gallo Giro round
ph o t o s by C h a d Z i emendorf
By Alfred J. Bru
“I never saw such a sure thing. We are actively seeking new projects in that area.” Don Imwalle Jr., president, Imwalle Properties
out the tenant profile. Plaza de San Jose is 100 percent occupied. Across the street from the Plaza de San Jose on the northeast corner of Story and King is the first Mi Pueblo Food Center owned by Juvenal Chavez. With new façades, new interiors, parking lot improvements financed primarily by Chavez and a $1 million grant from the redevelopment agency, the center also has undergone substantial change. Mi Pueblo is now a bustling, 37,000 square-foot complex with sales per square foot placing it among the top 5 percent of grocers nationally, according to a statement from Richard Keit, the redevelopment agency’s neighborhood and business development director. It is also a successful chain, with 13 locations throughout the Bay Area. In addition to the shopping centers’ reincarnations, Weis points to significant public improvements. These include replenishing Emma Prusch Farm Park with new landscaping and decorative fencing, rehabilitating the oncecrime-ridden Poco Way Apartments and creating new streetscapes with distinctive medians, plants and pedestrian lighting. The streetscapes alone came to $11.5 million. Annual retail sales tax revenues generated at Story and King increased to roughly $1 million from 1995 to 2008. “Sales and tax revenues over the past three years are very stable. They haven’t gone down. They did take a big jump up when Plaza de San Jose was fully developed. We’ve had a 150 percent increase over the year before it opened,” Weis said. Blake Hunt Ventures sold 62,000 square feet of Plaza de San Jose in December 2007 for $34.7 million to PDSJ PAD Street Wise Investments LLC of Los Angeles. Repeated attempts to reach the buyer were unsuccessful, but the broker on the deal said the property sold at a 5.3 percent record-setting cap rate. According to a December 2007 news release announcing the sale, Blake
Hunt invested $34.5 million to develop the entire 195,000 square foot center. Asked about the sale, Hunt said simply, “It was an ownership decision.” Work remains. Fred Chavez, president of the Story Road Business Association and no relationship to Juvenal Chavez, says the Tropicana parking lot remains a problem. Fong, who employs a full-time security force and has installed a $58,000 security-camera system in the La Placita building, does not deny it: “Crime is still a challenge, but it’s a lot better than what it used to be.” n
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All Mixed Up A formula for urban revitalization is under review as cities and developers realize the marginal benefits of mixed-use. By Broderick Perkins
ph o t o s by C h a d Z i emendorf
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round-floor retail vacancy rates are as high as they’ve been in more than a decade in some Bay Area locations, but that’s not just a sign of the economic times. Attribute some of the glazed stare of empty storefronts to a headlong redevelopment push to revitalize city cores by requiring residential and office projects to include pedestrian-friendly retail. Experts say this back-to-the-future mindset came with sub-par design, city revenue-based mandates and questionable location decisions that now are exacerbating the downturn’s chokehold on merchants. “The motivation [for mixed-use development] was good, but it has gone awry,” said Anita Kramer, senior director of retail and mixed-use development for the Urban Land Institute. “There is not an unlimited demand for retail. Not every location can support it. Not every site is the right site.” The good news is that city planners are rethinking retail space design, location and zoning, though arguably well after the horse has left the barn: San Francisco Bay Area experts say ground-floor retail vacancy, overall, is as high as it has been in at least 10 years. “I would guess it’s between 10 [percent] and 15 percent vacant. Every neighborhood is different, and some areas are less and some are more, but it’s doubled if not tripled since 2006 and 2007,” said Jeff Mishkin, San Francisco regional manager for Marcus & Millichap Real Estate Investment Services. “It hasn’t been like this since the early 1990s.” Property values have fallen to levels of 10 years ago, said Jon Stansbury, a partner with Bay Area retail brokerage Terranomics. “Retail rents are 20 [percent] to 40 percent below their heyday, and we don’t expect any [rent or value] spike when the market does recover. It will be a very slow, steady appreciation,” Stansbury said. Bay Area retail, like retail elsewhere, is plagued by the current economic downturn. But retail also suffers from too much of a good thing. Decades ago, urban planners began championing development anchored by groundfloor shops as one answer to restoring deteriorating inner cities. Except on major inner-city thoroughfares with nearby, dense populations of pedestrians and effective public transit, ground-floor retail deteriorated and died in many former urban cores. To bring people and tax revenues back, city planners attempted to restock new Main Streets with elements that once made for vibrant, thriving city centers. Required ground floor shops became a staple on the redevelopment drawing board. “It was in vogue in planning circles,” said Todd Regonini, an executive vice president for Northern California infill developer Regis Homes. Unfortunately, planners too often took the if-you-build-it-they-will-come approach without fully considering market factors. “Cities have thought that because old commercial corridors worked before, they should now, but that’s not always the case. San Pablo Avenue in Berkeley is an example,” said Dena Belzer, president of Strategic Economics, a land-use economics consulting firm. Outdated storefronts, vacant spaces,
retail empty lots and low-end retailers are commonplace along the once-bustling corridor. “Another problem is you have a bunch of retailers and independent builders all managed by separate managers. There’s no synergy, no incentive to create a symbiotic group of retailers,” Belzer said. Then there’s the space itself. Crunched for cash, developers built to the minimum specifications of the local planning mandate and left behind a supply of unattractive narrow, squat, dark spaces.” Mom-and-pops will take it, but the national retailers refuse it. So you narrow your pool,” said Terranomics’ Stansbury. Plopping retail in inner cities with poor ingress, egress and parking doesn’t sell well either. Population density is a key, too. Union Street in San Francisco, Palo Alto’s University Avenue, Castro Street in Mountain View and Berkeley’s College Avenue exemplify the right mix of design and location that better reflect bustling Main Streets of an era gone by. Push poorly planned, inadequately designed retail space outside the city core and a concentrated population base, and business conditions worsen. “There are bullet-proof corridors of retail in Berkeley and Oakland that have 7 to 8 percent vacancy rates, but as you get off Main Street, you see double-digit vacancies. I’ve never seen it like this,” said Jerry Smith, Marcus & Millichap’s regional manager for Oakland. Harry Mavrogenes, executive director of the San Jose Redevelopment Agency, remains bullish on downtown retail as a viable alternative to the ghost town the city core was for decades. Retail has been instrumental in turning downtown around, he argues, but he concedes retail isn’t a panacea. San Jose Planning Director Joseph Horwedel says the city began grappling with the retail issue before the economy tanked. Six years ago, it stopped mandating ground-floor retail on all new downtown residential projects. The city also has learned from failures. “In Japantown, retail didn’t turn out how we hoped. We pushed to put it on Taylor [Street] rather than Jackson Street (Japantown’s retail strip). We learned a lot dealing with projects like that and by talking with Federal Realty [Investment Trust],” Santana Row’s developer, Horwedel said. The city also is building more flexible retail spaces and changing zoning to help fill existing space with services such as optometrists, attorneys, accountants and other small businesses, including locations that accommodate store fronts, office space and living quarters for people who work and live in the same locale. Regonini suggests leaving glassy fronts and turning some empty retail space into recreation rooms, community centers, meeting and business spaces for homeowner associations or the community in general, provided the uses meet the bottom line needs of the owner. Experts also say that when retail is pushed out from under mid- and high-rise housing to a pad in front, it works well too. “[Cities] learned the hard way. A more horizontal mixed-use will be the trend now because it’s viable from a retailer’s point of view,” said Stansbury. n
“There is not an unlimited demand for retail. Not every location can support it. Not every site is the right site.” Anita Kramer, senior director of retail and mixed-use development for the Urban Land Institute
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theregistrysf.com 13
W Dean Givas
e start the year at The Registry in a way that has become our tradition each January by convincing a number of outstanding industry leaders to share their observations and make very difficult predictions for the year ahead. The caliber of the participants is notable as is the breadth of their experience and quality of their insight. They include a San Francisco executive for Lennar Homes, a larger national home builder with considerable regional interests; a managing principal for worldwide architectural firm Gensler, which is headquartered in the city; the president of one of the region’s largest and most successful commercial brokerages; and the regional head of one of the largest general contractors in the country. Their views collectively and individually provide a window on our world that is both multi-faceted and seamless, and we believe, irreplaceable.
John Protopappas
Kofi Bonner, president, Lennar Urban Dan Winey
Lennar Urban is the urban housing development division of Miamibased Lennar Corp., one of the largest homebuilders in the United States. The division is overseeing the 770-acre redevelopment of San Francisco’s Hunters Point and Candlestick Point. The division previously developed The BLU in San Francisco.
Meg Spriggs
2010 REAL ESTATE
PREDICTIONS
Where will your company focus next year? We are clearly focused on completing entitlements for Hunters Point Shipyard and Candlestick Point as well as concluding negotiations with the city and the Navy to acquire Treasure Island. We also anticipate breaking ground on vertical construction for homes at phase one of Hunters Point with expected completion by the end of 2011. How does 2010 look different from 2009? From 2011? We believe we will see some stabilization in the San Francisco and inner Bay Area markets toward the middle of next year, which should create opportunity for some upward pressure on the price of land. Property values will be higher next year but still have a long way to go before reaching the values seen during the past five years.
Rich Henry
What do you expect from financial markets? It is a big unknown. It will take a while for financial markets to tiptoe back into major commercial development. They will be very discerning because there will still be an overabundance of caution. We believe the financial markets are still going to be in a shell for the most part next year. However, I think certain markets like San Francisco will begin to see some activity. The real question is whether rates will be at levels that will enable developers to achieve the margins we need.
Mike Kamm
Rob Wagner
Who is emerging as a winner and as a loser in the Bay Area home building industry? The larger companies that have the asset base and management expertise to survive the housing crisis are the ones that will have the better negotiating power going forward. The focus will be on how well companies have protected and managed their balance sheets during the past two to three years.
Kofi Bonner
“We expect the market to gear slightly toward smaller homes and a more value-oriented product.” kofi bonner president, Lennar urban
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What kind of product do you expect to sell best next year? Where will most of the new development be? We expect the market to gear slightly toward smaller homes and a more valueoriented product. San Francisco will continue to be an extremely attractive location because of the potential for appreciation over time and the proximity to job sites and educational facilities. Is anyone pursuing new construction? If so, who and when will it be delivered to market? We are excited about pursuing new construction on a limited basis at Hunters Point Shipyard. Those developers that have inventory in places where they believe there is a shortage of supply and have lots that are reasonably priced will be the first to come back once they are able to find financial partners. What are we not asking that we should be? One issue worth examining is the role of cities and regional government in stimulating new construction, particularly in urban areas. While there is a desire on a regional level to build on vacant land in the inner cities with proximity to mass transit, the cost and the barriers to developing those very same areas can be prohibitive. There is an opportunity to direct financial incentives for residential development to areas where regional and state policy would dictate it should go for the benefit of all. Dean Givas, president, Oyster Development Corp. Oyster is a San Francisco real estate company focused on the acquisition of distressed for-sale multifamily properties in infill locations throughout the Bay Area and distressed commercial properties in north San Mateo and San Francisco counties. Givas formerly served as president and chief operating officer for Intracorp San Francisco, a high-density housing developer.
ph o t o s by C h a d Z i emendorf
Who is emerging as a winner and as a loser in the Bay Area home-building industry? I don’t believe there are any winners at the moment. The volume is currently controlled by banks in one form or another. Access to capital and the lack of legacy issues are the present key. In the medium-term, the winners should be public home builders in suburban locations and local players, whether with established companies or starting new ventures, with access to private capital for infill locations. What production volumes do you anticipate this year in the Bay Area? My primary focus has been San Francisco condominium development. In the city, only 250 for-sale, market-rate condo units will be delivered in 2010. That follows 1,500 in 2009. Between 2006 and 2008 about 2,500 units a year were delivered compared to an historic average of about 1,100 a year. The good news for developers in San Francisco is that the existing new supply is being absorbed, which, combined with the lack of future supply, should put upward pressure on prices. Throughout the immediate Bay Area, there is no significant number of homes under construction. Market recovery will depend on how quickly the existing new inventory is absorbed, which will be hindered or facilitated by the number of foreclosures in a particular geographic area. What kind of product do you expect to sell best next year? Worst? Where will new development be? Absolute gross price point has been the sales driver this year, and I expect that trend to continue through 2010 with the primary buyer being the first-time home buyer. San Francisco and the Peninsula have benefited from pent-up demand and a lack of foreclosures. I would expect market-rate for-sale development to occur in the single-family area where public home builders have holdings and essentially need to build. The only building of market-rate for-sale
“The good news for developers in San Francisco is that the existing new supply is being absorbed, which, combined with the lack of future supply, should put upward pressure on prices.” DEAN GIVAS PRESIDENT, OYSTER DEVELOPMENT CORP.
projects that private developers will be able to justify will be townhomes, because they can be done in phases, where they have acquired land or finished lots at a discounted basis in locations that support higher prices such as infill, immediate Bay Area locations. Is anyone financing new home construction? I don’t believe there is any bank financing to construct new for-sale projects, and, frankly, I don’t believe anyone can justify building new product in the present environment. The only current financing source is the U.S. Department of Housing and Urban Development. What is the status of financial markets for potential home buyers? It is primarily Federal Housing Administration or Fannie Mae-insured loans, which means loans below the $729,000 limit. Fortunately for the Bay Area, the higher loan limit has been extended through 2010 and the FHA has just revised its requirements to make its financing more widely available. Nonetheless, the ability of a buyer to obtain a loan will likely be subject to the developer’s success phasing and pre-selling projects. Is anyone pursuing new construction? If so, who and when will it be delivered to market? I am not aware of anyone pursuing new construction of market-rate homes in the sense of planning to commence construction. Public home builders are pursuing single-family and townhome land, and private developers will likely become more active in 2010. Given the lag time with construction and present conditions, I think that it is unlikely we will see construction starts until 2011, which puts delivery in 2012 or 2013 depending on the product type. How important are state and federal incentives to new home sales? State and federal incentives certainly facilitate new-home sales especially given the high percentage of first-time homebuyers. I don’t agree that incentives borrow from tomorrow’s demand. Incentives provide a sense of urgency that will be replaced by builders with other means. Ultimately, the issue is finding the right pricing to compel buyers. What are we not asking that we should be? The big question remains whether banks will act any differently in 2010 regarding seizing and disposing of distressed assets and whether the FDIC seizure and sale of banks speed those sales. My bet is that due to both volume and time, we will have a more active 2010.
