The Registry October 2010 Issue

Necessity Mothers Invention

Essex uses bankruptcy to get good land, pg. 10

THE

Deconstructing Inflation

Green SFO

Exploiting the dollar’s decline, pg. 22

The new airport terminal aims to be, teach green, pg. 24

Final Offer with John Weis Seeking renewal’s source, pg. 36

Registry

BAY AREA real estate JOURNAL

OCTOber 2010

2010 commercial market update

The economic engine turns Technology companies (yet again) are igniting the pistons of Bay Area recovery pg. 12

The air we breathe pg. 16

HOT SEAT pg. 18

With its locally sourced vintage furniture, traditional molding and heavily patterned wallpaper, the Yelp lobby resembles a Victorian apartment in the Mission.



The toil of commercial real estate

Contents OCTOBER 2010

commercial market update Information, Please, pg. 12 Bench Marking a New Era, pg. 14 A Good Airing, pg. 16 Heat or Light, pg. 18 Technology Tenants on the Move, pg. 20

6 News Desk A summary of recent news about the industry and people on the move

8 Residential Market Report

Rethinking Affordable Housing

10 Commercial Market Report

Upside in the Downturn

12 Feature Package: Commercial Market Update

22 Finance Learn Inuit to Understand Inflation

30 Commercial Lease and Commercial Sales Reports

24 Design Airport as Ambassador

32 Real People CoreNet VIP Event

26 Green Low Risk, High Reward

34 Calendar of Events

28 Rob’s REality The Demise of Confidence

36 Final Offer | John Weis Seeking renewal’s source

This page: IMAGE COURTESY OF VLADIMIR BOSANAC; Front cover: IMAGE COURTESY OF JASPER SANIDAD

Media Partners

Editorial Boards

The Registry would like to acknowledge its partnership with the following organizations:

Board members of The Registry serve without expectation of recompense or reward. They advise the magazine’s executive team on matters of relevance to the region’s commercial and residential real estate community. The board’s makeup reflects the wide readership of the magazine including attorneys, architects, interior designers, residential and commercial real estate brokers, investors, lenders, general contractors and subcontractors, engineers and other professionals.

www.norcal-ai.org

NORTH

Stephen Austin, RPA

Regional Property Manager Boston Properties

Daniel Myers

Marc Cunningham President AllWest

Jeanne Myerson

Partner, Real Estate Practice President & Group Leader Chief Executive Officer Wendel, Rosen, The Swig Company Black & Dean LLP

Bruce Dorfman

Jesshill E. Love III

Daniel Huntsman,

Principal LEED AP Thompson | Dorfman President & Founding Principal Partners, LLC Huntsman Architectural Group

Anton Qiu

Principal TRI Commercial

Phil Williams, P.E., LEED AP Vice President Webcor Builders

Partner Ropers, Majeski, Kohn & Bentley

Paul Zeger

Principal, President & CEO Pacific Marketing Associates

SOUTH

Terry de la Cuesta,

Jennifer Dizon, CPA

Norman C. Hulberg, MAI

Robert Kraiss, CFM

Audit & IIDA, LEED AP Advisory Partner Director of Healthcare Hood & Strong, LLP Synergy 4 Health, a One Workplace Company

Director of Corporate Facilities & Real Estate President Adaptec, Inc. Hulberg & Associates, Inc.

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Erik W. Doyle

President Cornish & Carey Commercial

Jody Quinton

Regional Manager DPR Construction, Inc.

Geoffrey C. Etnire

Co-Chair, Real Estate Group Hoge, Fenton, Jones & Appel, Inc.

Patricia Sausedo

Vice President of Public Policy & Communications San Jose Silicon Valley Chamber of Commerce

Michael W. Field

Director, Commercial Real Estate The Sobrato Organization

Jeffrey A. Weidell

Executive Vice President NorthMarq Capital

Contributors Peter Ingersoll Learn Inuit to Understand Inflation pg. 22 Peter Ingersoll is chief executive of East Bay investment advisory Safe Harbour Equity Inc. and a serial entrepreneur. He has an economics degree from the University of Pennsylvania Wharton School and several advanced degrees from the School of Hard Knocks earned while working in the construction, development, site acquisition, private banking & trust, investment banking, securities and, most recently, the Northern California commercial real estate industries. This article is based on research for his forthcoming book, “The Real Estate Tsunami Survivor’s Guide,” to be published in November. The book features interviews and remarks from industry leaders such as Dr. Sam Chandan, the global economist for Real Capital Analytics; Ethan Penner, president of CBRE Capital Partners; and Michael J. Panzner, author of “Financial Armageddon: Protecting Your Future from Four Impending Catastrophes” and “When Giants Fall: An Economic Roadmap for the End of the American Era.”

Rob La Eace The Demise of Confidence pg. 28 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 sixth year in the industry, La Eace is in touch with his clients’ needs and with the city—putting a local’s perspective to work.

Primo Orpilla Bench Marking a New Era pg. 14 Primo Orpilla founded Studio O+A with Verda Alexander in 1991. Recognizing a need in the Bay Area for a design firm with the agility to respond to dynamic changes in the local tech-based economy, Orpilla created a company that quickly established itself as an innovator. Since that time, he has directed design and construction for millions of square feet of space and coordinated projects throughout the United States.

Oprilla’s expertise in facilities programming, building and site analysis and corporate workplace planning has resulted in a client list of remarkable diversity: technology and communication firms, financial institutions, government agencies, developers, non-profit entities and multi-national corporations.

THE

Registry

P.O. Box 1184 San Mateo, CA 94403 415.738.6434

Mission Statement

Letter from the Publisher

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.

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

Creative Director Jelena Krzanicki

Photographer Jesus Nava

Writers Doug Caldwell, Michael Fitzhugh, Sharon Simonson, Sasha Vasilyuk

Contributors Peter Ingersoll, Rob La Eace, Primo Orpilla

Advertising 415.738.6434

News news@theregistrysf.com

Feedback letters@theregistrysf.com

Subscriptions subscriptions@theregistrysf.com

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.

The Registry is a registered trademark of Mighty Dot Media, Inc. ©2010 Mighty Dot Media, Inc. All rights reserved.

This publication and/or its contents may not be copied, reproduced or republished in whole or in part without the written consent of Mighty Dot Media, Inc.

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Dear Reader, All of us are acutely aware of the impact that the economy is having on our industry. It has shaken the foundations of our beliefs, leaving some with little confidence in the market and even their own instincts. This has fueled a strong desire for information, anything that helps explain the current status or even gives a perspective on where things may be heading. We at The Registry have witnessed the impact of this information seeking first hand.

We’ve noticed attendance at various industry events spike, we get questions about what we are seeing in the market, and we track the activity of the readership on our Web site. This last point has been the most interesting for us, because we see also which one of our past issues is downloaded the most, and interestingly our Commercial Market report from last year keeps popping to the top slot, even today.

The endless hunger for data has spiked globally, as well. Information technology, the economic engine of the Bay Area, has asserted itself soundly on the global scene and has given our region a leg up following the dot-com implosion from almost a decade ago. In editor Sharon Simonson’s piece titled “Information, Please” on page 12, we follow the industry’s impact on the commercial market in the last 18 months to two years. All indicators point to the fact that information technology will lead the region out of the economic malaise, and we are starting to see evidence to that effect. Technology talent in the region is scarce, and companies are having difficulty filling open positions.

This may be one of the reasons behind the recent resurgence of demand for San Francisco office space.

The city is a magnet to the younger workforce, and companies realize that. Providing shuttles to Silicon Valley campuses is a nice touch. However, opening an office in San Francisco may actually sway a young engineer’s decision to join a company. When San Francisco doesn’t work out, companies are trying the next best thing: locating close to Caltrain, so at least the commute is easy and provides productive work time for a youngster with a good iPad. Tech companies are transforming the accepted notions of office space again, too. In Primo Orpilla’s column “Bench Marking A New Era” on page 14, he explores how design is catching up with the demands of the younger, hipper, techie urbanite.

Technology in the Bay Area now has five main pillars. Information tech and chip/hardware technology are probably the largest. Biotech follows close behind. Emerging technology such as nanotech is in its nascency and a strong up-and-comer. But clean/ green tech is starting to get national attention. In the article “Heat or Light” on page 18, Doug Caldwell explores how solar companies popping up in Silicon Valley are capturing the innovation vigor for which this region is known. The industry is a natural extension of the technology base that is already here.

We look at the industry’s future and how well it can be expected to make the jump from governmentsubsidized newcomer to a self-sustaining entity.

The clean/green tech industry is closely related, naturally, to the green movement, which has been especially pronounced in California. It has spurred the evolution of green buildings, and now the newest permutation is coming on line at SFO: Terminal 2. In the story “Airport As Ambassador” by Sasha Vasilyuk on page 24, we look at the green efforts of the city of San Francisco and Terminal 2’s main tenants, Virgin America and American Airlines. Air travel is typically viewed as diametrically opposite of anything green, but a Gold LEED-certified terminal is not a bad start.

On the other hand, the green movement is also ushering in an age of government involvement that is having unintended consequences. In another piece by Sharon Simonson titled “A Good Airing” on page 16, we explore how California’s landmark 2006 greenhouse gas-emissions law has developed an externality that severely punishes developers and may actually push businesses to leave the state.

In this Commercial Market issue I hope you will find insight into what is driving market recovery, what areas and properties are being most affected by tenants’ return and where the market may be heading. One of the major drivers of The Registry’s success has been the industry’s insatiable need for more and better coverage of the business. We will continue to deliver that, and if there are ways in which we can improve our efforts, please do not hesitate to let us know.

Thank you for your interest in our publication.

Sincerely, Vladimir Bosanac

News

Desk

SENT to us Brocade Christens San Jose Headquarters Brocade Communications Systems Inc. has completed two office towers and a data center totaling 562,000 square feet at its new corporate campus at North First Street and Highway 237 in the North San Jose Innovation Triangle.

Green innovations include a 550-kilowatt photovoltaic system on the rooftop of the 1,800-stall, six-story parking garage—one of the largest solar-power deployments in San Jose. The company is seeking LEED Gold certification for the campus. Other amenities include on-site dining, a 7,500-square-foot fitness center, an outdoor sports court and wireless connectivity throughout.