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theregistrysf.com 15
2010 REAL ESTATE
PREDICTIONS Rich Henry, president, Northern Pacific Division, McCarthy Building Companies Inc. St. Louis-based McCarthy Building Companies is an employee-owned general contractor with regional offices in San Francisco. With $3.5 billion in annual revenue, 1,700 full-time salaried professionals and 3,100 weekly payroll employees, the company is one of the largest general contractors in the country. Its regional projects include Berkeley’s East Asian Library and the College of San Mateo’s Science Building and Planetarium.
How does your market in 2010 look different from 2009? From 2011? Do you expect to hire anyone? 2010 for us is primarily viewed as a bridge to 2011 when we expect conditions to begin to look brighter but not by a lot. We feel that there could be further erosion in the commercial building markets in some areas of the state, especially in those areas where the housing market is still bouncing along the bottom. We always look to hire people who we consider to be role players, especially those with special skills in technology because that element continues to change the face of our industry every day. When you compare McCarthy’s 11 markets—health care, education, science and technology, hospitality, civil, industrial, etc.— where do you see demand growing in the Bay Area? The demand for upgrades to healthcare facilities continues to grow throughout the Bay Area, despite the pressures on capital budgets for both public and private healthcare providers. There are clearly several markets that have little or no life right now, which include commercial office, housing and hospitality; there has also been a significant decline in the education sector resulting from state budget challenges and the markets that buy and sell public-project bond financing. Budget cuts by the state’s higher-ed public institutions such as the UC, CSU systems and numerous K-12 school districts have put many capital projects on hold or have been cancelled altogether. Each sector of the overall Bay Area seems to be reacting in different ways due to the wide diversity of business that exists in the region. The residential housing pull back in the East Bay has affected the commercial market differently than Silicon Valley or San Francisco where controlling factors are not so dependent upon housing growth but have slowed substantially as a result of the difficulties in obtaining capital financing. Are you seeing increased public-sector spending at the state, local and/or federal levels due to financial commitments through the American Recovery and Reinvestment Act or so-called “stimulus law?” In the markets here in the Bay Area, most of the stimulus money that we have
“There are positive signs that this flow of funding will start to become available in the second or third quarters of 2010...” rich henry president, northern pacific division, mccarthy building companies inc.
seen has been funneled into infrastructure and civil types of work, such as road improvements. At McCarthy, our focus is on healthcare, higher-ed, K-12, community college and federal projects. Thus far, we have seen little or no money from stimulus hit the schools or university level where we specialize. There are a number of large courthouse projects to chase these days, but most are working on the promise of future funding and seem to only have enough resources for initial planning, design and preconstruction, rather than the dollars needed for construction. Is there other public-sector work that is being funded in different ways? Most of the public sector work in progress today is funded by money that was committed and allocated to capital projects well before the economy went in the tank last year. There are numerous public projects that rely on state funds to match up with local bond funding that are simply on hold or have been cancelled as a result of the state’s inability to meet its obligations to the local institutions. There are positive signs that this flow of funding will start to become available in the second or third quarters of 2010, but that is just speculation. There are a number of things that could happen between now and then that could adversely affect the state’s ability to sell its own bonds in the market. There are also many projects that were contemplating public-private-partnership financing but have stalled because of the difficulty the private investment sector has had in obtaining financing rates that make sense or that are available at all. Public-sector projects that rely on private donations for large shares of their financing strategy have also been hit hard and dried up. Has public-sector construction work drawn greater interest from a broader swath of the industry in the last year or two as the private side has slowed? The public sector has clearly seen a large increase in interest from firms that are both local and from regions not only outside the Bay Area but outside of California in the last year. We see bids across the board in the public sector these days by companies who may have never, or seldom do, public-sector work. This is dangerous to companies themselves who will be very surprised by the vast differences between the private and public sector work processes. Public owners also should be very careful as pressure continues to grow on the balance sheets of companies, including the subcontractor marketplace where the dangers of default and even bankruptcy exist even more these days. The underwriting standards for many bonding companies also have grown more stringent as they dig deeper into the business practices of their clients. C. Michael Kamm, chief executive officer, NAI BT Commercial NAI BT is a real estate brokerage and services company with 15 Northern California offices and 250 agents. In 2008, NAI BT completed nearly 2,000 deals and $3.3 billion in transactions. The company is part of an international network with 325 offices in 55 countries.
Where will your company focus next year? Clearly, our first priority will be to continue to assist our clients through what will be a challenging year. Our landlord clients are focused on managing their assets as efficiently and productively as possible with an eye toward financial performance. Our occupier clients are focused on having their real assets (leased or owned) contribute to strategic, operational and financial goals. Our emphasis will be to ensure that real estate solutions fit these goals. In 2010, we will also focus on helping occupiers to mitigate risk associated with owner solvency issues. With regard to sales, 2010 will not be a good year to sell an asset. What are you looking for in 2010 as an indicator of where the market is besides vacancy rates and rents? On a macro level, I will watch indicators related to job creation, consumer confidence and consumer activity, business investment, global trade flows and stock
“On a macro level, I will watch indicators related to job creation, consumer confidence and consumer activity, business investment, global trade flows and stock markets.” C. Michael Kamm Chief executive officer, NAI BT commercial
markets. Improvements in those areas are going to be precursors to real recovery. Real estate fundamentals are lagging indicators, so I will watch net absorption rates as, first, an indicator that deterioration is subsiding, and second that the markets are improving. Without positive net absorption real estate recovery can’t happen. What are the characteristics of a successful lease and sale early in the year and late in the year? That they get done!? Just kidding. So many deals have fallen through over the last 12 months that it seems a successful lease or sale is a completed lease or sale. Of course the real answer depends on whether you are a landlord or a tenant, a seller or a buyer. The issues we are facing today are that with activity low and fundamentals still deteriorating (albeit less so), leases are significantly weighted to the tenant side. While that may feel good to the tenant right now, if in the long run it places the landlord in a financial predicament or causes service levels to be reduced, that may not be good for the tenants. As for sales, a successful early year sale is one that happens irrespective of who the seller is. A successful sale later in the year is one that happens between a seller that is something other than a lender and a buyer.
What do you expect from financial markets? More trouble. Local and regional banks are really struggling and don’t have the capital-raising capacity or the political clout of large banks. The federal government has been backstopping the residential-mortgage market through purchases of Fannie and Freddie debt. That program is coming to a close soon. What happens to interest rates then? The stock market seems unrealistically buoyant. I see a stock-market correction coming. Interest rates are going to rise, probably in the latter half of the year. Do you expect more industry regulation? What impact will that have on the market? I anticipate more regulation in a few areas pertaining to the issuance and packaging of mortgages and rightfully so. I also anticipate that we will see renewed momentum at the state level toward a split-roll tax program for commercial properties. The state is in a horrible mess, and unfortunately commercial real estate is often seen as an easy political target. What that logic fails to acknowledge is the portability of companies and jobs. California is already an expensive place to do business and about to get a lot more so. John Protopappas, president and chief executive officer, Madison Park Financial Corp. Madison Park is a real estate developer, operator, investor and asset manager with interests in commercial and residential real estate including apartments.
What production volumes in terms of new units do you anticipate this year in the Bay Area or in the markets you do business in? I expect very little if any new production. Financing is very difficult. However, now is the time to build because in two or three years, there will be upward pressure on rents, and construction costs are at their lowest level in many years.
What industry sectors—retail, offices, apartments, R&D, manufacturing, warehousing—do you see selling or leasing next year? I see velocity improving across all sectors, albeit slowly. As trades increase in number (and they are), it creates a market and sets values. We have two fundamental issues today: lack of debt on reasonable terms and lack of agreement on pricing. I believe those elements will improve during the year. As for specific product types, I believe that activity will be driven either by pain or gain. Pain, in that the sectors with the most pain (land, retail, office) will see deal flow, and the sectors with most gain, as in the least worst fundamentals and therefore best prospects of recovery, (apartments, industrial, manufacturing) will see deal flow.
Where will most of the new development be? It will be mostly urban with very little suburban. Non-profit, affordable housing developers specializing in multi-family rental will be most active.
How does 2010 look different from 2009? From 2011? 2009 was a plunge. 2010 will be a bottoming year. 2011 will perhaps be an extension of the bottoming process. In 2010, much of the fear will be gone and acceptance will set in. There is a peak in lease expirations in 2010. Tenants are already positioning themselves to take advantage of the favorable conditions. That means deal velocity should improve. There is a lot of debt maturing in 2010 as well, and lenders and borrowers are and will be having those difficult conversations around valuation, equity and asset performance. As buyers, the best deals will be made in 2010, probably in the first half of the year. 2009 has been tough. 2010 and 2011 will be more positive.
How important are state and federal incentives to new home sales? I think the incentives exacerbate the problem. Let the market clear. The bubble will continue if these incentives are extended for too long.
Will property values be higher at the end of the year compared to now or lower? Why? If I knew the answer to that question, I’d keep it a secret. I would like to say that property values will be higher in 2010, but I doubt they will be. Fundamentals continue to erode, rents are re-setting at lower rates, and cap rates aren’t likely to compress soon. Right now, values are so low that in many cases buyers aren’t concentrating on cap rates. We’re back to percent of replacement cost and price per pound.
What is preventing banks and others from lending and how long will conditions last? Banks are not lending because they have so much product on their books at high prices. I expect these conditions to last for another year or two.
“Now is the time to build because in two or three years, there will be upward pressure on rents, and construction costs are at their lowest level in many years.” John Protopappas president and chief executive officer, Madison Park Financial Corp.
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theregistrysf.com 17
2010 REAL ESTATE
PREDICTIONS Meg Spriggs, senior development director, Avalon Bay Communities
Rob Wagner, principal and co-founder, Sares Regis Group of Northern California L.P.
AvalonBay Communities, Inc. develops, redevelops, acquires and manages high-quality apartment communities in the high barrierto-entry markets in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest and Northern and Southern California.
The Sares Regis Group and its affiliates, Regis Homes of Northern California Inc. and Regis Contractors of Northern California L.P., develop, manage and invest in commercial and residential real estate on behalf of institutional and private-capital clients including CalPERS, BlackRock Inc. and Cigna Life Insurance.
What are you looking for in 2010 as an indicator of where the market is besides vacancy rates, rents and employment? Construction costs. With new development grinding to a halt, construction pricing is likely to be favorable in 2010. How does 2010 look different from 2009? From 2011? We expect job growth to turn positive by mid 2010. 2010 is likely to be another challenging year for apartment fundamentals followed by a transition year in 2011. What production volumes in terms of new units do you anticipate this year in the Bay Area or in the markets in which you do business in? How does that compare to production volumes in 2009? In the San Francisco Bay Area, 2010 will produce significantly less housing stock, including rental housing. We anticipate that, at the most, 200 market rate apartment units could be completed in San Francisco in 2010 and don’t anticipate that deliveries will pick up again in a meaningful way until late 2012 (at the earliest) or 2013. As a comparison, 2009 produced about 500 market rate rental apartments in San Francisco. What kind of product do you expect to sell best next year? One outcome of the current credit markets that we are seeing is a downsizing of home sizes and lifestyles. This will likely create an invigorated appetite for higher density urban development. Although this trend was already developing over the last five-plus years, both the financial markets and the green movement will continue to exacerbate it and place more priority on smart growth in the areas that demand it. Is anyone pursuing new construction? If so, who and when will it be delivered to market? Yes, selectively. There are some well-capitalized groups, like the REITs, that are evaluating new construction deals. The Bay Area will likely start to see more housing units on the market in late 2012 at the earliest, or 2013. The builders that can bid out a job in 2010 (at what will probably be an all time low in construction costs) and deliver units in 2012 or 2013 stand to benefit.
“One outcome of the current credit markets that we are seeing is a downsizing of home sizes and lifestyles.” Meg spriggs senior development director, avalon bay communities
Who is emerging as a winner and as a loser in the Bay Area home building industry? The survivors of the housing downturn will be the winners. Many of the healthy public builders have not only survived but have stockpiled cash to take advantage of cheap land and improving opportunities. In the down cycle, they were forced to take significant write-downs and to reduce staffing and capacity. Our expectation is that they are now in a strong cash position and are ready to move on new deals. Many well-funded private builders also have survived and are now in a position to benefit from reduced competition. Our philosophy at Regis Homes and Sares Regis Group has been to joint venture projects and to limit recourse wherever possible. This discipline has served us well. Those private builders that didn’t spread the risk and limit recourse are now dealing with legacy issues that will make it difficult for them to compete going forward. What production volumes do you anticipate this year in the markets in which you do business? Regis Homes of Northern California will close approximately 225 homes in 2009, 65 in Sacramento and 160 in the Bay Area. In 2010 we project approximately 265 closings, 65 in Sacramento and 200 in the Bay Area. These totals reflect the fact that demand is there at the right price. The buyer today is looking for value, and absolute price is critical. On the supply side, foreclosures are an issue but not as much in the Bay Area as they are in Sacramento and the Central Valley. Inventories are coming down as production levels fall. The supply of new projects and lots has declined so much that there will likely be a significant shortage of new homes in the Bay Area within a few years. What kind of product do you expect to sell best next year? Worst? Where will most of the new development be? Most of our homes are in Silicon Valley cities near jobs. We currently are building in Palo Alto, Mountain View and Fremont. The majority of our units are condominiums and townhomes. We are averaging three to four sales a month at all of our communities and believe that the demand for value product will remain strong. We also are selling a single-family move-up community that we have value priced to move product. Move-up buyers usually have an existing home to sell, which provides a greater challenge; however, longer escrows and lower interest-rate mortgages are helping absorption. One market segment that we are not active in is downtown San Jose or San Francisco high-rise condominiums. These markets are extremely competitive today with downward pressure on pricing. What is the status of financial markets? Is anyone financing new home construction? Both equity partners and construction lenders are focused on their troubled commercial and residential loans. Most are not yet looking at new housing opportunities. However, there is money available for the right builder and the right project. We are currently financing a new housing community in Davis and continue to build out projects in Palo Alto, Mountain View and Fremont. For new projects, equity-return targets are up and joint-venture partners are very selective. Construction lenders have tightened their underwriting standards coupled with more stringent appraisals and higher rates. This results in lower loan-to-value ratios and higher equity requirements for new projects. There has been a tremendous amount of money raised for distressed opportunities in land and aborted housing projects. Typically this capital is looking for 20 percent to
“ The supply of new projects and lots has declined so much that there will likely be a significant shortage of new homes in the Bay Area within a few years.” rob wagner principal & co-founder, sares regis group
25 percent unleveraged returns, which is very difficult to achieve. Therefore many of these distressed opportunities will not attract new capital or be completed until the economy improves. Is anyone pursuing new construction? Builders are building through existing land inventories at very controlled rates. Releases are tightly monitored by construction lenders with an effort to reduce inventories and get loans paid off as soon as possible. We are looking at a variety of broken deals that will attract new capital at the right price. This opportunistic capital is not only looking for high returns but also wants to see blood in the street before it will commit. We also are advising a few institutions on multi-family opportunities, and I would not be shocked to see more apartment projects start in late 2010. How important are state and federal incentives to new home sales? The federal tax credit has been extended until April 2010. The tax credits and other incentive programs are helping by getting some buyers off the fence. However, in core Silicon Valley markets, the price points are high enough that even the combined state and federal credits are not enough to get a non-buyer to commit to a new home. What are we not asking that we should be? The Bay Area continues to be a highly constrained market. The high quality of life, great higher education and many strong companies will continue to make it an attractive place to live and buy a home. As the economy recovers and construction lenders get back to lending, the housing market will recover over the next three to five years. Daniel W. Winey, managing principal, Gensler San Francisco-based Gensler has 31 offices and 2,200 professionals on five continents. More than 300 Gensler professionals work in the Bay Area in three offices, San Francisco, San Jose and Walnut Creek. Winey has managed the Pacific Northwest office for a decade and has helped establish architectural practices in San Jose, San Ramon, Seattle, Tokyo, Shanghai and Beijing. Where will your company focus next year? As difficult as this last year has been, we believe it is important to stay true to our long-term vision. From my perspective, this is a once in a lifetime opportunity, as the situation today is unlikely to repeat for many years. Our competition has pulled back and is concentrating on cost control. We think now is the
time to invest, especially in recruiting new talent. Our primary investments will support our clients locally and globally. Locally, clients are restructuring and rethinking the way they work. Globally, we want to be on the ground guiding clients as they expand. This means building new Gensler offices with talent from the U.S. combined with local design and construction expertise. What benchmarks will you watch to guide your business going forward? Historically, a very strong indicator for our business was employment. I am not sure it will be an accurate predictor in the next decade. Mobility programs, such as allowing employees to work virtually, will profoundly impact long-term corporate real estate needs. Corporations want less space, not more. The goal now is to enhance employee productivity, effectiveness and satisfaction. The indicators we will watch are capital spending, global investment in emerging markets and client growth. This will help us understand where and when we need to be in new markets. What will be the strongest sectors in the year ahead? I am most optimistic about the education sector. In today’s world it is critical that one constantly re-educates and reinvents oneself. This will require our workforce to continuously go back to school. An undergraduate degree will become the norm for an entry-level job and postgraduate degrees required for promotions. This bodes well for private and public universities. The retail sector also needs to reinvent itself. Many big box tenants are dead, or their business is moving online and they need smaller stores. Retail venues will increasingly be a social experience, and developers need to make their properties more engaging and human. For architects, that means opportunities. There will be very limited pursuit of office development in the near term. But investors picking up distressed properties with an eye toward repositioning or reinvention also will provide ample opportunity for architects. What do you expect from financial markets? The banks as traditional lending institutions for commercial real estate are dead. They will not have the wherewithal to compete with private money. Their loan restrictions will be too great and capital reserve requirements will limit what they can do. I expect capital to come in from foreign sources, especially China and other parts of Asia while the prices are low. There will be a lot of vulture funds looking for deals and many will be made.
“Historically, a very strong indicator for our business was employment. I am not sure it will be an accurate predictor in the next decade. Mobility programs, such as allowing employees to work virtually, will profoundly impact long-term corporate real estate needs.” Daniel w. Winey managing principal, gensler
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theregistrysf.com 19
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Finding Clarity Space for concentration and collaboration. By Michael Fitzhugh
Y
ears ago, when Bob Gunderson was still a young attorney cloistered in a downtown San Francisco office, colleagues would call to urge him to take a moment to look up and enjoy the beautiful winter sunsets. A sunset would be hard to miss in Gunderson Dettmer’s new Redwood City office. Nearly half the walls in the interior and exterior are glass. Every color used is neutral, shifting tints with the variance of sunlight. The offices, each equally-sized, invite open and casual interaction among occupants. In a profession best known for respecting discretion and precedent, Gunderson’s new digs emphasize transparency, embrace changeability and reflect the values of its primary clientele: Silicon Valley entrepreneurs, venture capitalists and start-ups. Louis Schump, the project’s director at HOK San Francisco, an architecture, design and planning company, describes the space as a “machine to adapt to change.” Evolving office configurations, staffing levels and spatial needs are all anticipated in the design, which is at once both controlled and fluid. Schump faced three central challenges in the effort to reflect Gunderson Dettmer’s self-image and plans: he needed to maintain the firm’s informal collegial culture as it grows, to pay homage to its egalitarian leanings and to build a space inviting enough to make the office as comfortable a work environment as home. His solutions, which unfold across 98,200 square feet and three floors, are both homey and professional. Glass-paneled offices, equally sized at 140 square feet for partners, entry-level associates and most support staff, meet multiple goals: They promote the firm’s ethos of everyone being on what co-founding partner Bob Gunderson called an “equal footing.” The idea of layouts reflecting equality is one that Charles Uehrke of San Francisco’s Huntsman Architectural Group says is getting more and more traction in modern law firm designs. At Gunderson, even space that could be used for corner offices is instead given over to informal conference space, avoiding the potential assignment of prestige its occupant would accrue.
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The identical office sizes also enable the continuation of a firm tradition of occasionally rotating workers from one office to another. The practice helps to build new social ties and collaborations and avoids social fragmentation or cliques. It also allows Gunderson staffers like Jonathan Gleason, who heads business development for the firm, to see with a glance whether the chief financial officer, with whom he frequently works, looks busy or free for a quick chat. Fifteen living rooms, each with different lighting and seating arrangements, make good quick casual spaces for information-sharing and collaborative problem-solving, said Gleason. And with five per floor, the availability of meeting space is rarely in contention. The interaction those spaces encourage also helps maintain the camaraderie and interaction the firm valued in its first office. Dedicated work rooms allow ad-hoc project teams to acquire dedicated space without monopolizing conference rooms. Occasional opaque-paneled conference rooms also allow for traditional discretion when needed. And doors, even though most are fully glass, afford the aural privacy that confidential phone calls require. Lofts tucked under the third floor’s peaked roofs and accessible via library-style step ladders provide a rare space for the firm’s staff to escape interaction. Views of the San Francisco Bay and sloughs that surround Pacific Shores Center as well as the complex’s elaborate landscaping are incorporated through not only the extensive use of glass, but also the intentional lack of accent colors, says Schump. Gunderson wanted a physical, visual and emotional connection to the outside environment, he said. “When a cloud passes over the sun, the entire color of the inside should change,” Schump says that members of the Gunderson Dettmer design committee told him. Not every high concept employed or considered in outfitting the firm has proved successful. Concrete floors meant to honor the adjacent cement plants have been mostly carpeted to muffle the sharp clacking of shoes in hallways that proved too distracting. The notion of clustering offices in circular pods, each one shaped as a fat pie piece was discarded along with the idea of using curved glass interior office walls to mirror the zigzag of the building’s exterior line. Both ideas proved too costly. Still, the final design truly resonates with clients, said Marcia Hatch, a partner who recently joined the firm. “You want people to like the space, but you don’t want it to be opulent and over-the-top,” she said. “The style for a law firm design is very much influenced by how the firm sees itself and how it sees itself moving forward,” says Uehrke, who has designed many legal practice interiors. As little as 18 months ago, Uehrke says, law firms were spending from $185 a square foot to $250 a square foot to fit out the interior of new offices. In the face of the economy’s meltdown, they have pulled back, expending from $85 a square foot to $130 a square foot in more recent projects. Some law firms are even moving into spaces vacated by less successful peers that have closed shop. But making a space one’s own remains paramount. Nobody wants a client to recall the time a firm’s office belonged to the practice that came before it, says Uehrke. The cost of the interior improvements at Gunderson was $8 million, according to public record, a little shy of $81.50 a square foot and in line with current trends. At Gunderson, clients find a space that looks a lot like their own startup environment. That is a competitive advantage, Gleason says. So, the overt understatement that Schump has created for Gunderson Dettmer’s own internal needs also serves the firm from a financial perspective. n
ph o t o s by D a v i d W a kel y
design
Below and right: Central living room surrounded by glass-encased offices Middle: Loft with views of Redwood City
“You want people to like the space, but you don’t want it to be opulent and over-the-top.” Marcia Hatch, partner, Gunderson Dettmer
Left to right: Corridor, library and reception Opposite page: File room
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theregistrysf.com 23
Wait Training Vulture investors sit on the sidelines in wait for good buys, but how many and when they come are the real questions. By Sharon Simonson
F
or the last year investors have anticipated a wave of foreclosed and distressed commercial properties. Billions of dollars have been raised in expectation that the Great Recession would deliver the sweetest commercial real estate opportunity in a generation. As the new year begins, the question arises: Will 2010 yield the hoped-for goods? To be sure, the Bay Area has seen high-profile failures affecting prestigious names: Morgan Stanley, Hines, CalPERS, MacFarlane. But against other U.S. markets, the financial distress has been minor. San Jose ranks last among 51 cities measured by dollar volume and proportion of distress, according to Real Capital Analytics. San Francisco is 45th on the same scale. Company failures, with the exception of San Francisco’s Lembi Group, have not rendered masses of troubled properties to market. Even multiple regional bank collapses driven by commercial real estate have not thrown up volumes of property distress. San Francisco’s Pacific National Bank, taken over by the FDIC on Oct. 30, and United Commercial Bank, which failed Nov. 6, both lent heavily on Bay Area commercial real estate. But neither has thrown up piles of distressed properties. (UCB had 12 at the beginning of October; Pacific fewer than five, Real Capital reports.) Pacific was a lender on the high-profile Watergate complex in Emeryville, now in receivership and effectively up for sale. But the bank also helped finance construction of millions of square feet of speculative office and housing development in Silicon Valley, much of it available for months and not well occupied. Yet none of it had fallen into distress ten months into the year, according to Real Capital. Whether conditions will hold is another question. Asked what might force the train from its tracks, the most likely answer is time. “The longer
“You can try to kick the can down the road, but if a loan has real cash-flow problems, it’s hard to run away from those.” Joseph Franzetti, managing director of debt advisory services, Cohen Financial