Brocade’s campus is part of the 39-acre @First mixed-use development that includes a new 138,000 square-foot Target superstore, a 162-room Hotel Sierra and a 73,000 square-foot retail village. Brocade retains an option to build a fourth tower, entitled up to 320,000 square feet.

San Francisco Landlord Acquires Sacramento Office Portfolio DivcoWest Real Estate Investments has completed the purchase of Prospect Green, a 642,000 squarefoot property portfolio consisting of six Class A office buildings. The $68 million purchase was made on behalf of Market Street Capital Partners, a real estate investment fund sponsored by Divco.

Developed in phases between 1990 and 2001, the Prospect Green buildings sit within a campus featuring a 2.5-acre central park. Occupancy in the park is approximately 70 percent and includes a diverse group of major national tenants including Barclays Bank plc, NEC Corp., Pearson plc, Allstate Insurance Co. and Aerojet, a GenCorp Co.

San Francisco’s LoopNet Inc. Strikes Again LoopNet Inc., the online marketplace for commercial property listed for sale and businesses for sale, has acquired LandsofAmerica, the operator of the largest and most heavily trafficked online marketplace specializing in land sales.

Combined, LoopNet-owned Web sites now feature more than 200,000 active land listings for sale across LoopNet.com, LandsofAmerica.com and LandAndFarm.com.

In March, LoopNet announced it had acquired Reaction Web, a developer of custom Web sites that help brokers market listings and enhance sales. The company did not disclose purchase prices.

In July, LoopNet reported net income of $3.2 million on second-quarter revenue of $19.4 million.

Green Glass Maker Will Build in Mississippi Milpitas-based Soladigm Inc. is locating manufacturing operations in Olive Branch, Miss. The project represents a capital investment of more than $130 million by the company and will create more than 300 new jobs. The State of Mississippi provided a $40 million loan in addition to $4 million in incentives for project improvements at the company’s new facility.

Soladigm makes highly energy-efficient, dynamic, insulated glass. The company’s glass can change from clear to tinted on demand and offers substantial energy consumption savings and maintenance costs.

The company was founded in 2007 and is currently operating a pilot production line at its Milpitas facility.

Webcor Starts Moscone Renovation San Mateo-based Webcor Builders begins the $55 million renovation of San Francisco’s Moscone Center. Built in 1981, the Moscone Center is the city’s largest convention building and a major source of tourism in San Francisco. The renovation of the more than two million-square-foot facility will help it remain competitive in attracting conventions to the region. The scope of work includes cosmetic improvements, mechanical upgrades and remodeling for compliance with the Americans with Disabilities Act . The two-year project will be conducted in six phases.

The Moscone renovation is funded by a public-private partnership between the City of San Francisco and the San Francisco Tourism Improvement District Management Corp., a privately funded group of local hotels. The city is providing $35 million, and the SFTID is contributing $20 million.

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Hayward Tree Manager Growing Very Fast Arborwell Professional Tree Management, a commercial and residential treecare company headquartered in Hayward, has earned a spot on the 2010 Inc. 5000, the annual ranking of the fastest-growing private companies in America by the business magazine Inc. The Inc. 5000 orders companies based on their percentage revenue growth from 2006 through 2009. To qualify, companies must have been founded and generating revenue by the first week of 2006. They must also be U.S.-based, privately held, for profit and independent—not subsidiaries or divisions of other companies.

Since the company’s start in 2001, Arborwell has expanded across Northern and Southern California. It has six locations statewide. Arborwell landed at 3,934 on the Inc. ranking.

Jones Lang Wins Leasing Assignment for One Front Street

Financial and professional services company Jones Lang LaSalle has been awarded the exclusive leasing assignment for One Front Street, a 38-story, 639,000 square-foot Class A office building in downtown San Francisco’s Financial District.

Christopher T. Roeder, Wes Powell and Ted Davies will handle leasing for the property owner, Atlanta-based institutional investor Invesco.

One Front Street is a short walk from the San Francisco waterfront and is surrounded by a wide range of restaurants and hotels. The property is also three blocks from both the temporary Transbay Transit Center and the five-story Transbay Transit Center at 1st and Mission streets, on which construction commenced and which is due to be completed by 2017.

Current tenants in the building include Wells Fargo Bank, Covington & Burling, Skidmore Owings & Merrill, FTI, Jones Lang LaSalle and BNP/Bank of the West.

Napa Garden Apartments Sell Cassidy Turley BT Commercial agents Ric Russell and Scott MacDonald have collaborated to broker the investment sale of the 162-unit Napa Garden Apartments for $14.8 million, or $91,358 a unit. Russell and MacDonald represented the Los Angeles-based seller, 3D Investments LLC. The buyer was a private San Francisco-based investor. A key to the sale was the buyer’s assumption of the existing Fannie Mae debt, which resulted in a favorable loan-to-price ratio.

Kaiser Purchases Building Kaiser Permanente closed escrow on a nearly 40,000 square-foot, vacant office building in Antioch at 3454 Hillcrest Ave. The price was undisclosed. The property was constructed in 2007 and has been vacant since. The seller, Hillcrest Medical LLC, was represented by Eric Erickson and Scott Ellis of Colliers International. Kaiser was represented by Bob Vance and Susan Wooton of Jones Lang LaSalle.

Sares Regis Sells Two East Bay Assets Sares Regis Group of Northern California sold Pinole Point Business Park in Richmond, a 475,000-square-foot industrial park consisting of three warehouse buildings on 30 acres, and Bayside Business Park in Fremont, a 246,500-square-foot industrial-office complex, to Industrial Income Trust.

Industrial is a Denver-based public, non-traded real estate investment trust run

by Dwight Merriman. Merriman was previously a managing director and chief investment officer at Stockbridge Capital Group LLC in San Francisco. Sares Regis Group acquired both properties in 2008. No sales price was disclosed.

The Pinole Point Business Park sale did not include an adjacent 43 acres of undeveloped property. Sares Regis Group plans to develop the site over the next three years. The land is entitled for four new warehouse and light industrial buildings totaling 650,000 square feet. Greig Lagomarsino in Colliers International’s Oakland office and Darla Longo in CB Richard Ellis’ Ontario office represented both the buyer and seller. continued on page 33

PEOPLE on the move Sares Regis Hires Investment Manager David Feinberg has joined Sares Regis Group of Northern California as investment manager. Feinberg will work to expand Sares Regis Group’s extensive property portfolio by acquiring value-added and core multifamily properties, as well as opportunistic distressed properties and note purchases in the Bay Area and Pacific Northwest.

Feinberg has more than 12 years experience in commercial real estate, including multifamily acquisitions, developments and joint ventures. He has recently worked with banks to purchase notes involving both short sales and foreclosure opportunities.

Before joining Sares, Feinberg served as vice president of acquisitions at RREEF. He was responsible for identifying, negotiating, underwriting and closing purchases, both direct and joint venture, of more than $300 million in properties for RREEF clients.

Cassidy Turley Appoints Partner in San Francisco Greg Moss has been promoted to managing partner for the Cassidy Turley San Francisco office. He will retain his responsibility as managing director for the broker’s North Bay office, a job he undertook in 2001. Before that, Moss worked in various roles including as a senior officer with Jones Lang LaSalle in San Francisco.

Construction Veteran Joins Santa Clara Contractor Mike Harney has joined Blach Construction Co. as a project superintendent.

Native to the Central Coast and Monterey Bay areas, Harney brings more than three decades of industry experience. He has supervised commercial construction projects for the Monterey Museum of Art, Bernardus Lodge & Winery, Santa Catalina School and the Santa Lucia Preserve. Harney is currently supervising the renovation of a 10,000 square-foot marine biology laboratory for Stanford University at Hopkins Marine Station.

Interior Architect Grooms Next Generation Ed Hall joins POLLACK architecture’s San Francisco office as a junior designer.

Hall completed dual degrees in architecture and business at Auburn University in Auburn, Ala., where he has spent the past year designing and building custom homes.

Adam Beneke joins the firm in its Los Angeles office, also as a junior designer.

Prior to POLLACK, Beneke focused on entertainment design including theme-park environments.

This year POLLACK renamed and doubled its annual scholarship award.

Established in 1995 in celebration of POLLACK’s 10-year anniversary, the Jason Wertz Memorial Scholarship assists students in their pursuit of higher education in architecture and interior design. Vanessa Pineda and Relicque Lott were awarded the prize as Bay Area applicants. They plan to attend UC Davis and Cornell University, respectively. In Los Angeles, Chase Rojas and Patrick Dodson received the scholarships and will attend Cal Poly and Syracuse University, respectively.

Contractor Recruits Senior Manager Kirk Reeves, a licensed civil engineer, has joined Menlo Park-based NOVO Construction as a senior project manager. He will do work for both NOVO’s San Francisco and Menlo Park offices.

Notable projects in his experience include: a 25,000 square-foot data center upgrade and expansion for Apple Inc. in Elk Grove; a 305,000 square-foot regional headquarters for General Dynamics with defense high security construction in Santa Clara; and The Bond, an apartment project with eight stories, 101 units and a garage in Oakland.

Reeves worked for San Jose Construction before joining NOVO and for Hathaway Dinwiddie and Hensel Phelps earlier in his career.

Newmeyer & Dillion Adds to Litigation Practice Scott W. Glassmoyer has joined Newmeyer & Dillion LLP in its Walnut Creek office to represent developers, builders and general contractors in construction and insurance disputes.

Glassmoyer received his law degree from the Boston College Law School, working summers with the U.S. Department of Justice in San Francisco and with a Rhode Island attorney, pursuing claims against sponsors of terrorism. continued on page 33

RESIDENTIAL MARKET REPORT

Rethinking Affordable Housing A California Supreme Court ruling on affordable rental housing production awaits market recovery to show its full effect.

By Michael Fitzhugh

A

landmark California Supreme Court decision limiting municipal inclusionary housing ordinances for apartment developments is forcing local policy change, but its effect has been muted by a slow economy and the ruling’s specificity. In the longer term, however, some believe the ruling could impact the production of new affordable units, a worry for some in a region with a chronic shortage of housing relative to demand.

Until recently, many cities required developers to set aside rent-restricted units in new market-rate rental developments.

Alternately, many developers paid in-lieu fees to cover the construction of affordable housing elsewhere.

But in the 2009 case Palmer/Sixth Street Properties v. City of Los Angeles, a Los Angeles developer successfully invalidated those requirements, winning an argument that the city controls violated the right of landlords to set initial rents as laid out in California’s Costa-Hawkins Rental Housing Act. The ruling, appealed by the city, became law when the state’s supreme court declined to hear it last year.