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the stress is in place, the more things will break down,” said Scott Robinson, co-director of the REIT Center at New York University and a 15-year veteran of real estate finance with experience in investment banking including debt securitization and syndication. Lenders will tire of loan restructuring and lose confidence that certain borrowers will survive. As time passes, property revenue will decline as more leases expire and tenants secure lower market rents or fade away. Property income will fall below debt service. Strapped borrowers might feed the beast for a time but ultimately will give in. In the words of a San Francisco expert who specializes in property-note sales: “Blend and extend will end.” But Robinson and others are not persuaded that the treachery will finally throw up the distress volumes that capital anticipates. “I am not entirely convinced there will be a wave of foreclosures,” said Kenneth M. Fox, San Francisco managing director of capital markets for Cohen Financial, a national real estate capital-services company. “None of the opportunities has gone retail yet. I get a list every week from a bank that is offering assets. It is all junk: land, non-performing commercial properties, broken condo deals. I don’t spend my time looking for investments” there. More distress has failed to materialize in part because the government has intervened so heavily in the marketplace, propping up banks with capital infusions, Robinson said. That has allowed banks to show borrowers deference. Commercial real estate has gotten time. The net effect, everyone hopes, is that fewer properties will fail, carried by the extra months through the storm, then allowed to soak in some economic recovery before regulators turn the screws. Of course, that is exactly the opposite of what today’s eager opportunistic investors want to happen. As the year closed, the Federal Financial Institutions Examination Council issued new guidelines directing bank examiners on how troubled commercial real estate loans should be treated. The guidance on its face is permissive. The Examination Council represents all major U.S. banking regulators: the Federal Reserve System, the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the National Credit Union Administration and the Office of the Comptroller of the Currency. In what may be one of the greatest strokes of unintended regulatory irony ever, the guidelines stipulate that lenders may carry incomplete commercial construction projects on their books at collateral values consistent with the rents and income that the finished project should produce, not
commercial
at current or as-is value. The treatment is suspiciously close to the proforma lending practices that bankers embraced during the go-go days, now viewed with askance. “It is interesting. The guidelines suggest that it is possible to restructure a loan based on expectations of future property performance,” said Gregg J. Loubier, a partner and expert on real estate finance with law firm Allen Matkins. “Lenders have been roundly criticized for making loans in the recent past based on what many people believed were optimistic assumptions about leasing expectations that in many cases have not materialized.” Loans also can be considered performing even if the collateral value has fallen below the loan balance. That was not true in the past, said Richard Caldwell, former chief credit officer at Pacific National. “It’s not carte blanche to keep everything in the performing category, but it’s very much distinct from the current regulation, a material deviation, in my view,” he said. “Banks were not able to keep overleveraged loans in the performing category in the past. It affects their loan-loss reserves.” The guidance helps banks to minimize required loan-loss reserves in other ways, too. “Historically, bank examiners didn’t look at [borrowers’] global cash flows available to repay debt. So if a borrower were repaying with something other than the cash flow from the asset, the loan was nonperforming,” said Michel Kapulica, a partner in Assurance and Advisory Business Services for Ernst & Young LLP in San Francisco. The new guidance lets lenders determine if a loan is recoverable based on borrowers’ general ability to pay and to classify the loan accordingly. The guidance also encourages lenders to divide troubled loans into A and B pieces, which also cuts required loan-loss reserves. If a borrower
is able to service a portion of the debt, that piece would continue to be considered fit, while only the B piece would be classified as troubled debt, Kapulica said Still, he and others are not convinced the changes will much prevent the distress from seeping in. “A large number of borrowers just don’t have the global strength to pay off on over-leveraged deals,” he said. Researchers at Deutsche Bank also predict that the worst is yet to come. “… [Commercial real estate] exposures will lead to hundreds of billions of dollars in real losses and many hundreds of [bank] failures,” Richard Parkus, the bank’s head of commercial real estate debt research, forecast this fall. U.S. banks are exposed to $1.81 trillion in construction, land development, core property and multifamily real estate loans. The largest group of banks, those with assets of $25 billion or less, are most at risk. They are heavily exposed to construction loans, half of which are expected to default. They also have failed to set aside sufficient loan-loss reserves. As to the theory (or hope) that time will reduce pain, Deutsche Bank is dubious: “Improvements in rents and vacancy rates are also extremely unlikely to be sufficient to materially affect the scope of the problems.” For Joseph Franzetti, managing director of debt advisory services for Cohen Financial in Chicago, now may be the deceptive calm before the storm. Franzetti works for commercial property owners to restructure and modify existing debt. Servicers in the commercial mortgage-backed securities market are overwhelmed, he said. Bankers are next, he believes. “You can try to kick the can down the road, but if a loan has real cash-flow problems, it’s hard to run away from those.” Those, he said, are real losses. n
Bad Moon Rising Commercial property distress* in the Bay Area is small compared to other markets.
boston $4.0 billion
18 16 14
Bay area
12
East Bay $2.3 billion San Francisco $1.9 billion San Jose $0.58 billion
10 8 6
manhattan $12.3 billion
4
bay area $4.8 billion LAS VEGAS $17.7 billion
San Francisco
San Diego
San Francisco
San Diego
San Jose
Inland Empire
Inland Empire
Sacramento
Orange County
Boston
East Bay
Dallas
Chicago
Phoenix
Los Angeles
Orange County
san diego $1.7 billion
Manhattan
inland empire $2.2 billion
0
Las Vegas
L0S angeles $7.1 billion orange county $2.3 billion
chicago 2 $5.2 billion
Houston
sacramento $1.4 billion
Ranking of Select US Distressed Markets
dallas $4.5 billion
18
phoenix $6.1 billion
16 14
houston $4.8 billion
in billions
12 10 8 6 4
Source: Real Capital Analytics
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San Jose
Sacramento
East Bay
Boston
Dallas
Houston
Chicago
Phoenix
Los Angeles
*As of Dec. 3, 2009, across all property types. Distressed assets include those that are in foreclosure, bankruptcy, lender-owned, operating under a restructured loan or lender forbearance, or transferred to a stable third party.
Manhattan
0
Las Vegas
2
theregistrysf.com 25
Legal & Government
When ‘No’ Means ‘Yes’ New state appellate court ruling says property brokers can be entitled to a commission even when a sale doesn’t close. By Scott D. Rogers
F
ailed real estate transactions are becoming increasingly common. Whether because of declining values, the unavailability of financing or innumerable other reasons, buyers are routinely cancelling purchase contracts during the due-diligence phase or even much later in a deal’s life. Doing so, however, may expose the buyer to an unexpected liability: The payment of a brokerage commission. In a case involving a commercial property broker and its client, a struggling new-home builder, the California Court of Appeal has determined that the builder may be obligated to pay a commission notwithstanding its reasonable termination of a purchase contract. While not plowing any new legal ground, the case is significant as a barometer of the appellate courts’ increasing tendency to interpret contract provisions strictly without regard to industry custom or practice. Faced with this ruling, state trial courts will be more likely to parse the language of contracts. The result may be judicial outcomes more often determined by what was written than what was intended. In the case in question, arising from facts set during the still-heady days of the global housing boom in 2005 and early 2006, Standard Pacific Corp. engaged RC Royal Development & Realty Corp. to act as its broker to find condominium development properties in Southern California. As is typical of buyer-representation agreements, the brokerage contract was broadly drafted to cover situations where Standard Pacific acquired title to, or indi-
The appellate court found that once Standard Pacific entered into the purchase agreement it acquired equitable title to the property and consequently obtained a beneficial interest sufficient to trigger its obligation to pay the agreed brokerage commission. 26 theregistrysf.com
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rect ownership of, properties through acquisition of stock, lease, option or joint venture and provided for payment of the commission through escrow upon closing. Well after expiration of the due-diligence period, Standard Pacific agreed with the seller to terminate the purchase. The agreement required Standard Pacific to release $2 million to the seller and walk away from another $2 million in investigation and transaction costs. But the broker was not paid. RC Royal, seeking to salvage its commission from the failed deal, sued Standard Pacific for breach of contract and breach of the implied covenant of good faith and fair dealing applicable to every contract under California law. At issue was a substantial paycheck for the brokerage: 1.5 percent of the $116 million sale price, or $1.74 million, according to court records. Standard Pacific defended, claiming that the commission would only have been due upon closing and that it acted in good faith in terminating the purchase agreement for legitimate economic reasons. As most would have expected, the Los Angeles Superior Court under Judge Ann I. Jones, agreed with Standard Pacific and found that the commission would only have been payable on closing and that it was justified in terminating the purchase agreement. Accordingly, the trial court granted summary judgment in favor of Standard Pacific. The appellate court, however, undertook a very different approach. It viewed the contract and circumstances more literally and came to a far different conclusion. In reversing the trial court’s determination, the appellate court focused on two provisions of the agency agreement. The first specified that the commission would be payable “in the event the (p)roperty is purchased... .” The second defined “purchase” as including any and all acquisitions of “any direct or indirect beneficial interest in the (p)roperty, including, without limitation, any lease, option, finance, exchange, stock purchase, joint venture or other transaction... .” The appellate court found that once Standard Pacific entered into the purchase agreement, it acquired equitable title to the property and consequently obtained a beneficial interest sufficient to trigger its obligation to pay the agreed brokerage commission. The court rejected the contention that close of escrow was a condition precedent to payment of the commission, holding that reference to escrow was merely a description of the payment’s timing. It reasoned that the contract’s definition of “purchase” contemplated several scenarios in which no escrow would exist, such as through a stock purchase. The court specifically noted the absence of language indicating that escrow must close before the commission is earned. The appellate court also reversed the trial court’s finding that Standard Pacific had not breached the implied duty of good faith and fair dealing. The court noted that although Standard Pacific may have acted in a commercially reasonable manner in declining to close under its purchase agreement, doing so may not necessarily constitute good faith towards its broker. The court acknowledged the existence of an implied promise by a buyer to its broker to complete the purchase so that the broker can earn a commission. The case was returned to the trial court to determine whether Standard Pacific breached the agency agreement and/or its duty to RC Royal. Standard Pacific was ordered to pay the cost of appeal. The appellate ruling illustrates that industry custom and practice can be trumped by literal interpretation of contract language. This case highlights the need for more careful drafting of commission agreements to unambiguously articulate parties’ intentions. Failure to do so may result in surprise, litigation and expense, as Standard Pacific has discovered. n Scott D. Rogers can be reached at 415-268-1990 or scott.rogers@hro.com
commercial
Bargain Hunters Beware Financially distressed buildings might seem like good deals on paper, but nasty surprises can lurk beneath fancy finishes and a Class A label. By Corey Folsom
T
here is a plethora of attractive deals right now for buyers interested in purchasing or leasing commercial property. However, an attractive finish or Class A designation is no guarantee of a building in good condition. Many of the properties on the market today have been vacant for some time with minimal ongoing maintenance. Buying a building that turns out to need hundreds of thousands of dollars in unanticipated repairs could turn a good deal into a financial quagmire. Empty buildings deteriorate faster than occupied buildings. An owner’s motivation to maintain a building in good condition decreases as the building’s value decreases or as a landlord is forced to trim costs due to tough economic times. In today’s market, we all hear terms like “underwater,” “overpaid for property,” “rents falling” and “no longer cash-flowing” more than any of us would prefer. For would-be buyers, these terms should be interpreted not only as an indication of a potentially good buy, but also as code for the temptation to cut corners on maintenance budgets. In addition, with non-judicial foreclosures, there is often a period of months when no one feels responsible for a building’s maintenance. A very common result is deterioration to exterior components like roof coverings and flashings. This often occurs simply because leaves clog roof drains, limiting water runoff, which in turn allows water to sit and ultimately to seep into the building itself. I recently saw the results of this exact chain of events at a Campbell warehouse where the water intrusion then became a termite problem. The damage to the property was extensive and clearly lowered its value. In another recent real-life scenario in which I was involved, a buyer was in contract for a vacant warehouse in Hayward when an inspector found that all of the rooftop HVAC units had been crudely stripped of their copper lines. Copper is an attractive target for thieves to sell for scrap value. In this case, $100,000 of HVAC equipment was destroyed for a few hundred dollars worth of copper. This was a significant enough finding to impact purchase negotiations. The degradation of HVAC equipment due to non-use for an extended time is a real concern. The system should be properly powered down by a professional technician followed
by semi-annual inspections to check the condition of seals and belts and the water-tightness of exterior ductwork. It is also a good idea to make sure that birds aren’t roosting inside enclosures. Another common problem in unventilated, unheated spaces is mold. I recently saw a Fremont building where a tenant with a water-intensive specialized use had moved out. No exit inspection was performed and red flags for moisture intrusion, such as rust at the slab and excessive moisture at the window mullions, were noted but not investigated. The building then sat vacant and unheated for 15 months. The moisture levels built up once the HVAC was no longer operating and driving moisture out of the interior space. It was also discovered that the tenant had cut the moisture barrier along with the floor slab when new plumbing for their process equipment was installed. This allowed intrusion by groundwater. Landscape over-watering and a grade that sloped toward the building also contributed to moisture intrusion. To achieve a clean-air sample report and a building that could be leased, a $60,000-plus, time-consuming mold remediation was undertaken to gut the building. Everything was removed including drop ceilings, ductwork, lights, insulation and interior walls. And, this was a less-expensive option than cleaning surfaces and equipment, a so-called “scrub and save.” It is not unheard of for mold remediation costs to reach $250,000. The phrase caveat emptor probably has more subtext today than at any time in the last decade. A property condition assessment can identify a building’s defects and reduce unwanted surprises. Even if you can’t negotiate on the proposed purchase price, defining with greater precision the term as-is means you will make far more accurate budget projections by plugging in needed maintenance and upgrade costs. You can buy at what seems an incredible low, but if you can’t lease a building because its condition is poor compared to competitors’ then even a low price is too much to pay. n
Buying a building that turns out to need hundreds of thousands of dollars in unanticipated repairs could turn a good deal into a financial quagmire.