Los Angeles developer Geoffrey Palmer argued that the city’s affordable housing ordinance conflicted with and was preempted by the vacancy decontrol provisions of CostaHawkins, which allow residential landlords to set rent levels at the commencement of each new tenancy. The city of Los Angeles sought to compel Palmer to build 60 low-income units or to pay an in-lieu fee of $5.8 million as part of a 350unit apartment development with about 10,000 square feet of support retail. Palmer argued that the requirement violated state law because it created a disincentive to build the rental housing that Costa-Hawkins seeks to encourage by interfering with his right to set initial rents on all new apartments and all future rental increases.

Although Los Angeles officials argued that the city’s in-lieu fee was a stand-alone provision, the Los Angeles County Superior Court concluded that “the fee provision was so inextricably intertwined” with the city’s inclusionary zoning ordinance that it could not be levied as a separate provision. A state appellate court in July 2009 affirmed the lower court’s ruling.

Dave Lanferman, a member of the Real Estate, Land Use and Environmental Practice Group in law firm Sheppard Mullin’s San Francisco office, said there had been some suspicion that CostaHawkins would preempt L.A.’s inclusionary zoning rules, but it hadn’t been definitively decided until Palmer. “Most city attorneys that I have dealt with have taken the cautious view that Palmer is the law and have suspended or are not enforcing

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their inclusionary zoning policies on for-rent developments,” said Lanferman.

Because development has been largely halted by the financial crisis, the impacts of the ruling have lain largely dormant, he said. “But I think the issue may be likely to resurface, either in the legislature or courts,” he said.

San Francisco put interim revisions to its affordable housing ordinance in place in response to the Palmer ruling, making payment of affordable housing fees for all new developments the city’s base policy while still allowing developers the flexibility to meet the requirements of the current inclusionary ordinance in other ways, such as by providing rent-restricted units if they wish. In cases where developers choose the fee route, the fee is based on the results of market-wide analysis of residential development conducted by the planning department staff evaluating the impacts of new residential development on affordable housing.

The interim revisions, first adopted in April 2010, will be reviewed by the city’s Board of Supervisors this fall. If the revisions are finalized, all developers of new rental and for-sale housing will have to pay an affordable housing fee that will support the development of affordable units in San Francisco. “In general the debate in San Francisco is less about if we should have this type of policy and more about the amount that a fee should be,” said Douglas Shoemaker, director of the Mayor’s Office of Housing.

Cities and developers alike retain a great amount of flexibility in negotiating the terms and methods by which new projects will satisfy local needs for affordable housing, Shoemaker said.

And at least for now, “we’re in an economic situation where there are very few viable projects,” said Shoemaker.

In other cities, revision to existing ordinances may not be immediately necessary, “as the legal issues raised by these decisions can be addressed adequately in the development-approval process,” noted the Public Interest Law Project in an evaluation of the decision.

That said, the city of San Jose has rewritten its inclusionary zoning laws to take into account potential challenges from developers in light of the Palmer case. “We believed that if someone challenged [local inclusionary zoning ordinances] with Palmer, we wouldn’t be able to require developers of rental housing to build inclusionary units or pay in-lieu of payments,” said Leslye Krutko, San Jose’s director of housing.

Because San Jose finances much of the city’s affordable housing stock on its own, through tax credits, development

“I think the issue may be likely to resurface, either in the legislature or courts.”

Dave Lanferman, Real Estate, Land Use and Environmental Practice Group, Sheppard Mullin

funds and other means and because there is so little marketrate rental development going on in the city in the current economic environment, Palmer has yet to have much of an impact on the amount of below-market-rate housing available, Krutko said. But, in the big picture, San Jose and other municipalities never have enough resources to build affordable housing to meet demand, she said. Without the ability to compel developers to build rent-restricted units or pay inlieu fees, cities lose another tool for meeting that demand, she said.

Scott Erickson, a housing specialist at City of Pleasanton, said that the city’s legal staff is in the process of analyzing the Palmer decision to see if any updates are needed to its inclusionary ordinance.

Evelyn Stivers, field director for the Non-Profit Housing Association of Northern California, said one of the pitfalls of the inclusionary policy approach in general is that it relies on “an aggressively, over-healthy, for-profit developer climate.”

“If we had to choose a development cycle to be in when this decision came through, it would be now. But we all hope the market will recover, and it’s our hope that when that happens, inclusionary polices will be in place so that we can help ensure the full range of housing options are available,” she said.

It is not clear how much of a production impact the Palmer decision will have when the market recovers, Stivers said. But one quick fix for municipalities that have yet to adapt their ordinances to Palmer may be to simply exclude rental units from their inclusionary housing policies, she said. In the last five to 10 years, apartments made up a small percentage of the overall affordable housing pipeline, she noted.

But it is not apparent if that will continue to be the case.

Federal policies that promoted home ownership in recent decades are under fire as a result of the mortgage finance debacle, and apartments are generally expected to lead commercial real estate recovery, which could lead to increased production.

A tally of affordable housing units in San Francisco conducted by the law firm Reuben & Junius in February found that out of 1,100 affordable housing units, about 800 are owner occupied and 300 are renter occupied.

As one developer noted, even in a more active housing market, large housing developments are like battleships, moving slowly and reaching port after long and often unpredictable journeys. Accordingly, what impact Palmer has on the way such projects engage with or oppose existing inclusionary zoning policies may take years to become more clear. n

Upside in the Downturn A Palo Alto real estate investment trust is using a federal bankruptcy court to assert control over an attractive South Bay development site.

By Sharon Simonson

P

alo Alto apartment company Essex Property Trust Inc. is close to gaining control of a prime South Bay corner poised for redevelopment.

The 12.6-acre site is at the center of a bankruptcy declared last year to thwart a lender’s attempted foreclosure.

Essex is offering take-out financing to a development team that has tried since at least 2005 to re-make the tract at Lawrence Expressway and El Camino Real into highdensity housing and retail. Pasadena-based East West Bank sought to take the property after the owners, Santa Clara Square LLC, defaulted on a $14.5 million loan. The bank has argued that the site no longer holds sufficient value to back the debt. But U.S. Bankruptcy Judge Arthur S. Weissbrodt has twice rejected the bank’s entreaties to allow it to foreclose. Should the judge now approve a proposed plan of reorganization, Essex will likely find itself

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heading the re-entitlement of the heavily trafficked South Bay corner and in the first position to develop the property as proposed. The site is also a stone’s throw from a new apartment complex, Villa Granada, completed this summer by Essex rival, San Francisco-based BRE Properties Inc. The bankruptcy filing, which has touched a spectrum of regional and national business interests, illustrates how Essex, a strong industry player, is leveraging its position in the downturn to access a valuable development site. The apartment landlord has bought aggressively since the beginning of the year spending more than $280 million acquiring full and partial interests in five properties, including two Silicon Valley complexes and two broken condo deals in Southern California.

Santa Clara Square, a company backed by Emily Chen, Albert Wang, Hung Nguy and Joseph Quoc Nguyen, declared bankruptcy almost a year ago to prevent East West Bank from foreclosing. Since then, the bank and the debtors have fought over the property’s worth and whether the developers retain equity.

Events surrounding the property have touched national discount clothing and home goods seller Kohl’s Corp., which operates a 120,000 square-foot department store on the site and has filed a contested $81,000 claim in the bankruptcy proceedings. The company recently signed its last five-year lease extension for the store site. Redwood City-based developer Urban Dynamic LLC also sought to buy the property in December 2008 and again last year. It, too, has filed a contested claim in the bankruptcy case seeking $610,000.

East West inherited the $14.5 million loan against the property when it acquired the assets of United Commercial Bank from the Federal Deposit Insurance Corp. in November 2009. It has petitioned Judge Weissbrodt to allow it to foreclose despite the bankruptcy, arguing that based on a February appraisal by Roger McDonald Hodge, the property is worth only $13.1 million “as is.” That is at least $2.1 million less than what the borrowers owe the bank, it says, including penalties and unpaid interest. The borrowers assert that the property is worth $19 million, that the bank’s loan is well-secured and that they retain substantial equity. As evidence, they cite the Essex offer, which was extended before the bankruptcy filing.

Under the Essex re-capitalization plan, the real estate trust would loan Santa Clara Square $5.3 million, which would be used to pay all claims against the property and to create bank reserves. The borrowers would place $1 million into an East West account to pay ongoing interest payments due under the loan. Another $700,000 would go to the bank to pay past-due amounts; $1.5 million would satisfy unpaid property taxes and other unsecured claims.

A final $1.5 million would be set aside to pay the cost of gaining new entitlements. Essex ultimately could convert its debt to equity and obtain 85 percent of the interests of the current property owners. It also would have the right to buy the remaining 15 percent equity for $800,000 for two years. Under the plan, Essex would take over the effort to gain entitlements for the site. An incomplete application filed by Chen and partners remains on file at the city of Santa Clara. It seeks development rights for 490 housing units and a total of nearly 750,000 square feet of new development in six buildings.

Current Santa Clara Square owners, under a new operating entity called Gateway Village Center LLC, would gain an option to buy the commercial portion of the site, or about 5.1 acres at a later time. The purchase price

Im a g e C ourtesy of J E S U S N AVA

COMMERCIAL MARKET REPORT

would be approximately 40 percent of the capitalized cost of the final development, which the proposed agreement contemplates at $25.1 million. Gateway also would have to pay a proportional amount of new parking costs.

“As plans go in this economy, this is a solid plan of reorganization,” said Sam Chuck, a real estate attorney for San Jose’s Rossi Hamerslough Reischl & Chuck who is advising Santa Clara Square regarding its agreement with Essex as part of the larger bankruptcy proceeding. “There is a large cash infusion and a solid set of reserves set aside for the bank,” Chuck said. Under the plan, the bank would receive interest-only payments on the outstanding loan amount for five years, while entitlements are processed and the Kohl’s lease runs, he said. The debtors could seek a twoyear extension of the loan, or the loan could be repaid before the five-year term. Creditors with undisputed claims, including the bank, would be fully repaid under the plan, he said.

The site at present is a vestige of the typical suburban development that was popular in the mid-twentieth century and is common along El Camino Real in the South Bay. Two small pad buildings closest to El Camino are occupied by a gas station and a fast-food restaurant. Behind them stretches a vast parking lot, which terminates in front of the Kohl’s store and another much smaller attached retail building, both of which sit near the back of the site.

Under its current general plan, the city of Santa Clara wants this corner and the three others at El Camino and Lawrence Expressway transformed. The goal is to overthrow four low-lying suburban-style retail and service centers to

create four high-density urban centers with what the city’s planning director has called “monumental buildings” and housing densities up to 45 units an acre. Santa Clara Planning Director Kevin Riley endorsed the redevelopment vision promulgated by Chen and partners in early 2008, before the financial collapse and U.S. recession that derailed the planning. The site is served by bus both along El Camino and Lawrence Expressway and is not far from the Lawrence Expressway Caltrain station.

Essex has acquired apartments aggressively in the downturn and has not shied from exploiting the property bust. This summer in the Silicon Valley, it bought 101 San Fernando, a 323-unit complex in downtown San Jose, and The Commons, a 264-unit complex in Campbell. Elsewhere, it acquired Eagle Rim Apartments, a 156-unit community in Redmond, Wash. In March, it bought a partial interest in a stressed high-rise condominium project in Santa Ana involving two adjacent 25-story towers. The company said it paid 55 percent of their initial construction cost and that it would benefit as the rental market recovers. A later exit could involve selling the units as condominiums. In January, it said it paid $27 million for an unfinished condominium project in Irvine with 115 units. The company said the development was 85 percent complete and would need six months and another $6 million to finish. The company expected to rent the units, which it acquired for less than replacement costs.

John D. Eudy, executive vice president of development for Essex, signed the Aug. 5 loan agreement submitted in federal court. Eudy did not return a call for comment. East West Bank also declined comment. n

Far Left: This Santa Clara property is being targeted by Essex Property Trust for redevelopment of high density housing and retail.

Essex Property Trust Inc. has acquired apartments aggressively in the downturn and has not shied from exploiting the property bust.

“We have not cut back on information. In fact the demand is accelerating.�

Im a g e C ourtesy of J E S U S N AVA

Paul Frischer, executive managing director for research and real estate strategies, Newmark Knight Frank

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commercial market update

Information, Please

A seemingly inexhaustible desire for more and better information is driving regional office recovery.

By Sharon Simonson

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or the Bay Area, economic recovery includes irony. American productivity is rising at its fastest rate in nearly 50 years, according to the Bureau of Labor Statistics. Technology developed in the region is a major contributor. But that expanding productivity, as necessary as it is to keep American workers competitive globally, has unhappy outgrowths at home: It weakens job creation by enabling those already working to do much more.

So as Google Inc. continues to mine the rich vein of interconnectedness, and as Apple Inc. continues to create better interfaces for that connectedness, Walnut Creek broker Jeffrey Weil can be forgiven for asking: “How many administrative assistants have iPhones and Droids replaced?”

The answer is unknowable. But for commercial property landlords, the question is worth a ponder. So is the inverse: How many jobs have the creation of the iPhone and Droid spawned, and what does that imply about the next generation of goods now in development?

The query is not academic: Technology, especially information technology, once again is driving regional recovery. Despite global financial turmoil and stunted U.S. GDP growth, Apple’s net income hit $8.2 billion last year, up from $3.5 billion in 2007. Google’s net income rose a third to $3.8 billion in the first half of the year. Oracle Corp., Cisco Systems Inc. and Hewlett-Packard Co. all have continued to grow. The largest two Silicon Valley leases in 2009 were signed by emerging tech giants Facebook Inc. and Tesla Inc., according to brokerage Cassidy Turley/CPS. In San Francisco in the first six months of this year, 58 technology tenants leased 500,000 square feet, according to brokerage Cornish & Carey Commercial.

Enterprise cloud computing company Salesforce.com accounted for roughly half of that, but upstart tech tenants are blossoming, too. Twitter Inc., Yelp Inc., video game maker Ubisoft Entertainment and UStream Inc., a videostreaming company, are all reshaping the city’s South of Market.

While conditions are tougher in the East Bay, which has been harder hit by the housing bust, retail trade is showing life, as it is in San Francisco and the South Bay. So are sectors of professional and business services, including computer-systems design. Professional, scientific and technical services have grown to 10 percent of Alameda County’s employment base since the dot-com bust and have added 500 jobs in the last year.

“Technology is a good leading indicator for the Bay Area,” says Colliers International Senior Vice President Scott Harper, who specializes in landlord representation in San Francisco and has been in the Bay Area market since 1991. As technology companies gain ground, they in turn drive demand for business services such as accountants, lawyers, consultants and financiers, he says. He believes city office vacancy, at 15.2 percent last quarter, is probably peaking.

Just as technology has been at the center of the bust, it will be at the center of the up-cycle too, said Paul Frischer, executive managing director for research and real estate strategies for brokerage Newmark Knight Frank. Newmark and Cornish & Carey Commercial, the largest privately held commercial real estate company in the Bay Area, recently announced their Northern California merger. Companies’ resistance to hiring is understandable, he says. Existing workers are the most skilled and productive that employers can find. But the status quo can’t go on forever. “At some point, the productivity of the experienced worker will peak,” Frischer says. Right

now, he believes the economy is not growing because “the current workforce in place is at its output limit.”

Ultimately companies will be forced to turn to the flock of eager Generation Y workers, those aged 20 to 24, among whom the unemployment rate is 15 percent.

They must be trained and won’t be nearly as skilled as existing staff, and in the short-term productivity growth will fall, he says.

But technology, mostly the information technology created in the Bay Area, has been central to allowing companies to slash staff but continue to generate the same output. “The software and hardware had so much more capacity in it than we were using before 2008,” he says. Now technology will be central to companies as they hustle to recoup their productivity growth as new hiring begins. “We have not cut back on information,” Frischer notes. “In fact the demand is accelerating.”

Colliers’ Harper says technology company managers already are telling him that they have job openings but are struggling to find workers with the right skills. South Bay tech tenants are saying the same thing to him, said Brandon Bain, a partner with brokerage Cassidy Turley/CPS in Santa Clara.

Bain represented the receiver who is managing the Sunnyvale Town Center when Nokia Inc. agreed to lease 156,000 square feet there. The Finnish mobile phone giant is expected to occupy by year end and has rights to lease additional square footage in the project as well.

Nokia’s decision highlights the tactics that tech companies are using to ensure they have a pipeline to strong talent: high-quality offices well-served by restaurants, gyms and other amenities and an unprecedented emphasis on being close to mass transit, Bain said. “Caltrain broadens their ability to attract from a wider geographic area, especially San Francisco.”

Apartment developer and landlord BRE Properties recently added its bet to Nokia’s on the successful restart of the Sunnyvale redevelopment. The San Francisco company bought 2.4 acres for $19 million and plans to build 280 apartments there. San Mateo developer Peter Pau, who sold BRE the slice, kept 2.6 acres to build another 120 housing units.

The seeds of recovery for Silicon Valley have long germinated in Palo Alto then emanated south to Mountain View, Sunnyvale and beyond. The Palo Alto draw has long been attributed to Stanford University and the community’s exceptional talent pool. The pattern is emerging again this cycle. Palo Alto and Mountain View office vacancy rates were 7.6 percent and 8.5 percent, respectively, at the end of the second quarter, according to CPS. That compares to an overall Silicon Valley office vacancy rate of 24.7 percent and is lower than in any office submarket in the city.

It is worth noting, however, that Palo Alto has two stations on the Caltrain line, one near University Avenue and the city’s bustling downtown that features a prominent Apple store; the other near California Avenue and another quaint retail cluster, not far from where AOL Inc. recently subleased an office from Google on Page Mill Road. Further south, Caltrain serves the Mountain View downtown, as well.

Caltrain also stops at San Jose’s Diridon Station, but the vast majority of office space in the downtown is a good 15-minute walk or more away. Office vacancy in downtown San Jose is a whopping 40 percent, CPS reports, driven higher by speculative development in the most recent boom and the lingering weakness of the brutal dot-com bust in the early 2000s.

In Spring 2006, Adobe Systems Inc., downtown San Jose’s anchor corporate tenant and another technology stalwart of the Silicon Valley economy, bought 5.5 acres for $25 million in downtown for expansion. The site is a stone’s throw from Diridon Station. n O C TO B E R 20 1 0

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commercial market update

Bench Marking A New Era Today’s technology tenants are creating an ethos of their own.

By Primo Orpilla

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ith technology companies again fueling a renaissance in the Bay Area office market, a new set of imperatives—different from the giddy excesses of the dot-com bust—is transforming the way tenants and landlords interact.

Tech businesses see the office landscape as reprising in microcosm the urban environment in which they operate. As in a dense city, an individual’s home base is small, while congregating spaces vary from private chat rooms for two (think vest-pocket park) to all-handson-deck auditorium and collaboration space (think Golden Gate Park).

In San Francisco, tech tenants have little interest in Financial District high-rises. South of Market, with its expansive floor plates and funky authenticity, is once again the place to be. Yelp Inc., which has expanded and renovated its San Francisco headquarters in the historic 706 Mission St. building, now has a main lobby that recalls a hipster living room with vintage furniture and candid photos of employees. Last year, Twitter Inc. moved its headquarters to a new SoMa spot and has since snapped up even more floors, reaching about 63,000 square feet. Occasionally, start-ups will move North of Market, but they want the vibe and character of an older building, like the one that entrepreneurial networking company Quid chose in Jackson Square.

In the South Bay, Stanford Research Park, long a leader in recovery, has seen a resurgence in demand in part because its 1950s-era structures often have more architectural character than other more recently constructed suburban offices. Architectural intervention is aimed at interior improvements that tech tenants want: concrete floors, no ceiling tiles, no wood molding or trim.

Walls come out to make way for open-plan offices. Facebook Inc. was at the forefront, consolidating employees from various locations into a former Hewlett-Packard Co. research facility repurposed for 24/7 activity.

That 24/7 mindset has always been the prevailing ethic in the tech industry, but recent studies show employees produce more when they take breaks and move around. While the era of playground slides and fireman’s poles is over, established tech firms still want youthful energy, informality and transparency. Food service and recreation areas with guest lectures or board games promote collaboration and creativity, while spacious paths of travel function as in-house boulevards (navigable, in Facebook’s case, by employees riding RipStiks).