Corey Folsom can be reached at 408.205.5915 or CoreyFolsom@yahoo.com
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commercial
A 5-Million-Square-Foot Question Mark Is NUMMI’s closing a step backward or a key piece in Silicon Valley’s evolution?
F
remont’s New United Motor Manufacturing, Inc. plant, slated to close in spring 2010, seems a giant Rorschach test: Its demise is either further evidence of America’s slippage as an industrial powerhouse or an opportunity to take a giant step into a clean and green future. Russell Hancock, president and chief executive of Joint Venture: Silicon Valley Network, calls the exit of scarce manufacturing jobs from the region “a shame.” At the same time, he sees opportunity for the plant to become the new home of electric-car manufacturers or cutting-edge green technology firms. “This isn’t Detroit,” Hancock said. “Silicon Valley is constantly reinventing itself; we’re replacing obsolete industries all the time. There’s a real resiliency here.” Resiliency will be needed. The 5.3 million square-foot plant, known as NUMMI, began as a joint venture of General Motors and Toyota in 1984. It is located on 380 acres in Fremont and has 3,600 North American suppliers, 1,000 of which are located in California. Forty-seven hundred NUMMI workers will lose their jobs when the plant closes, about a quarter of the city’s manufacturing job base. Of that number, 730 live in Fremont, said Lori Taylor, economic development manager for the City of Fremont. But the aggregate toll is sure to be higher. NUMMI’s California suppliers employ about 20,000 people. Some sources present an even darker scenario, predicting as many as 50,000 jobs lost. Fremont itself will lose $2 million in annual sales and property taxes from NUMMI alone, and the ripple effect of the shutdown is sure to affect not only industrial real estate but occupancy and rents in the retail, offices and apartments nearby due to the loss of well-paying union jobs. The typical pay for a production-line worker at the plant is $60,000, according to the California Manufacturers & Technology Association. Scott Miller, managing director at Jones Lang LaSalle, while acknowledging that finding a new tenant for the plant could be a challenge, especially
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in a raging recession, says NUMMI has many favorable features not least of which are its current owners. Large corporations do not like to be seen as indifferent to the needs of dislocated workers, Miller said. So, the carmakers are likely to be active participants in the search for a new occupier. NUMMI also has other attractive attributes, said Benjamin Pollock, executive vice president of Jones Lang. For an auto manufacturing plant, it is relatively new. It also has an on-site railyard, excellent highway access and proximity to one of the largest ports on the West Coast, the Port of Oakland. A significant amount of undeveloped land on the site, about 180 acres, further adds to NUMMI’s charms. In addition, the future Warm Springs BART station is being built adjacent to the site. However, the redevelopment of such a large facility can be akin to watching paint dry. In a report on the impact of NUMMI’s closure on Fremont, Senior Vice President Steve Kapp and Managing Partner Joe Fabian of Cornish & Carey Commercial/ONCOR International predict that NUMMI’s redevelopment will likely take a decade or longer, due to the large amount of money needed to complete the job. Environmental cleanup, infrastructure improvements and layers of governmental process will lengthen the timeline. NUMMI’s loss will have a negative impact on Fremont’s industrial real estate as the plant goes dark, and suppliers and other companies who service NUMMI put space on the market. This will further stress the stock; similar
Forty-seven hundred NUMMI workers will lose their jobs when the plant closes, about a quarter of the city’s manufacturing base.
ph o t o by C h a d Z i emendorf
By Gene Gilligan
THE
to most other U.S. industrial markets, it already suffers under weak fundamentals due to the recession. “There will be injection-molding companies and tool-and-dye makers who are going to be putting space from 35,000 square feet to 100,000 square feet on the market,” said Craig Hagglund, principal in the Oakland office of Lee & Associates. “Those bits and pieces add up to more space in a market that doesn’t need it right now.” Fremont’s industrial vacancy was 14.2 percent as of this year’s third quarter, Silicon Valley’s highest, and swelled significantly from the second quarter figure of 11.4 percent. Rents are 71 cents a square foot a month. Thankfully, many of NUMMI’s suppliers are not solely reliant on the auto plant and have diversified to service other industries such as electronics, medical and biotechnology. The buildings that house these suppliers are mostly owner-occupied, and the report predicts that those who are highly dependent on NUMMI for their revenues will look to sell their assets quickly, likely taking a loss, which will dampen prices. However, that level of distressed selling should be minimal, involving half a dozen buildings or so, Kapp said. Those suppliers who lease will likely put their space up for sublease, the report said, noting that a significant amount of subleasing tends to depress rental rates. But, the total industrial space occupied by NUMMI suppliers in the cities of San Leandro through Fremont is less than 1 percent of the industrial base. It’s difficult to tell how realistic hopes are for a clean-energy firm or electric car producer making NUMMI its new home. The major auto makers have been slow to innovate, which spells opportunity, Hancock argues. “Detroit has been lackluster” on the electric-car front, Hancock said. “This area could become the Detroit of the electric car industry. There could be a real cluster of them here.” Two electric-car manufacturers, Tesla Motors and Fisker Automotive, have found the plant wanting, both citing its enormous size. At the same time, Solyndra Inc., a solar-panel manufacturer, just broke ground on a second plant in Fremont, which will help the company fulfill a $2 billion contractual backlog of work. The new facility will be located near NUMMI and will employ 1,000 to 2,000 workers. Additionally, Solyndra has signed a 500,000 square-foot lease for a former Hewlett-Packard Co. facility nearby to house back-office functions, adding another 200 to 500 jobs. Tough economic times may also hamstring the search for new tenants at NUMMI. In a better economy, California’s economic development representatives would be combing the nation to find likely replacements, JLL’s Miller said. But, with the state’s fiscal migraine, incentive packages are unlikely to be bountiful. The City of Fremont has not introduced any new incentive packages to attract a user to the NUMMI plant, Taylor said, though the city did unveil an economic stimulus package in the spring, before the NUMMI shutdown was announced. The package contains elements such as development impact-fee reductions and clean-technology business tax exemptions. But Allen Valdellon, an investment sales broker with Marcus & Millichap who specializes in industrial properties along the Interstate 880 corridor, said that business owners in Fremont have told him that city government does not provide enough incentives to attract or retain businesses. “Fremont is a great place to raise a family, has great schools and great restaurants,” Valdellon said, and he is not ready to count the city out. “I’m optimistic,” he said. “The economy is turning, and there are good things to come.” n
Registry
Now, more thaN ever, to whom you speak is just as importaNt as what you say. Let The Registry focus your message on your industry—where it counts!
The only Bay Area publication with 100% focus on the real estate industry.
415.738.6434 | www.theregistrysf.com
Getting In While Gettin’ Is Good Seeing no recovery in 2010, San Francisco continues to offer opportunities for buyers. By Rob La Eace
e R ’s
rob
es AR
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“N
ow this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” So said Winston Churchill following an Allied victory over Axis powers in a decisive World War II battle for El Alamein in northern Egypt, 1942. Perhaps the stakes were a bit higher then, but Churchill’s observation beautifully sums up my view of our market status: Despite the Dow Jones Industrial Average sitting at a 13-month high and retailers boasting positive numbers from Black Friday sales receipts, there is plenty of room for concern. We can agree that nobody knows for sure where we are going; therefore, I think it’s fair to surmise that predicting a market direction for Bay Area housing in the year ahead is a gamble. There will not be a jobless recovery. In order for our market and the economy to improve, we must add jobs. But job creation almost certainly will be slow. Some of the lost jobs will never be filled again, and salaries and benefits will be lower when jobs do return. Even though the Bureau of Economic Analysis states that the U.S. GDP grew 2.8 percent in the third quarter, of which, the BEA states 1.45 percent was due to motor-vehicle output, it is yet to be seen if this is a precursor to sustained growth across the board. This is unlikely, in my mind. Cash for Clunkers, for example, seemed like the catalyst for hundreds of thousands of car sales. One study by Edmunds.com reported that of the 690,000 cars sold in the program only 125,000 were vehicles that would not have been sold. In my opinion, we simply fast-forwarded demand. Most folks didn’t buy an extra car; they simply replaced their old car a bit earlier. Because Americans ran out and bought all those cars back in August, it is yet to be seen what impact on the economy this should have in 2010. As for housing, the National Association of Realtors reports the national median single-family home price is $173,000, down 7.1 percent from a year ago. The good news is sales in this price range are up approximately 30 percent year over year. NAR adds that 30 percent of all homes sold are distressed properties—contributing to declines in median value. Inventories are down as well, however. With a seven-month supply, we are at our lowest inventory levels in two-and-a-half years. Depressed prices and the federal and state first-time buyer programs motivated those first-time buyers who made up 41 percent of all purchases. As we like to say in the business: “All markets are local.” So, what’s going on in this local San Francisco
market? Looking at the third quarter, the $500,000 to $750,000 price point made up the largest share of activity at 39 percent. The $1 million-and-up price range dropped from the previous quarter to 20 percent—supporting the theory that folks in the $750,000 to $1 million range may be unable to sell their homes and bump up to a higher price-point, either due to lack of equity to cover the sale, lack of sufficient down payment, or fear of taking on a larger mortgage in these times. But for the San Francisco market to begin appreciating again, a multitude of things must happen. We will need job and salary growth, stabilization of our commercial real estate market, which is just starting to unravel, continued liquidity in lending while maintaining the increased Federal Housing Administration loan limits of $729,750, and support for our key local service industries, namely the tourism and convention business. San Francisco will have a $438 million budget shortfall in this fiscal year, and the state of California faces a $7 billion dollar budget gap. To fill these and make up for lost revenues, San Francisco is sticking it to residents and visitors in the name of sales and hotel taxes and increased parking meter rates and fines. This form of taxation will not help grow local business. Furthermore, we will continue to see short sales and bank-owned homes enter our market. These, coupled with the shadow inventory of already foreclosed homes in the Bay Area, will create lower-priced options to compete with the regular resale market. With these conditions in mind, I have to say that I don’t expect a lot of change in 2010. I feel that prices, on the average, will stay put or drop a wee bit more— giving buyers yet another chance to get in while the gettin’ is good. n Rob La Eace can be reached at 415-290-7228 or rob@roblaeace.com. San Francisco Single-Family Homes Quarter
Quantity Sold
Average Sale Price
% Days on Change Market YOY
Q308
609
$1,105,784
-14%
52
Q309
625
$954,439
-14%
58
San Francisco Condominiums Quarter
Quantity Sold
Average Sale Price
% Days on Change Market YOY
Q308
476
$859,672
-10%
60
Q309
466
$774,486
-10%
82
Real S C E N E
O F
T H E
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The Registry’s commercial Finance Event Above: California Closets new showroom on Townsend Street Left: Panelist Kurt Alvater, CB Richard Ellis
Below: Panelists: Amy Price, Morgan Stanley; Bob Gray, Rockwood Capital and Jeff Giller Above: An intimate gathering of industry leaders to discuss the state of the commercial real estate finance market.
On December 8, 2009 The Registry hosted a commercial finance event at California Closets’ new showroom in the design district in San Francisco. The by-invitation-only crowd gathered to hear from lenders and finance experts on the climate of current and future lending in commercial real estate. The panelists were Kurt Alvater, CB Richard Ellis; Jeffrey Giller; Amy Price, Morgan Stanley; and Bob Gray, Rockwood Capital. The event was moderated by Sharon Simonson, editor-in-chief of The Registry. Left: Sharon Simonson, The Registry, and Bruce Dorfman, Thompson Dorfman
P h o t o s by C h a d Z i emendorf
Below: Rob Rubano, Eastdil Secured; Patrick Crandall, CIBC; Gregor Watson, McKinley Capital Partners
Left: Tony Rattner, Farella Braun + Martel; Gene Miller, Miller Starr Regalia and Dan Myer, Wendel Rosen Black & Dean
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Real S C E N E
O F
T H E
S E E N Below: Ed Shea, BN Builders, and Diane Fischer, WSP Flack + Kurtz
City of Hope’s kickoff reception
Above: Dr. Larry Couture, Sylvia R. and Isador A. Deutch Center for Applied Technology Development, at City of Hope
On November 19, City of Hope’s Northern California Real Estate and Construction Business Alliance held a kickoff reception for their 2010 fundraising campaign honoring Hamid Moghadam, Chairman and CEO of AMB Property Corporation. Moghadam will be awarded City of Hope’s highest honor, The Spirit of Life® Award, at a dinner in May.