Communal spaces are more planned and hierarchical than in the past. Observed patterns of congregation determine the space plan now, with some companies needing more two-and-three-person spaces than 10seat conference rooms. Still, the demand for meeting 14 theregistrysf.com

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space is growing. The norm used to be one conference area for every 25 workers; now it is closer to one for 15.

Today’s tech companies prefer multipurpose spaces and communal areas to large boardrooms. Given the prevalence of lectures and multimedia presentations, audiovisual flexibility, good sight lines and acoustics are key.

Private spaces are undergoing a similar reassessment. A typical per-person square footage ratio may now be as small as 110 square feet. Some firms are doing away with traditional workstations altogether and going with “benching.” Employees sit at long tables with their laptops, separated from their neighbors by no more than an elbow or a cup of coffee. They achieve privacy by wearing headphones and often have several Web sites running as they work. The trend of executives in hiding is over. Larger companies are following start-ups and putting executives along major circulation routes, so they are at least visually accessible.

With tech tenants driving this office renaissance, landlords are taking extra steps to entice them. Owners are sprucing up building entrances and tweaking space to make it more attractive. Although tenant-improvement allowances of $10 a square foot to $17 a foot are typical, in some recent instances, allocations have risen as high as $40 a foot for a particularly attractive tenant.

A growing tech company with an impressive workplace can pay a landlord dividends: Brokers can show other tech companies the possibilities (a good strategy when a building has mostly conventional build-outs).

Landlords are also more willing to pay designers to prepare test fits (a quick sketch to see if a client can fit into a space) and to analyze that space to determine the most efficient tenant layouts. In many deals, landlords are even including office furniture—something they have historically eschewed.

Used furniture is popular; tenants look at photos of what is available in a supplier’s warehouse and have it moved quickly, avoiding the lengthy wait of shipping new furniture from a factory.

Anticipating an economic rebound, landlords are disinclined to commit to lease periods longer than four or five years, thus retaining the option of negotiating higher rates when leases expire. In the past three months, contractors, seeing an uptick in tenant-improvement projects, have also increased pricing after a couple of years of aggressively courting work with steep discounts. Full recovery? Not yet. The Bay Area office market as a whole is not out of the woods, but the tech-company market looks like a bellwether for better times to come. n Primo Orpilla can be reached at 415.932.2000 or primo@o-plus-a.com.

Yelp’s elevator wall graphics, filled with a cacophony of user quotes, are meant to reference an urban alleyway.

to p i m a g es a n d bottom l eft i m a g e C O U R T E S Y O F J A S P E R S A N I DA D

Quid’s concentrative space has all of the traditional trappings of a library - wingback chairs, globes and (trompe l’oeil) books.

Every Yelp employee sits in the open plan to allow for collaboration and flexibility in the workspace.

Employees sit at long tables with their laptops, with little separation from their neighbors; they achieve privacy by wearing headphones.

A O L “ C o n ce p tu a l ” R e n der i n g C O U R T E S Y O F S t udio O + A

Studio O+A’s proposed design for AOL strips back Class A office space, revealing the building structure.

commercial market update

A Good Airing New air-quality standards based on the state’s green-house gas law are making urban development harder.

By Sharon Simonson

t

he real world effects of California’s landmark 2006 greenhouse-gas law are seeping through the economy.

New guidelines from regional air-quality regulators adopted June 2 are complicating the already arduous review of new development required by the California Environmental Quality Act. It is the first time under CEQA that cities, developers and consultants are being asked to treat greenhouse-gas emissions as adverse environmental consequences of new land-use decisions.

All development classes are affected, but industry observers say two in particular are caught in the crosshairs: mixed-use urban infill and data centers, the expensive, technical shelters for computers and other equipment that power the Web. The outcome, which affects all 110 cities and counties in the region, is rubbing the wrong way. Data centers are one of the few thriving sectors of the devastated building industry. The new requirements add substantial cost and headache. Meanwhile, high-density mixed-use development in tight urban centers has long been seen as a solution to reducing greenhouse-gas emissions by cutting car travel and promoting transit use. If the new air standards thwart such building, policy makers appear to be undoing with one hand what the other is doing.

According to the Bay Area Air Quality Management District, which is promulgating the new standards, regional air quality is worse than previously thought. In the 10 years since it last reviewed pollution thresholds, technological advances have revealed that air contamination affects health more than supposed. In addition, subregions within the nine counties have been found to have significantly more toxic air than the rest.

They include downtown San Jose and the eastern third of San Francisco, as well as the Interstate 880 corridor including Berkeley and Oakland. “Concentrations of diesel exhaust in east Oakland are very high, and the cancer risk near the Port of Oakland is more than three times higher than the regional average,” said Henry Hilken, planning director for the Air Quality Management District. “That gives us pause.”

Initially, the air district sought to impose more stringent standards for new development in those locations but met with stiff resistance from communities. “The cities said, ‘No way. It is hard enough to do infill development already.’ We had lots of discussion with the city of San Jose staff, and they told us they were doing all they could to push downtown development, and they wanted consistent standards for everyone,” Hilken said. The district agreed instead to launch pilot programs with San Jose and San Francisco to take a wider look at development plans to find ways to reduce local air pollution.

Hilken acknowledges that signals from the new standards about development in urban centers could be construed as contradictory. But he says there are ways to negotiate what seem to be competing demands. “We want development in downtown Oakland, but the closer you get to the port and the 880 freeway, you need to be careful,” he said. That involves setbacks for housing from freeways, for instance, and completing projects in phases.

“Build the part farthest from the freeway first. Vehicle fleets get 16 theregistrysf.com

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better every year, and vehicle emissions are falling every year.

That is a reasonable mitigation,” he said. His agency is being driven by requests from consultants and planners seeking direction on how to determine if greenhouse gas emissions related to a development are significant. District standards are aggressive because the reduction targets for carbon dioxide emissions are aggressive under the California Global Warming Solutions Act of 2006, Hilken said.

But Tay Via, a partner in San Francisco with law firm Coblentz, Patch, Duffy & Bass and an expert on commercial real estate law, land-use and development, says the guidelines “are discouraging exactly the kind of projects that we need.” They require even “modest” infill projects to do in-depth and costly research whether a full environmental impact report is required or not. At the same time, the triggers for a full EIR are low, she says. She cites air district examples of projects that would likely fall below the EIR threshold: a 56-unit single-family development; a 91-unit high-rise apartment building; and a 53,000 square-foot office development. “There is no guidance or credit for mixeduse. Projects near freeways (which includes most urban infill) trigger special analysis,” Via says in an email message.

The upshot is that projects that might have gone forward won’t, and an approach to improving air quality that seems common sense

commercial market update

“In the long run, while a Silicon Valley address has cachet, the requirements place the state at another competitive disadvantage to other places that are actively recruiting data-center development.”

Randy Scott, a senior vice president in critical facilities and infrastructure, Skyline Construction

is being undermined. Projects that now will need an EIR, but that would not have before, are not looking good. “I have talked to people who are trying to decide whether to pull the trigger on entitling or re-entitling a project. Where a project that might otherwise qualify for an urban-infill exemption (to preparing an EIR) or a negative declaration now triggers an EIR, it might involve a six figure delta in cost, plus the time and uncertainty. That is a real consideration,” Via writes.

The changes are so complicated, and the problem under attack so complex, CEQA consultant Michelle Yesney, a vice president for environmental and planning consultant David J. Powers & Associates, said based on her experience, it will be years before the building industry truly understands what they mean. Environmental impact reports themselves are iterative documents; these standards will be too, she said. “It is a huge step in a different direction. It may be a huge step forward,” Yesney said. Whatever else might be said about the air district’s direction, she admires the “courage” it took “to grab that bull by the horns and try to craft something that will help us to understand the impacts” of new development and land-use decisions on greenhouse-gas levels. But the analysis involved is extraordinarily complicated.

“We are not dealing here with a guy who wants to remodel the interior of his convenience store,” she said. Her firm is currently preparing environmental documents meant to account for the effects of new general plans being proposed by the cities of San Jose and Santa Clara, geographies that cover hundreds of square miles and house in excess of a million people. “A general plan is important to an entire community,” she said.

The new air-quality rules are affecting the city of Santa Clara, the epicenter of data-center development in the South Bay and regionally, as much as anywhere. Kevin Riley, director of planning and inspection, said data centers historically did not command a full environmental review because they were considered

a traditional industrial use and traffic to and from them was low. With the greenhouse-gas considerations, that has changed, and the city is looking at data centers’ electricity and water consumption, he said. The new environmental review is adding four months to the entitlement process, a delay that comes at a poor time: “There is huge demand for data centers right now, and these guys are all struggling to be the first to open their doors,” Riley said.

Randy Scott, a senior vice president in critical facilities and infrastructure for Skyline Construction in San Francisco, said the new conditions have caught the attention of the industry and regulators in other states. The impacts are still sinking in, but he believes investors will look more seriously at locations outside California than they have in the past. “This is a big change. This is something that folks are looking at,” he said. The new regulations impose tighter emissions standards for the generators that supply back-up power to data centers, he said. That is adding up to $200,000 to the cost of each generator, which already costs $500,000. “Some of these installations will have six and 10 generators,” he said. “It is a financial cost that has to be captured in the capital cost and obviously the rent that tenants are paying, and it makes it more expensive to do business in California.”

In the long run, while a Silicon Valley address has cachet, the requirements place the state at another competitive disadvantage to other places that are actively recruiting data-center development, Scott said. While none of his clients are announcing plans to up and leave, there is no question that in the future locations like Texas, Arizona and Virginia will be the beneficial recipients of investment that would otherwise have come to California. Between the state’s higher power costs, the increased cost of the generators and the greater cost associated with the longer and more expensive environmental review, “Someone is really going to have to want to be here,” he said. n O C TO B E R 20 1 0

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commercial market update

Heat or Light With millions of square feet of vacant commercial properties, it is worth asking: Can Solar Save Silicon Valley?

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hree years ago, San Jose Mayor Chuck Reed told the world he intended to make his city the global clean-technology epicenter. It was a bold promise and one that pitted the Capital of Silicon Valley against a lot of other clean-tech wannabes, not the least of them the country of China.

In the intervening years, the city says it has added 4,000 clean-tech jobs. Some two dozen solar-technology companies have located in San Jose and surrounding cities including Nanosolar Inc., SunPower Corp., SoloPower Inc., Stion Corp., Sunwize Technologies Inc., Sopogy Inc. and Fat Spaniel Technologies Inc. The South Bay’s fit with the solar industry in some ways is natural: Creating cutting-edge technology is obviously a well-ingrained Silicon Valley habit, and the region is rich in semiconductor industry talent, which is readily transferable to the solar technology sector.

Moreover, San Jose has a huge concentration of underused and unused commercial real estate, a percentage of which is well-suited for solar technology development and manufacturing thanks to enhanced power supplies and upgraded heating, ventilation and air conditioning systems.

Mayor Reed’s hope—and the hope of many a desperate landlord—is that continued expansion of the solar technology industry will fill more of these buildings.

But how viable is the solar-power industry, really, and what is the likelihood that it will make a real dent in reducing commercial property vacancy in the South Bay? So far, the industry is mostly the creation of government mandates for electric power providers on the one hand and government subsidies aimed at engendering adoption by electric power users on the other. Depending to whom you speak, those subsidies will have to last for a long time before the industry is self-sufficient, or, in the matter of several short years, it will be standing on its own.

Severin Borenstein, economics professor in the Haas School of Business at the University of California, Berkeley and co-director of the Center for the Study of Energy Markets, is in the former group. With current federal policies, he believes it will be a long time before government intervention can be withdrawn without the industry collapsing. “If we’re not going to put a price on carbon, I don’t think it’s likely to be able to compete for many, many decades. Solar will continue to get cheaper, but it has got a long way to go. And as it gets cheaper and cheaper, I think incremental improvements get more and more difficult,” he says.

Given that framework, solar companies must rely on government edict to make the economics of their operations work, he says. And relying on government, with its changeable priorities, is never an easy basis from which a company can thrive. California’s landmark greenhouse gas law, AB 32, which requires the California Air Resources Board to develop regulations and market mechanisms to reduce the state’s greenhouse gas emissions by 25 percent by 2020 and imposes mandatory caps beginning in 2012 for major polluters, is a prime example. The law could be scuttled before it even starts: Proposition 23 on this November’s ballot would stop implementation of AB 32 except under the most unusual of circumstances. “It’s hard for companies to make investments if they don’t know whether the mandates or the subsidies or whatever are going to be there in a few years,” Borenstein says.

As distasteful as government subsidies are to some, there is evidence that they can succeed in remaking an economy, though the timeframes can be very long indeed. Christopher Knittel, associate economics professor and a Chancellor’s Fellow at the University of California, Davis, points to Brazil, which propped up the domestic sugar cane-based ethanol industry 18 theregistrysf.com

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beginning in 1975. After ups and downs, ethanol-infused gasoline is now used in most cars in the South American behemoth, and the country has become the world’s largest ethanol exporter. Greatly helping that, however, has been the development of the flex-fuel engine that can run on ethanol, gasoline or a combination of the two.

Nonetheless, economists’ disdain for subsidies is not ill-placed, Knittel says. “The most efficient way to replace natural gas and coal with alternative fuels is to place a tax on the things that we don’t want. That’s more efficient than throwing money at technology or something like a renewable portfolio standard because you not only draw on those technologies that can stand on their own feet but you also end up reducing consumption of the product that’s causing the harm.”

Fremont-based Solyndra Inc. is perhaps the Bay Area’s most high-profile photovoltaic system manufacturer. It is also the recipient of substantial federal largess—and is in the process of seeking even more. It says that within the next two years, its products will no longer need government subsidies. The company caters to the commercial real estate market, discussing its business opportunity in terms of the “approximately 11 billion square meters (118 billion square feet) of commercial rooftop area worldwide” that could be covered with its cylindrical modules.

A $535 million loan facility guaranteed by the U.S. Department of Energy that matures in 2016 is helping build the first of two planned phases of its new East Bay factory. Solar system production is supposed to begin in the first quarter of next year. A $642 million second phase is planned, and in September 2009, the company applied for a second, $469 million DOE loan guarantee to help finance it. That application is still pending, a company spokesman says.

In December, the company filed documents with the Securities and Exchange Commission to sell shares to the public. But after Solyndra auditors PricewaterhouseCoopers expressed “substantial doubt about its ability to continue as a going concern,” Chief Executive Chris Gronet issued an open letter to customers and suppliers assuring them of the company’s continued confidence. In it, he says, “... our ability to achieve positive gross margins and attain operating profitability is dependent upon our ability to rapidly increase our production capacity.” He describes phase I of the Fremont plant as an “important first step” in reaching that goal.

The public offering, which was supposed to help pay for the second phase, was withdrawn June 18. Phase two of the Fremont plant is not underway.

Despite the setbacks, corporate spokesman Dave Miller says the company stands by previous statements that by 2012, it will be able to deliver photovoltaic systems capable of producing electricity at competitive rates without subsidy: “We have a cost roadmap that will bring our panel and installation costs down to a point where our total installed system costs will allow our customers with large rooftops to generate power at a competitive cost to conventional electricity in many markets,” he says. Since the IPO withdrawal, the company has gotten a funding infusion of $175 million from some of its existing long-term investors, he says.

A major part of the U.S. alternative energy foundation is built on paper: The government rules and regulations that require public utilities to get some of the electricity they sell from alternative-energy sources. Those requirements are driving much of the solar demand. There is also a federal tax credit of 15 percent to encourage solar installations.

The carrots and sticks used by local, state and federal governments can be seen whenever someone in the Bay Area flicks on a light powered

by San Francisco-based Pacific Gas and Electric Co., one of the largest

I M AG E S C O U R T E S Y O F vladimir bosanac

By Doug Caldwell

“Our ability to achieve positive gross margins and attain operating profitability is dependent upon our ability to rapidly increase our production capacity.”

Chris Gronet, Chief Executive Officer, Solyndra Inc.

natural gas and electric utilities in the country and one of the nation’s largest buyers of power from sources such as solar, wind and hydroelectricity.

“We have an aggressive program of purchasing power from [alternativeenergy producers] to meet our general energy needs and also to meet the requirements of the state’s renewable portfolio standards,” says Jonathan Marshall, a PG&E spokesman.

California is requiring the major investor-owned utilities to buy or make 20 percent of their electricity from green methods such as solar and wind by 2013, Marshall says.

“We, and other utilities like us, represent the huge bright spot for this industry,” Marshall says. Some solar companies target utilities exclusively “because their technology only works large scale,” he says.

In one example he cites Oakland’s privately held BrightSource Energy Inc., which is building a plant in California’s Mojave Desert that will use a vast field of mirrors to focus the rays of the sun on a boiler atop a tower, creating superheated steam to drive turbines to spin generators to make

electricity. PG&E and Southern California Edison, an Edison International subsidiary, will be the plant’s two customers.

Today, California has more than 600 megawatts of solar connected to the electric grid at nearly 65,000 customer sites. It sounds impressive, but all those solar power plants combined make up less than a third of the output of PG&E’s Diablo Canyon nuclear power plant, which has a total output of 2,230 MW. Steve Kapp, a senior vice president for brokerage Cornish & Carey Commercial in Hayward, sees solar and other clean-tech industries as a significant answer to industrial vacancies in the area where he does business.

He expects the eventual economic and property resurgence to be a combination of research and development and actual manufacturing, noting that the Interstate 880 corridor has many high-tech companies with assembly lines that turn out things like hard drives. “It is one segment that is rapidly growing, and it could provide for a lot of buildings to get full,” he says, “if all goes well.” n O C TO B E R 20 1 0

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commercial market update

Technology Tenants on the Move Information technology companies are repositioning themselves and beginning to grow. Some, like Nokia Inc., are locating close to public transit links such as CalTrain to broaden their employee recruitment base and to make it easier for young, hip San Francisco workers to reach them. While job growth overall has been poor across the Bay Area for most of the last decade, computer-related jobs are growing in all three metro areas.

Significant Bay Area technology tenant leases Jan. 1, 2009, to June 30, 2010 Caltrain System Map with stops

Gains Amidst Losses

MAP LEGEND

Salesforce.com, enterprise software company

The number of Bay Area jobs in computer-systems design and related services has climbed by nearly 10,000 in the last eight years, even as the number of private-sector jobs overall has fallen.

delivering services online 269,000 square feet, April 2010 One Market Plaza, San Francisco

Trulia Inc., residential real estate search engine 31,748 square feet, 2Q 2010 116 New Montgomery St., San Francisco

Ubisoft Entertainment S.A., video game maker 42,429 square feet, 2Q 2010 625 Third St., San Francisco

Computer Systems Design and Related Services Employment (Metro SF, Metro SJ, Alameda County)

Yelp Inc., Website for user-generated reviews of businesses and service providers 49,005 square feet, 1Q 2010 706 Mission St., San Francisco

Fox Interactive Media, now News Corp. Digital Media; owns MySpace 104,897 square feet, 1Q 2009 625 2nd St., San Francisco

100,000

+11.2%

75,000

95,200

85,600

50,000 25,000

Shutterfly Inc., online photo storage, processing and print production 100,000 square feet, 2Q 2010 2800 Bridge Pkwy., Redwood City

0

2002

2010

Sony Corp., consumer electronics and gaming systems 320,000 square feet, 2009 Metro Center, Foster City

224,852 square feet, July 2010 395 Page Mill Road, Palo Alto

40,000

LinkedIn Corp., online business-social networking

30,000

Intersil Corp., chip-maker for mobile devices, LCD televisions 126,563 square feet, 2Q 2010 933 Murphy Ranch Road, Milpitas McAfee Inc., data-systems security

384,832 square feet, 1Q 2010 2811-2821 Mission College Ave., Santa Clara

NetLogic Microsystems Inc., fabless semiconductor 105,930 square feet, 1Q 2010 3975 Freedom Circle, Santa Clara

Super Micro Computer Inc., proprietary server boards and other components 166,834 square feet, 2Q 2010 Fox Drive & Fox Lane, San Jose

Sources: Cornish & Carey Commercial, Cassidy Turley/CPS, Colliers International, CB Richard Ellis, Grubb & Ellis

20 theregistrysf.com

O C TO B E R 20 1 0

-10

Ja n

8

-09

Ja n

6

7

n-0

Ja

n-0

Ja

3

5

n-0

n-0

Ja

Ja

156,000 square feet, May 2010 200 S. Mathilda Ave., Sunnyvale Town Center, Sunnyvale

0

-04

Nokia Inc., mobile-phone maker

10,000

2

video games 125,210 square feet, December 2009 1040 Enterprise Way, Sunnyvale

n-0

Rambus Inc., memory-chip maker for PCs and

Alameda Cty.