Above: Simin Naaseh, Forell/Elsesser Engineers, and Hamid Moghadam, AMB Property Corporation
Above: Members of City of Hope’s Northern California Real Estate and Construction Business Alliance: John Eller, SB Architects; Ed Cherry, Cox, Castle & Nicholson; Wally Naylor, Pankow Special Projects; Jeff Leon, Rawson, Blum & Leon; Mark Hansen, AMB Property Corporation; Allen Nudel, Forell/Elsesser Engineers; Diane Fischer, WSP Flack + Kurtz; Cloey Del Santo, Donnelly Kerley Builders; Laura Medanich; Tom Sullivan, Wilson Meany Sullivan; Joe Olla, Nibbi Brothers; Chris Lang, CIC/Arthur J. Gallagher & Co.; Marc Press, KPFF Consulting Engineers; Ron Heckmann, Heckmann Communications
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Above: Phil Tagami, California Capital & Investment Group, and Mark Hansen, AMB Property Corporation
P h o t o s by C o u rtne y G erz y m i sch
Below: Richard Watkins, TMG Partners, and Tom Sullivan, Wilson Meany Sullivan
technology
I
was going to title this article “Property Management in the Era of Facebook” but decided to skip it because I haven’t seen many of my peers write on my wall. Rather, LinkedIn is emerging as the preferred social-networking Internet site to develop online relationships in commercial real estate. Do you know how to tell when your relationship is crossing the threshold from associate to friendship? It is when you are invited to go through a person’s 200-plus connections and offered introductions to good leads. Recently, I surprised a potential client during our presentation with my familiarity with his education and work history. We also had a good time talking about his favorite tourist spots in Asia. I give credit to LinkedIn for helping me get on his property management shortlist. I suspect that more and more, people we do business with will expect us to do our homework and to know their public profile on LinkedIn. All of which is to say that with the current technologies available, it is increasingly unacceptable for property managers not to have transparent relationships with tenants and owners because technology now makes it so easy. By transparent, I mean having the ability to offer personal and immediate service as your clients need it, whether it be adjusting the balances on an owner’s report or directing your maintenance team to repair their heating-ventilation and cooling system. The use of technology to create on-demand response to calls for service has been our secret sauce over the last several years to growing our business and keeping our owners close. Indeed, despite the industry’s turmoil today, we have been doing relatively well. I believe it is because our owners and tenants have access to easy-to-use, secure online systems. Examples include the online workorder system EasyWorkOrder and the financial software Property Management Accounting (PMAS). Owners and tenants who have opted in are now equipped to virtually see us working on their issues. For instance, during the heavy rainstorm on Oct. 2, our team, through the online work-order system, was able to update tenants continuously on when repairs would be completed and to simultaneously direct the overwhelmed roofing companies on the exact locations and repairs that were needed. Currently, 40 percent of our owners avail themselves of this system’s access. Auditors love this capability, too, because most of our documents are scanned and stored on a secure server, not kept in filing cabinets, so they can check all supporting documents such as invoices, checks and financial reports from the comfort of their offices or even homes. This tight relationship is crucial to better and timely decision-making for the property. In the last quarter, for instance, one of our owners unexpectedly developed a cash-flow issue. Because she was plugged into our system, she was able to see future expenses, including tenant work orders streaming in, along with the rent col
Property Management in the Era of LinkedIn Web-generated transparency is making it easier for property owners to track property managers’ performance. By Gemma Lim
lection reports detailing which tenants haven’t paid rent and the number of days they are late. Consequently, it was relatively easy for us to work with her to prioritize expenses while still meeting her tenants’ needs until her cash-flow situation stabilized. Historically, property management is a low-margin business. Depending on the services required, fees range from 3 percent to 6 percent of gross revenue for large office and retail buildings and 6 percent for multifamily. Some brokerage and investment firms add a property management department to develop it not as one of their core businesses but instead so they could claim to offer a one-stop shop and be an obvious choice when owners chose to buy or sell new properties, the source of the real big bucks in commercial real estate transaction services. Property owners have suffered often from archaic systems because poor performance was so pervasive in the property management industry. Among the hardest hit are the private owners with smaller property portfolios. Here is what one office building owner told me the other day: “I was with my previous property management company for 10 years. During this time, I found myself taking tenant calls because my manager was not around or hearing about maintenance issues that were not getting resolved. I stayed with this company because I did not want the hassle of changing and knew that many of my fellow landlords had similar mediocre service from other management companies. I just assumed that was the nature of the business.” My, how times have changed. Many real estate firms barely surviving have gone back to basics and are sticking close to personal service and cash flow because these are looming as the best bets to surviving this economy. With the current state of the commercial real estate industry and scarcity of good tenants, it is a good time to invest in tenant retention programs and maybe even score gold with business referrals. Of course, it doesn’t hurt to take the transparency a step further and invite your owners and tenants to make a connection on LinkedIn. Assuming, of course, you’ve performed and your invite is accepted. n Gemma Lim can be reached at 650.579.1010 or gemma.lim@westlake-realty.com.
With the current technologies available, it is increasingly unacceptable for property managers not to have transparent relationships with tenants and owners because technology now makes it so easy. dec 2 0 0 9 | jan 201 0
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10 Calendar
january february march april may june july august september october november december
5
SPUR will host a lunchtime forum called Learning from Washington D.C.: Monumental planning and thriving TOD’s at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information.
7
SPUR will host a lunchtime forum called Transit on the Information Highway: Web 2.0 and the public process at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information. BOMA Silicon Valley will host a membership luncheon and an annual broker roundtable. Visit www.boma-sv.org for more information.
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CREW Silicon Valley will host an event called Luis Belmonte: The World According to Luis2010 starting at 11:30 a.m. at The Silicon Valley Capital Club, Knight Ridder Building, 50 W. San Fernando, Ste. 1700, San Jose. Strict dress code required; no jeans please. Members $50 and non-members $80. Register online at www.crewsv.org.
12 USGBC Silicon Valley Branch will host a Funding Energy Efficiency event from 5:30 p.m. 8 p.m. at Roosevelt Community Center, 901 E. Santa Clara St., San Jose. Members $15 and non-members $30. For more information contact heathernoelledurham@gmail.com. SPUR will host a lunchtime forum called The World’s Great Streets: Best practices from home and abroad at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information. SPUR will host a special event called Classrooms of the Future: Opening symposium on green school design at 6 p.m. at 654 Mission St., San Francisco. This event costs $10-$20 (sliding scale admission) to attend. Visit www.spur.org for more information.
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SPUR will host a lunchtime forum called The Sustainable Sites Initiative: Metrics for a greener city at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information.
14
SPUR will host a lunchtime forum called The Parking Problem: Balancing local needs with regional aims at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information.
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14
BOMA Oakland/East Bay will host a luncheon called Commercial Property Conditions starting at 11:30 a.m. at Scott’s Seafood Grill & Bar, #2 Jack London Square, Oakland. Members $40 and non-members $70 with registration by 1/19/10. Email Robert@bomaoeb.org with questions or register online at www.bomaoeb.org.
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CoreNet Global Northern California Chapter will host a Holiday Party from 5 p.m.- 9 p.m. at Astaria Restaurant and Bar, 50 E. Third Ave., San Mateo. Visit www.corenet-norcal.org for more information.
19
USGBC Northern California Chapter will host a LEED Green Associate Exam Prep Workshop from 8:30 a.m. - 5 p.m. at PG&E, 851 Howard St., San Francisco. Members $245 and nonmembers $345. For more information, contact info@usgbc-ncc.org. ULI San Francisco will host a brownbag luncheon by Tim Tosta called Why Not Thrive in Turbulent Times from 12 p.m. - 1:30 p.m. at CBRE Offices, 101 California St., 44th Floor, San Francisco. There is no cost, and attendees will need to provide their own lunch. Register online at www.ulisf.org or call 800.321.5011. SPUR will host a lunchtime forum called The Complete Street: A new plan for Cesar Chavez at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information. SPUR will host a special event called Saving the Bay: Film Screening with Ron Blatman at 6 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Visit www.spur.org for more information.
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SPUR will host a walking tour called From Denim Factory to Quaker School: The story of the San Francisco Friends School starting at 3:30 p.m. at 654 Mission St., San Francisco. This event is for members only. RSVP to tours@spur.org.
20 CREW San Francisco will host an event called Creating Success-Top Women Leaders in Commercial Real Estate from 11:30 a.m. - 1:30 p.m. at The City Club of San Francisco, 155 Sansome St., San Francisco. Members $55 and non-members $75. Visit www.crewsf.org for more information. 21
ULI San Francisco will host a South Bay My ULI Nite from 5:30 p.m. - 7:30 p.m. at Oracle Corporation/Penthouse, 488 Almaden Blvd., San Jose. This event is free for all ULI members and prospective members. Register online at www.ulisf.org or call 800.321.5011.
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SPUR will host a lunchtime forum called The Latest in Living Architecture: Green roofs and more at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information.
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CREW East Bay will host an event called A Look In to 2010: An Economic and Investment Outlook from 11:30 a.m.-1:30 p.m. at Fleming’s Prime Steakhouse & Wine Bar, 1685 Mt. Diablo Blvd., Walnut Creek. Members $45 and nonmembers $60. For questions, send an email to eastbaycrew@crewnetwork.org or register online. at www.eastbaycrew.org b8/10.
22
SPUR will host an evening symposium called The Legacy of Livable Streets: Four Decades later, what have we learned? at 654 Mission St., San Francisco. Visit www.spur.org for more information.
26
SPUR will host a lunchtime forum called Cities in Asia Minor: A contemporary take on the urbanism of ancient empires at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information.
26 SPUR Young Urbanists will host an event called From Tamales to Crème Brûlée: The economics of street food at 654 Mission St., San Francisco. This event is free to members and costs $20 for non-members. Drinks and light food will be provided. Visit www.spur.org for more information. 27
SPUR will host a lunchtime forum called Sustainable School Architecture: Presentation by award-winning architect Lisa Gelfand at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for nonmembers. Feel free to bring your lunch. Visit www.spur.org for more information. IFMA Silicon Valley Chapter will host meeting called Be Yourself: Everyone Else is Already Taken from 5 p.m. - 8 p.m. Contact Joy Dunn at 408.226.0190 or admin@ifmasv.org with questions.
28
SPUR will host a lunchtime forum called SFpark: 21st Century parking in San Francisco at 12:30 p.m. at 654 Mission St., San Francisco. This event is free to members and costs $5 for non-members. Feel free to bring your lunch. Visit www.spur.org for more information. NAIOP Silicon Valley will host a Brokers’ Panel luncheon from 11:30 a.m. - 1:30 p.m. Visit www. naiopsiliconvalley.com for more information.
sent to us
continued from page 4
construction of replacement facilities to be completed in three phases over seven years, making it the largest healthcare investment in the history of Alameda County. Clark is a subsidiary of Maryland-based Clark Construction Group LLC. Founded in 1906, Clark Construction has more than $4 billion in annual revenue and major projects throughout the United States.
Public Utilities Commission Starts Headquarters Construction San Francisco Mayor Gavin Newsom joined the city’s PUC General Manager Ed Harrington and others to formally break ground on the utility’s new environmentally sustainable headquarters. The property, at 525 Golden Gate Ave., is to be a world-class, energyand water-efficient structure that exemplifies the highest standards of the Green Building movement.
PEOPLE on the move
Moffett Field Developers Selected A limited liability company formed by the University of California, Santa Cruz and Foothill-DeAnza Community College District, has selected San Francisco-based TMG Partners and The Related Cos. as the master development team for a proposed 77-acre research and education community at the NASA Research Park at Moffett Field. University Associates-Silicon Valley LLC signed a 95-year ground lease with NASA Ames Research Center in December 2008. The goal is to create a sustainable community featuring classrooms, laboratories, sustainable housing and room for entrepreneurial partnerships. The new community will be comprised of approximately three million square feet of development. It will, in conjunction with adjacent NASA research facilities, serve as a test-bed for advances in green technologies and provide an environment that nurtures innovation. n
continued from page 4
tion since 2005 and has been named to JLL’s newly-created chief operating officer role for the firm’s global Corporate Solutions division. Chicago-based JLL, which reported third-quarter net income of $20 million, is one of the largest publicly traded commercial real estate brokerages and business consultants in the world. Sperling was managing director at Catellus Development Group, a national mixed-use development company and wholly owned business of ProLogis. As the chief operating executive for Catellus, she oversaw strategy, finance, operations and marketing. JLL also has appointed Colin Yasukochi director of research for the firm’s real estate operations in Northern California and the Pacific Northwest. Yasukochi has studied Bay Area real estate since 2000 when he became head of research for the Grubb & Ellis Co. in San Francisco.
Grubb & Ellis Hires Four in San Francisco Matthew Brasler and Kareem Barzegar have joined Grubb & Ellis Co. as associate vice president and senior associate, respectively.