20,000

Ja

146,292 square feet, 2Q 2010 2025-2029, 2051 Stierlin Ct., Mountain View

Metro San Jose

50,000

Ja n

AOL Inc., Web portal

n-0

265,294 square feet, December 2009 1050 Page Mill Road, PaloAlto

Metro San Francisco 60,000

Ja

Facebook Inc., online social networking

Computer Systems Design and Related Services

Total Private Employment (Metro SF, Metro SJ, Alameda County) 3,000,000 -8.7%

2,500,000 2,000,000

2,523,900

2,305,400

1,500,000 1,000,000 500,000 0

2002

2010

Source: California Employment Development Department

FINANCE

Learn Inuit to Understand Inflation Real estate investors would do well to understand the many meanings behind the word ‘inflation.’

By Peter Ingersoll

U

rban legend tells us that the Eskimos have more than 100 words to describe snow. That’s a lot of different snowflakes! If one of the primary fears of commercial real estate investors is a multiple-year, blizzard of inflation and the accompanying wealth-smothering drifts of worthless fiat currency, then we need more than a single word to describe inflation too. All inflation is not created equal and depending on a real estate investor’s portfolio and cost structure, inflation will impact operators differently.

Monetary inflation is what investors and bondholders fear most. Monetary inflation happens when a sovereign government decides that the easiest way to pay its bills is to print currency. Politically, this is preferable to announcing a tax increase or a currency devaluation, but monetary inflation is the equivalent of a tax and does the job of eliminating a mountain of debt just as well (with no press conference needed). The most striking modern-day example of monetary inflation is the country of Zimbabwe, which experienced inflation at its peak of more than 100 percent per day in the years 2005 through 2008. I keep a $100 trillion Zimbabwe banknote on my desk as a reminder of this very real potentiality here in the United States.

The sneaky thing about monetary inflation in today’s digital economy is that the Treasury need not use any paper or ink.

Money is created at the Federal Reserve by moving the decimal place on a balance sheet to create the dollars to buy U.S. Treasuries.

But the eventual result of chronic quantitative easing is inflation, which is another form of taxation—that is: buying power is taken

22 theregistrysf.com

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from citizens through inflation and used to repay sovereign debt.

Monetary inflation’s currency tax is highly regressive and impacts citizens quite differently depending on the basket of assets they own and their sources of income.

Baby Boomers dependent on Social Security benefits, annuity payments and bond portfolios will be hit with the highest currency tax. Hyperinflation would effectively strip these Boomers of their net worth. Investors with assets denominated in stronger currencies than the U.S. dollar would fare better. Owning stocks in companies with business models that allow them to increase prices with inflation is one way to hedge. Investors in commercial income property would also benefit if their property can bear rents increased with inflation without losing occupancy.

For commercial property investors, that’s not the whole picture, however. Real estate investors using short-term debt to finance acquisitions may find the cost to refinance that debt surprisingly high in an environment of high inflation. Real estate investors who secure a long-term, fully amortizing loan today will benefit from inflation by being able to pay off the debt with ever cheaper dollars, provided the property is able to maintain occupancy and rents increase in step with inflation. An income property that is inflation hedged for both its income and its debt is probably one of the best vehicles available to survive and prosper during times of high or hyperinflation.

Although the United States has never overtly defaulted on its sovereign debt, it has used inflation many times, starting just after the Revolutionary War and most recently after the Vietnam War, to devalue its mountain of debt. At 3.5 percent, the doubling rate of money is 20 years, which is to say the outstanding debt of the U.S. government is cut in half every 20 years with 3.5 percent inflation. At 7 percent, money doubles every 10 years and thus U.S. government debt is halved each decade. Governments that have a mountain of debt, like the United States, benefit greatly from inflation. Expecting our government to be genuinely serious about keeping inflation low is like expecting fraternity brothers to give up beer and mixers with coeds. Ain’t gonna happen as long as global bond buyers continue to buy our debt, which in turn helps finance our deficit spending and consumption of imported goods.

Consumers viscerally understand inflation as the cost of groceries, heating oil and other staples increasing faster than their wages. However, this type of inflation is driven by increased demand from the world population for raw materials and basic resources, not by government printing presses. Consumer commodity inflation reduces disposable income and has a deflationary effect on discretionary purchases. Household budgets cannot purchase as much and families must cut back on their luxury purchases like eating out, premium movie channels and personal hygiene. Commodity inflation impacts real estate operators to the extent that they purchase materials for their property management needs. But generally, that does not materially impact net operating income.

Another variation of the inflation snowflake is contractual inflation. Contractual inflation is created by provisions in union and government employee contracts that increase wages and/or pension benefits in step with an increasing Consumer Price Index. This upward pressure on wages does not cause inflation but given the sheer number of government employees, once inflation starts, contractual inflation adds fuel to the fire. Most importantly, the CPI is used to index Social Security benefits to keep payments in pace with inflation.

But just as we need multiple terms to define inflation, we need multiple words to describe the CPI. Starting in the early 1980s, the definition used by the Bureau of Labor Statistics to calculate the CPI began to change. Under both the Clinton and Bush administrations, this tinkering continued in earnest. Today the measure incorporates the concept of core inflation, which removes the costs of food and fuel from the index. That is no problem, provided we can figure out how to live without food and fuel, of course. Believing the reports issued by the Bureau of Labor Statistics as gospel without digging under the surface will lead to significantly understating true inflation, which in turn can have a drastic impact on inflation-adjusted yields. The motivation for this political tinkering is simple. If the CPI records modest inflation, then the increase in cost to the U.S. government for Social Security entitlements and government-employee wages and pensions is significantly lessened.

Understating true inflation also wreaks havoc on macro-economic models that calculate the size of the deficit and our national debt in comparison to our gross domestic product. GDP is reported without adjusting for inflation. A lower reported deficit and debt compared to an unadjusted GDP makes our fiscal policies look better than they really are. Additionally, a lower CPI provides the Federal Reserve with the authority (and political cover) to keep interest rates low and still adhere to its mandate of fighting inflation. Never mind that the measure of inflation has been changing to suit political agendas, as long as buyers of Treasury notes believe that inflation is low, all is well.

But is it? Self delusion is not conducive to making informed investment decisions. If a real estate investor doesn’t know the true rate of inflation, he or she can’t accurately forecast budgets for properties considered for acquisition. If investors use an inaccurate CPI in lease provisions, rents may not keep up with true inflation as intended. If bankers suddenly discover that inflation is running higher than they had forecasted, they will quickly offer only adjustable-rate mortgages, which eliminates an investor’s ability to use inflation to help repay debt. Using an inaccurate CPI lures investors and bankers alike to drive into an inflation blizzard using a dashboard with a broken dial.

If monetary inflation is the dragon investors fear, then logically having an accurate gauge to measure when it might arrive seems a crucial early warning system. If the needle is glued to forever point at a constant 3 percent inflation rate, then surely we will be surprised when the inflation dragon rears its head and we scramble for our swords and fire extinguishers. All of which leads me to wonder: What is the Eskimo word for government snow job?

Practitioners of residential and commercial real estate don’t generally cross pollinate, but in this instance one fix does apply to all. A simple way for both homeowners and investors to protect against inflation, whatever its rate, is to secure a fully amortizing loan. Predicting when inflation will commence and how high it will go is difficult. This strategy is indifferent to timing and the rate.

Moreover, with a fully amortizing loan you, and I, can fantasize about pushing a wheelbarrow overflowing with inflated currency (like citizens of Zimbabwe and Weimar Germany did to pay for groceries) into my lender’s offices to pay off both my home mortgage and my apartment loan with the equivalent of a steak dinner. This result would be terrible for our economy, but I grin with expectancy nonetheless. n Peter Ingersoll can be reached at peter@safeharbourequity.com.

What is the Eskimo word for government snow job?

Airport as Ambassador

DESIGN

San Francisco isn’t going to change the world with its new green terminal, but with four million passengers a year, it’s a start.

I

t’s no secret that flying is not the most fuel-efficient human activity. And despite some recent experiments with running planes on biofuel, the airline industry has not come up with any earth-shattering ways to reduce its emissions. But San Francisco International Airport is doing what it can to combat air travel’s polluting ways. As part of SFO’s expansion and modernization of the 56-year-old Terminal 2, the airport is pursuing a LEED Gold designation, which would make the 587,000 square-foot terminal one of the nation’s most sustainable.

The $383 million project, which will house seven Virgin America and seven American Airlines gates, is expected to be complete in the spring. Designed by global architect and design firm Gensler and constructed by general contractor Turner Construction Co., the redesign seeks to combine comfort, sustainability and a touch of charm. “The attitude we’ve taken is to return some of the glamour of air travel to make it a fun experience again,” said Ray Quesada, SFO’s Terminal 2 project manager. “We want to make the experience more customer-oriented by providing nicer spaces.”

When finished, the terminal will feature hotel lobby-like seating, hydration stations for filling water bottles (no plastic water bottles will be sold), a paperless ticketing system, art installations, a wine bar and spa, preferential parking for hybrid cars and the first-ever sustainable-food marketplace to appear at an airport. Waiting passengers will also be treated to

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By Sasha Vasilyuk

panoramic views of the airfield with arriving and departing flights, the bay and even Mt. Diablo. The large, perimeter windows that accommodate such views also help keep energy use down by letting in lots of natural light.

There are also less visible green design features. The original building was stripped down to its steel skeleton and is being re-clad with a metal and glass building envelope as well as structural, mechanical and electrical improvements that will, among other things, improve energy efficiency. Reclaimed water will be used to flush toilets, and 93 percent of the construction waste (about 15,100 tons) was recycled. It also includes an innovative displacement ventilation system that releases fresh air at floor level, conditioning only areas where people actually are instead of the entire interior, parts of which have ceilings as high as 38 feet. The approach uses more than 25 percent less fan power than most ventilation systems, Quesada says. Gensler senior associate in charge of the project, Melissa Mizell, said sustainability is at the heart of the renewal. “You can’t design something in a box and then sprinkle sustainability on it; it has to be part of the core right from the beginning.”

Even with all its green features, no one could argue that one sustainable airport terminal is more than a drop in the bucket compared to the inherently polluting global aviation industry. But SFO looks at its terminal as more than a building.