Jeff Congdon has joined GVA Kidder Mathews as an executive vice president in the firm’s San Francisco office focusing on institutional real estate investments. Congdon has completed more than $15 billion in transactions and has been recognized numerous times as a top producer for Cushman & Wakefield, where he served as the executive director of the firm’s capital markets group for 15 years.
Pollack Adds in San Francisco Lucas Martin has joined the San Francisco office of Pollack Architecture. Pollack, which also has offices in Los Angeles and India, comes from architect Gensler’s San Francisco office. He will work for Pollack in design and production. Martin has been a practicing designer with an emphasis on interiors since attending California College of the Arts. Pollack specializes in space planning, construction documents and administration and design.
SOM Promotes Four, Adds Three
A 10-year industry veteran, Brasler specializes in leasing and investment sales of office and retail properties. Prior to joining Grubb, he spent four years as a managing director of Zapolski+Rudd, a private Bay Area real estate investment and development firm. Brasler began his career in commercial real estate in 1998. He holds a bachelor’s degree from the University of California, Davis.
Leo Chow and Ellen Lou have been elected directors for architect and urban design firm Skidmore, Owings & Merrill.
Barzegar will focus on office leasing and investment transactions. He joins Grubb from TRI Commercial, where he served as an investment and senior office-leasing specialist since 2007. Barzegar spent five years with the Axiant Group, where he held the title of vice president. He earned a bachelor’s degree from San Francisco State University.
Housing Nonprofit Pulls from Brokerage Ranks
Jordan Wilkes, former center for the University of California, Berkeley basketball team and a member of the 2009 All Pac 10 Academic team, has joined Grubb as associate. Wilkes will work with the team led by Executive Vice President Daniel Cressman focusing entirely on the sale and leasing of buildings in downtown San Francisco. Matthew Bernstein has joined the San Francisco office as a research manager. Bernstein most recently served as an associate at Gera Developments, a commercial and residential development company in Pune, India, where he assisted the firm in proposal development, financial analysis and research support. Prior to Gera, he served as a consulting associate at Charles River Associates, a global consulting firm offering economic and financial expertise. Bernstein began his career in 2001 as consultant with Navigant Consulting Inc. He holds a bachelor’s degree from the University of North Carolina at Chapel Hill and a master’s in business administration from the University of California, Berkeley.
NAI BT Commercial Expands in South Bay, San Francisco Craig Petersen has joined the Santa Clara office of GVA Kidder Mathews as vice president. He will specialize in corporate real estate services primarily for companies occupying research and development and office buildings. Petersen spent 16 years at brokerage NAI BT Commercial’s San Jose office. San Francisco commercial real estate expert and 37-year industry veteran
Also, senior designers Angela Wu and Sean Ragasa were named associate directors. In addition, three new associates were named. They are Lucy Ling, Bradley Skipton and Lydia So.
Joel Kelly, a vice president in the Oakland office of NAI BT Commercial and a member of the firm’s multi-family group, has been elected to the board of directors for the Rental Housing Association for Northern Alameda County. RHANAC is a nonprofit trade association representing more than 20,000 rental property owners in the cities of Oakland, Berkeley, Alameda, Albany, Emeryville and Piedmont.
Longtime Deloitte Tax Partner Joins Law Firm David S. Howard has joined Hoge Fenton Jones & Appel. Licensed as a certified public accountant and attorney for nearly 40 years, Howard has recently returned to the practice of law after completing a more than 20-year career as a tax partner with Deloitte Tax LLP. He will be based in the law firm’s Silicon Valley office. Howard is a graduate of the University of Southern California’s Gould School of Law, Marshall School of Business and School of Policy, Planning and Development.
Bay Area-Based Property Investor Expands Partner Ranks Drew Hess has joined Orchard Partners with responsibility for industrial real estate acquisitions in Southern California and Seattle. Most recently, Hess was a vice president of acquisitions with Prudential Real Estate Investors in San Francisco. While at Prudential, he acquired or structured joint ventures to develop more than $1.6 billion of property investments. Prior to joining Prudential, Hess was a vice president at AMB Property Corp. in San Francisco. Hess earned a bachelor’s of science from the University of Colorado. He earned his certified public accountant designation at Arthur Andersen and is a LEED-accredited professional. n dec 2 0 0 9 | jan 201 0
theregistrysf.com 35
2000
Numbers 1500
by the
growing smaller Bay Area small businesses ride into 2010 on a modest expansion begun late last year. According to San Francisco’s Rofo.com, the Peninsula and North Bay saw rising business-search numbers while the rest of the region was stable at the online market for tenants and landlords focused on spaces of 5,000 square feet and less. Alan Bernier, Rofo co-founder, says small-business leasing activity surged on his site in early 2009 but flagged after March, hitting the year’s low in July. “Since then, there has been a slow but steady increase in activity,” he says. “We are also hearing about more deals in the market and more tenants making decisions.” Still, Oakland and San Francisco saw declining search activity late in the year. In October, the Peninsula recorded a 3 percent increase in searches, but San Francisco and Oakland dropped a notable 19 percent and 16 percent, respectively. Conversely, cities that support high-tech and start ups, such as Palo Alto, San Jose and Redwood City, saw searches increase. Tenants continue to delay final decisions until the last minute, looking for clearer direction from the market, Bernier says. Small businesses make up an increasing percentage of the Bay Area office tenant class. According to commercial real estate information provider CoStar Group Inc., the percentage of office tenants occupying 5,000 square feet and less has grown in all three 100% major Bay Area markets. In the last five years, the proportion of San 90% Francisco tenants in less than 2,500 square feet has expanded from 80% 70% than 40 percent as of mid-2009. 26 percent in mid-2005 to more 60% remain the largest tenant group Finance, insurance and real estate 50% at 20 percent to 25 percent across all five years, based on the total 40% square footage of all tenants. At 30%the same time, the space allocated 20% for FIRE (finance, insurance and real estate) workers has plummeted 10% to 233 square feet per employee compared to nearly 350 square 0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 feet in mid-2007, near the height 100% of the financial-markets bubble. In the South Bay, not only90% are more tenants smaller, they are 80% more frequently manufacturing-oriented. At nearly 30 percent 70% of the market, manufacturing has overtaken business services 60% 100% 50% office tenant, CoStar shows. The as the most likely Silicon Valley 90% 40% 80 count includes only the office square footage occupied by the 30% 70 manufacturer, according to the data company. The percentage of 20% 60 10% tenants that are in less than 2,500 square feet has reached more 50 400% in than 50 percent from 30 percent mid-2005. Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 30 The same pattern is expressed in the East Bay. There, the 20 proportion of tenants in spaces 10 below 2,500 square feet reached nearly 50 percent in mid-2009,0 considerably up fromJun-08 27 percent in Jun-05 Jun-06 Jun-07 Jun-09 100% mid-2005, according to CoStar. Finance, insurance and real estate 90% have ranked largest over next-in-line manufacturing in four of the 80 100% 70 90% represented nearly a quarter of last five years. FIRE consistently 60 80% the market’s tenants. But in 2009, that changed. Both FIRE and 50 70% manufacturing saw substantial40 declines in their market shares while 60% medical grew. 30 50% 40% Broker Alex Di Chiara, who20 has specialized since 1998 in leasing 10 30% for the small-business market20% in San Francisco, counts 6,000 to 0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 7,000 small companies in the city 10% today. He attributes any increased 0% prevalence in the small-tenant group to the costJun-07 of doing Jun-05 Jun-06 Jun-08business Jun-09 100% locally and the corporate focus90% on cost control. “I think it all starts with the 80% cost of housing in the Bay Area and 70%economic sense for large firms not the cost of living. It makes good 60% to have a big office here. Those remaining are high-paid executives, 50% law firms, accounting firms, financial services,” he says. 40% 30% He and his partner, James Walker, completed about 100 leases in 2008 and expected to do20% much the same in 2009. Despite 10% the sluggish economy, Di Chiara 0% says he is not worried about his Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 financial prospects. “We have plenty of business,” he says. n
36 theregistrysf.com
dec 2 0 0 9 | jan 20 1 0
1000 500 0
1/1/09
2/1/09
3/1/09
4/1/09
5/1/09
6/1/09
7/1/09
8/1/09
9/1/09
10/1/09
Weekly Searches of Sub 5,000 Square Feet Space in Bay Area
4000 3500 3000 2500 2000 1500 1000 500
100% 90% 0 80% 70% 1/1/09 2/1/09 3/1/09 4/1/09 5/1/09 60% 100% 50% 40%90% Source: 30%80% 20%70% 10%60% 0%50% 71% 69% Jun-09 Jun-05 Jun-06 Jun-07 66% Jun-08 61% 40% 53% 30% 20% 10% East Bay Total Tenants by Size 100% 0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 90% 100% 90% 80 70 80% 60 70% 50 60% 100% 71% 40 50% 69% 66% 90% 61% 30 40% 53% 80% 30% 20 70% 10 20% 60% 0 10% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 50% 0% 71% 69% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 64% 40% 60% 53% 30% 100% 20% 90% 10% 80% 70%0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 100% 60%San Francisco Total Tenants by Size 90% 50% 80% 100% 40% 70% 90% 30% 60% 80% 20% 50% 70% 71% 10% 69% 64% 40% 60% 60% 53% 0% Jun-06 Jun-07 Jun-08 Jun-09 30%Jun-05 50% 64% 61% 20% 40% 57% 53% 51% 10% 30% 0% 20% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 10% 0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 100% 90% 80% 70% 60% 50% 64% 61% 40% 57% 53% 51% 30% 20% 10% 0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
100% 90% 80% 70% 6/1/09 7/1/09 8/1/09 9/1/09 10/1/09 60% 50% 71% 69% Francisco Bay 61% 66% San 40% East 53% North Bay 30% South Bay 20% Peninsula 10% 0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
South Bay Total Tenants by Size 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
60%
64%
69%
71%
53%
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
100% 90% 80% 70% n Over 5,000 60% n Sub 5,000 50% 64% 61% 40% 57% 53% 51% 30% 20% East Bay: 680 Corridor, 80 Corridor, 10% 880 Corridor, Highway 4, Oakland 0% South Bay: Campbell/Los San Jose, Jun-05 Jun-06 Jun-07Gatos, Jun-08 Jun-09
Milpitas, Morgan Hill/Gilroy, Mountain View/Los Altos, Palo Alto, Santa Clara, Sunnyvale/Cupertino
San Francisco: San Francisco County, San Mateo County
Source:
activity
Reports commercial leases
Address
City
Lease Sq. Ft.
Tenant/Rep/Brokerage
Landlord/Rep/Brokerage
Notes
Alameda County 901 Page Ave
Fremont
506,490
John Olenchalk (GVA Kidder Mathews)
Rob Shannon, Joe Kelly, Ben Knight (CB Richard Ellis) & Greig Manufacturing Lagomarsino, SIOR (Colliers International Oakland) Building
48201 Fremont Blvd
Fremont
50,000
Paul Lyles (CB Richard Ellis)
Brian Erlanson (ProLogis)
Manufacturing Space
8652 Thornton Ave
Newark
48,960
Conor Famulener (CB Richard Ellis)
Doug Norton (CB Richard Ellis)
Warehouse/ Distribution Space
40999-41049 Boyce Rd
Fremont
47,703
Thomas Taylor (CB Richard Ellis)
Brian Erlanson (ProLogis)
Warehouse/ Distribution Space
4160 Dublin Blvd
Dublin
38,801
Tria Beauty/Cornish & Carey Commercial Pleasanton
Tishman Speyer/Brian Lagomarsino & Ted Helgans (Colliers International Pleasanton)
Class A Office
41480 Boyce Rd
Fremont
28,792
Steve Shields (Transportation Property)
Joe Kelly & Rob Shannon (CB Richard Ellis)
Warehouse/ Distribution Space
295 S Vasco Rd
Livermore
24,240
High Summit LLC/Mark Triska, SIOR & Ned Wood (Colliers International Pleasanton)
Vasco Ventures LLC/Todd Severson, SIOR (Colliers International Oakland)
Warehouse/ Distribution
4473 Willow Rd
Pleasanton
15,911
Neotract Inc/CRESA Partners San Jose
HARSCH Investment Properties LLC/Brian Lagomarsino (Colliers International Pleasanton)
Renewal & Expansion, Class B Office
4900 Hopyard Rd
Pleasanton
8,852
Sensiba San Felippo LLP/Mike Copeland (Colliers International Pleasanton)
Principal Mutual Life Insurance Company (Parkway Properties Pleasanton)
Class A Office
2427 Pratt Ave
Hayward
8,370
Pearson Dental Supplies/Greig Lagomarsino, SIOR Day Wireless Systems/Dan Bergen & Kate Webster (Colliers International Oakland) (Colliers International Pleasanton)
Light Industrial
6336 Patterson Pass Rd
Livermore
8,104
Compact Particle Acceleration Corporation
Walton CWCA Sierra 18 LLC/Michael Lloyd, SIOR & Mike Carrigg (Colliers International Pleasanton)
Renewal & Expansion, Light Industrial
6747 Sierra Ct
Dublin
6,586
Onyx Optics Inc/Mike Carrigg (Colliers International Pleasanton)
Walton CWCA Sierra 18 LLC/Michael Lloyd, SIOR & Mike Carrigg (Colliers International Pleasanton)
Office/Flex
6210 Stoneridge Mall Rd
Pleasanton
5,961
EYC USA Inc
6200 SMR Investors/Brian Lagomarsino (Colliers International Pleasanton)
Class A Office
6759 Sierra Ct
Dublin
5,355
RREEF Management Services
Walton CWCA Sierra 18 LLC/Michael Lloyd, SIOR & Mike Carrigg (Colliers International Pleasanton)
Office/Flex
6150 Stoneridge Mall Rd
Pleasanton
5,298
ImagePress Inc/Justin Grill (Colliers International Pleasanton)
TIAA-CREF/Marshall Snover, Loren Honda, CCIM & Ted Helgans (Colliers International Pleasanton)
Renewal, Class A Office
7901 Stoneridge Dr
Pleasanton
5,286
Kronos Inc/NAI-BT Commercial Pleasanton
Hacida MD 7901 Delaware LLC/Ian Thomas (Colliers International Pleasanton)
Class A Office
3825 Hopyard Rd
Pleasanton
5,045
Metlife Bank National Association/ Jones Lang LaSalle Denver
HARSCH Investment Properties LLC/Brian Lagomarsino (Colliers International Pleasanton)
Class A Office
San Francisco County 1 Maritime Plz
San Francisco
153,000
Gary Arabian (The CAC Group)
Phil Tippett (CB Richard Ellis)
Office Space
3 Embarcadero Ctr
San Francisco
50,403
Ropes & Gray LLP/Jerry Evans & Cal Nakanishi (Colliers San Francisco)
Boston Properties/Rod Diehl
N/A
55 Francisco St
San Francisco
11,683
Scott Nykodym (CB Richard Ellis)
Marc Travato & Bart O'Connor (Cornish & Carey Commercial) Office Space
274 Wattis Wy
South San Francisco
49,000
Jesse Cardenas (Coldwell Banker Commercial)
David Black (CB Richard Ellis)
Warehouse/ Distribution Space
1575 Adrian Rd
Burlingame
38,172
Greg DeLong & Nick Whitstone (CB Richard Ellis)
Mark Melbye (GVA Kidder Mathews)
Warehouse/ Distribution Space
155 Linfield Dr
Menlo Park
23,479
Doug Beck & Mike Von der Ahe (CB Richard Ellis) None
1201-1285 Walsh Ave
Santa Clara
150,480
Steve Prehm (Colliers International San Jose)
Joe Kelly, Rob Shannon (CB Richard Ellis) & Dave Sandlin (Colliers International San Jose)
Renewal, Warehouse/ Distribution Space
2020 Tenth St
San Jose
138,240
Scott Borgia (CPS Corfac International)
N/A
Warehouse/ Distribution Space
3050 Zanker Rd
San Jose
97,910
Jay Phillips (Cornish & Carey Commercial)
Jeff Houston (CB Richard Ellis)
R&D/Flex Space
950 Yosemite Dr
Milpitas
78,923
Thomas Taylor (CB Richard Ellis)
Direct Deal
Warehouse/ Distribution Space
1308 Moffett Park Dr
Sunnyvale
55,456
Steve Horton (CPS Corfac International)
Jeff Houston (CB Richard Ellis)
R&D/Flex Space
390 Java Dr
Sunnyvale
48,480
Direct Deal
Jerry Inguagiato (CB Richard Ellis)
R&D/Flex Space
303 Bryant St
Mountain View
17,589
Justin Hedberg (GVA Kidder Mathews)
Mike Charters (CB Richard Ellis)
Office Space
1135 Walsh Ave
Santa Clara
16,000
Mike Massaro (Pacific Pointe Partners)
Joe Kelly, Rob Shannon (CB Richard Ellis) & Dave Sandlin (Colliers International)
Manufacturing Space
150 Mathilda Pl
Sunnyvale
11,331
No Tenant Rep
Jeff Houston (CB Richard Ellis)
Office Space
Santa Mateo County
Office Space
Santa Clara County
38 theregistrysf.com
dec 2 0 0 9 | jan 20 1 0
commercial Leases Address
Lease Sq. Ft.
City
Tenant/Rep/Brokerage
Landlord/Rep/Brokerage
Notes
Tractor Supply Company/Tim Hoelscher (Tractor Supply Company)
Airport Business Center/Shawn Johnson (Keegan & Coppin Co., Inc.)
N/A
Real Property Solutions/Jim Sartain & Bill Severi (Keegan & Coppin Co., Inc.) Nick Abbott (North Bay Commercial)
N/A
Sonoma County 22,670 (bldg) + 23,000 (yard space)
Lots 6 & 7 Conde Ln/ American Wy
Windsor
1219 Briggs Ave
Santa Rosa
21,872
AEG Industries/Tony Lucchesi (NAI BT Commercial)
1201 Piner Rd
Santa Rosa
14,000
Rancho Mendoza Supermercado, Inc./Chris Nunez Pine Creek Properties/Joel Jaman & Tom Laugero (Keegan & N/A (Creative Property Services) Coppin Co., Inc.)
5801 Commerce Blvd
Rohnert Park
6,050
Daniel Ibarguen/James Manley & Chris Castellucci (Keegan & Coppin Co., Inc.)
Diane Fafoutis/James Manley & Chris Castellucci (Keegan & Coppin Co., Inc.)
N/A
121 J Rogers Ln
Rohnert Park
5,500
Cagwin Dorward/Linda Zacharin (The Zacharin Company)
Tim & Nancy Kerrigan/ Kevin Doran (Keegan & Coppin Co., Inc.)
N/A
1360 N. Dutton Ave
Santa Rosa
5,414
Cinquini & Passarino/Brian Keegan (Keegan & Coppin Co., Inc.)
Robert Wersen/Shawn Johnson & Danny Jones (Keegan & Coppin Co., Inc.)
N/A
3181 & 3185 Cleveland Ave
Santa Rosa
5,012
Fireside Specialties, Inc./Joel Jaman (Keegan & Coppin Co., Inc.)
Leonardi Properties, Inc.
N/A
commercial sales City
Property Size
Buyer
Seller
Price
Product Type
Brokers
Hayward
66,612 sf
Wallace Lee
Neil Fisher (LRF Properties)
$5,500,500.00
Industrial
Sam Higgins & Jay Hagglund (NAI BT Commercial)
460 Townsend St
San Francisco
17,280 sf
Townsend St LLC
1238 Sutter St LLC
$4,750,000 (list price)
Industrial
James Cahan (HCM Commercial)
950 Van Ness Ave
San Francisco
N/A
950 Van Ness Ave LLC
Euromotors Inc
$8,500,000 (reported)
Retail
Catherine House (CB Richard Ellis)
3080 Raymond
Santa Clara
187,650 sf
Digital Realty Trust
Ann Sharp
$90,500,000.00
Industrial
N/A
4070 Stevens Creek Blvd
San Jose
68,900 sf
Smythe European
Circuit City Stores West Coast $11,150,000.00
Retail
N/A
1195 Elko Dr
Sunnyvale
44,277 sf
GSI Technology
Jeff Lindsey
$4,634,500.00
Industrial
Kalil Jenab (NAI BT Commercial)
555 Los Coches St
Milpitas
20,358 sf
Second San Jose Vietnamese Larry Russel (Calveras)
$3,509,00
Industrial
N/A
60 El Camino Real
Sunnyvale
13,994 sf
Arton Investment Inc.
Dave Falore (CD Investments) $7,502,000.00
Office
N/A
2471 Berryessa Rd
San Jose
3,106 sf
Berryessa LLC
Henry Yip
$5,196,000.00
Office
N/A
Acacia Capital Corp
Avalon Bay Communities
$43,800,000 (per Globe St)
MultiFamily N/A
Baywest Realty Capital
Jack Teresi
$6,420,935.00
MultiFamily N/A
Address Alameda County 27279 Industrial Blvd San Francisco County
Santa Clara County
355 N Wolfe Rd
Sunnyvale
92 units
291 Evandale Ave (deedin-lieu)
Mountain View 63 units
For-Sale Transaction Data provided by:
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theregistrysf.com 39
FinalOffeR The Sage
MIKE Kriozere
By Sharon Simonson
Mike Kriozere, founder of La Jolla’s Urban West Associates, is best known in the Bay Area for developing San Francisco’s One Rincon Hill, the stunning green and white condominium tower near the foot of the Bay Bridge. At 71, Kriozere has lived and developed through multiple business cycles. He has observed economic events, political culture, businesses successes and development failures across 50 years of his adult life. His first development was at age 29, secured after assembling an 80,000 square-foot building site on Lake Michigan and presenting it to legendary Chicago developer Philip Klutznick. The project consisted of two 25-story residential buildings. He also worked for Chicago developer Dan Levin, chairman of the The Habitat Co., a large housing developer and manager. He spent 20 years as a salaried man assembling sites on behalf of others, developing them and saving a portion of his profit, until in his mid-40s he formed his own development company. The product of working-class parents, he credits his mom for imbuing in him a mindset that starting with nothing had no bearing on where one eventually might wind up. His 47-year-old son is the only other full-time employee of Urban West.
years of horizontal development created a lot of urban sprawl and all of the problems, and it made it necessary to start looking at downtown development. So it became propitious to start looking at the urban core to do development, and that was right in my sweet spot. My first San Diego high-rise condo was in the early 1990s, City Front Terrace, 230 units in a 15-story building in the Marina District downtown.
MK I learned a lot from Philip Klutznick and Dan Levin. You can do enormous developments without lots of people. You bring in the professionals you need, and you don’t have them on your payroll. I answer my own phone. I could go to a pension fund and say I would like $300 million and find seven or eight projects and hire seven or eight project managers, and I would become an administrator rather than a developer. But it is not easy to find these kinds of projects. They are difficult to do. A lot of development is done now [using the fund model.] I don’t think high-rise development really lends itself to that. The really good projects take time. You have to dig and assemble. There is a lot more money than there are good deals. It is one of the reasons we are in the mess we are in now.
MK Our DDA (disposition and development agreement) with the city of San Jose is expiring. I am interested in renewing it, but no one is sure if and when it will be a good time to develop it or any other site in San Jose or anywhere.
What is a good project?
What’s the status of the second phase of One Rincon Hill?
MK I spend a lot of time on the location. I don’t just look for the easiest site to buy. Even if a site is not for sale, I get in touch with the owners. That’s the start. The second thing I do is the architecture. So you need top-notch design and location.
MK We have the land and the drawings, but until the economy allows, everything is on hold.
What is a good location? MK Growing up in Chicago on Lake Michigan, you learn that waterfront locations are extremely desirable. So my developments in California are located on the coast and within the cities as close to the water as I can get. They’re all centrally located downtown and close to what I would call an anchor, a significant development like a major city park, a major hospital, a landmark that lends stability to the neighborhood. In San Francisco I have one across from the ballpark. In San Jose the site is on [Plaza de Cesar Chavez] park and next to The Fairmont San Jose hotel. How did you find your way from Chicago to Southern California? MK I had a friend who moved to La Jolla, and I would visit him and we would play tennis together. I loved La Jolla. San Diego 20 years ago was not an intense urban city, but
40 theregistrysf.com
dec 2 0 0 9 | jan 20 1 0
In 2005, you tied up a 1.5-acre development site in downtown San Jose owned by the redevelopment agency. What is happening with that property?
What’s happening at the existing tower? MK It is 80 percent sold. We are pleased that we were able to close a good portion of the units before the meltdown, and we were able to pay off all of the construction loans and equity partners; the developer is the last one to get paid. Obviously we are selling the units at prices that are lower than the original contracts. What do you see ahead? MK I am kind of depressed. I see what [federal fiscal policies] have worked in the past, and, this is not a political thing, they worked for John Kennedy and Ronald Regan and they would work now, but they are not being done and in fact the opposite is being done. I think these policies have to change for us to recover and unfortunately they usually don’t change until we hit a wall, such as employment gets over 11 percent. What are you telling your son about new development? MK
Be patient. There is nothing else you can do. n
ph o t o by C h a d Z i emendorf
What lessons were learned during your tenure working for others that bled into your work as an independent developer?
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CREW Silicon Valley thanks our 2009 Board for their hard work and dedication over the past year and congratulates our new 2010 Board 2010 Board (Below) Front row, l-r: Ginger Sotelo, President Elect; Debbie McCarty, President; Back row: Mitsie Smith, Past President; Penny Lewis, Programs; Claudia Folzman, Membership; Jill Collins, Treasurer; Diane Rebecchi, Communications Missing: Shelley O’Toole, Secretary; Genene Vaccaro, Sponsorship
2009 Board (Above) Front row, l-r: Mitsie Smith, President; Debbie McCarty, President Elect; 2nd row: Ginger Sotelo, Sponsorship; Penny Lewis, Secretary; Dale Green, Communications; Mary Wagle, Past President; Back row: Claudia Folzman, Programs; Diane Rebecchi, Communications; Peter Clonts, Membership; Jill Collins, Treasurer
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