Rather, it as a sustainability ambassador whose reach extends

R E N D E R ING S C O U R T E S Y O F G E N S L E R

well beyond the terminal’s walls by virtue of its essential purpose: To house and manage lots of people from points near and far. The terminal will have the capacity to serve four million passengers a year. “The big opportunity with this facility is capturing so many people who are traveling through the space and opening their minds to sustainability issues,” said Mizell. Toward that end, the terminal will feature educational posters that shed light on the building’s innovative features. Taken together they create a green building tour that will be accessible via a smart phone application or a brochure. The airport also has created a guide for its concessioners, an important part of which is creating educational material about their operations and the food they serve.

In its effort to influence the industry, SFO also is working with the Federal Aviation Administration to experiment on new airplane descent techniques that reduce fuel consumption. In addition, the airport will provide power outlets to the planes while they’re parked so they don’t have to use fuel. SFO will assist the airlines with recycling, achieving one of the highest rates of recycling in the nation, the airport’s environmental manager Sam Mehta said. In Terminal 2, the airport also will provide charging stations for small vehicles that rely on electrical power.

“We really need to start somewhere,” said Mehta. “The city of San Francisco is always pushing eliminating plastic bags, having higher requirements for recycling and composting, etc. We’re identified as industry leaders, so we want to push it instead of doing nothing because every little bit helps.”

In fact, the project’s green policies were born out of San Francisco’s Green Building Ordinance, which mandates

that all new municipal projects and those undergoing major renovation achieve LEED Silver status. But as the terminal’s design progressed, SFO managers realized they wanted to try for gold.

If that weren’t enough, Virgin America is trying to up the game and receive the highest LEED rating possible for its part of the space. “Virgin is a very socially-conscious company in terms of energy and design,” said David Battenfield of the San Francisco-based Lundberg Design, the project’s architect. “Through our designs, we work with them on pushing the threshold on things.”

On top of the terminal’s green policies, Virgin is hoping to reduce water use by another 30 percent, reduce lighting power by 35 percent through the use of task lighting in the offices as well as automated light sensors. It plans to install zoned HVAC controls, implement an enhanced building commissioning system to measure the effectiveness of all the systems and measure carbon dioxide levels with special alarms.

As a whole, the efforts by Virgin, American Airlines and SFO are projected to reduce carbon dioxide emissions by 1,640 tons of each year. “This is a really green facility—there are just so many things about it that are going to be different, and frankly it is partly because it is here in San Francisco,” said Lynn Simon of San Francisco’ Simon & Associates, the project’s green consultant.

As the word about the new terminal’s design gets out, SFO is receiving inquires from other airports about the project. “In the future, having a LEED airport won’t be a big deal because everybody will surpass LEED by that time,” said Mizell. n

“In the future, having a LEED airport won’t be a big deal because everybody will surpass LEED by that time.”

Melissa Mizell, Gensler senior associate

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theregistrysf.com 25

GREEN

Low Risk, High Reward Insurers recognize the benefits of being green, but financiers remain unpersuaded.

By Michael Fitzhugh

I

nsurers have decided that green buildings are better risks than their nongreen counterparts. But environmentally savvy projects have yet to secure the favorable financing treatment some think that they deserve.

The advantages of green-building certification seem clear to Stephen Bushnell, director of emerging industries for Novato-based Fireman’s Fund Insurance Co., a member of Germany’s Allianz Group. Fireman’s began extending insurance discounts to LEED-certified commercial properties in 2006.

The company offers premium discounts of 5 percent to a growing pool of approximately 1,350 commercial insurance policyholders with both LEED-certified and Energy Star-rated buildings. It even pays to replace damaged business property with green-rated equipment, products and construction materials for some customers. On Aug. 31, it announced it was expanding its green coverage to schools, including colleges and trade and vocational schools. In the case of a total loss, the company will pay a school to rebuild as a green-certified building. For properties that are already certified, it will pay to rebuild at one level above the previous certification.

The reason for such apparent largess? Sustainable buildings present fewer safety risks and are better risks for the company, Bushnell said.

“We’ve done lots of cause-of-loss studies looking at primary and secondary causes,” he said. Most frequent cause of losses: Electrical and plumbing system failures.

Because building commissioning—a process in which both those critical systems are thoroughly tested—is an essential part of LEED and Energy Star certifications, such buildings are statistically less risky from an insurance standpoint.

Buildings covered by Fireman’s green insurance exhibit a ratio of premiums paid to losses incurred of about 40 percent, compared to 60 percent for typical non-green policies. “Our results are better and that helps us be more competitive in pricing,” said Bushnell.

Green projects also can present potentially smaller risks to the workers involved in their construction, said Dolores Glass, area vice president in San Francisco for Arthur J. Gallagher & Co. Insurance Brokers of California Inc. The stronger quality and material controls required by some LEED guidelines, combined with an understanding on the part of subcontractors that a developer cares about bigger issues than project costs, can help encourage a safer work environment, she said.

But mortgage financiers are not as ready to place their bets on the benefits of green development. “All else being equal, everyone would prefer to lend on a green building rather than not. But it really depends on the economics,” said Tup Fisher, director of real estate investments at Washington Capital Management. So far, there aren’t really a sufficient number

“Sustainable buildings present fewer safety risks and are better risks for the company.”

Stephen Bushnell, director of emerging industries, Fireman’s Fund Insurance Co. 26 theregistrysf.com

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of green buildings to draw conclusions about whether they might make for better financing risks, he said.

As Aaron Binkley, director of sustainability programs at AMB Property Corp., a San Francisco-based owner of industrial and transport-oriented real estate, puts it: “A bad development opportunity that’s green is still a bad development opportunity.”

“Still,” Binkley added, “If you can differentiate yourself, it is going to help you improve leasing and occupancy rates.” A study of its own client base led the company to conclude that infill development, a fundamental green principle, is good for business, the environment and provides strong investment returns too.

Its findings are, however, but one data-point in a growing body of evidence that is beginning to lend credence to the fiscal attractiveness of green-minded property developments. At this time, it is not enough to turn the tide. “Many tenants I’m sure consider a LEED-certified building or other green building certifications to be attractive,” said Thomas Dudley, a principal with Newmark Realty Capital. “But these days it still comes down to the economics of a deal. Real estate fundamentals continue to be under great pressure. So, it still comes down to the quantity, quality and durability of the income stream,” he said.

Some believe the current economy may be dwarfing advantages of green building for the moment. Demand for commercial loans and new leasing remains weak, green building or not. But, they argue, that’s the short-term view. Equity investors will eventually recognize that building practices and certifications, such as LEED, can deliver. “They look at the broad political, legal and environmental landscape and see an increase in laws focusing on issues of sustainability reporting,” said Lisa Michelle Galley, founder and managing principal of Galley Eco Capital in San Francisco. “They’re reading the tea leaves and seeing this is definitely going to be an issue,” she said. The trend is more pronounced in Europe than the United States so far, said Galley. But California is quickly catching up.

A building energy usage disclosure law that takes effect in January 2011 will require building owners to make a property’s energy usage data available to prospective tenants, buyers and lenders. Commercial property investors will now know that they could be shown to be out of line with the rest of the market if they don’t focus on green-building and efficiency, Galley said.

Another recent state law, California’s Sustainable Communities Strategy and Climate Protection Act, established the reduction of greenhouse gas emissions as one of the main goals for regional planning. That could make environmental friendly projects even more attractive to investors, as California’s 18 metropolitan planning organizations start to take the carbon footprint of new projects into account.

“What it basically means is that if you make your money by building properties, this law will control where you build your buildings and how much it is going to cost you,” Galley said.

Despite such developments, Galley said just choosing to build in an environmentally friendly manner has yet to become a key deciding factor for commercial property lenders and investors. “They might look at a [green] project favorably, but that doesn’t necessarily mean they’re going to fund it,” she said. n

The Demise of Confidence

By Rob La Eace

F

or many San Franciscans, football rules the fall.

I fondly remember growing up as a kid, going out to The Stick to watch our, then rather mediocre, 49ers play. Steve DeBerg was the starting quarter back at the time, and a fella named Joe Montana sat on the bench—the boy that would be king. “Confidence is a very fragile thing,” said Joe later in his career. An unlikely quote to be uttered by a man who performed so flawlessly under pressure. Unlikely, yet so true, and not just on the football field.

Labor Day weekend has come and gone. Wouldbe buyers have several prime buying months ahead of them. What lies ahead for sellers? Challenges. And how does confidence come into play? Buyers will have it; sellers will long for it. Underwriting guidelines, unemployment, foreclosure inventory, short-sale inventory and mortgage-rate resets are all of key importance in today’s market. Each can deliver a blow to confidence.

Consider: Joe and Jane Seller can spend $5,000 to stage their home, hire a painter to touch up the walls and rent a storage locker for $90 a month to store their clutter. They can interview three local Realtors who know the market and price their home at a level to bring buyers in the door with a realistic chance for a successful appraisal. Despite all this preparation, though, their home will still be subject to the whims of a buyer’s market. One of the biggest problems for Joe and Jane Seller will be Bob and Marsha Shortseller, the couple down the street with a comparable home priced at 20 percent less.

But let’s get back to things that destroy confidence.

Now that most loans with attractive rates require 20 percent down-payments, there are a lot of would-be buyers who simply can’t buy. I was recently at a listing appointment. While discussing market conditions with the sellers of a home valued at $600,000, I explained to them that they should think of all the friends they have. Of those friends, I said, think of how many have $130,000 burning a hole in their pocket and are certain that they won’t be unemployed anytime soon. These are the friends they have that could afford to buy their home (with closing costs). Needless to say, not many names and faces popped to mind. Unless underwriting changes, heavy pressure will continue to keep prices low and affordable. These guidelines also are killing demand.

Next, unemployment numbers are critical. No industry is adding any number of meaningful jobs, and the national unemployment rate seems stagnant at 9.6 percent. Furthermore, the number of underemployed (forced-furlough or cut-back hours) is rising. Underemployed numbers went up by 331,000 in August alone, and the national number now stands at 8.9 million, according to the Bureau of Labor Statistics. Locally, the bureau reports that the San Francisco/Oakland/Fremont metropolitan area recorded one of the largest reductions in employment (down 2.3 percent) over the past year, putting the Bay Area’s current unemployment at 10.8 percent. Behind each of these numbers is a real person and a sad story. Those real people will have no interest in buying a home for some time and may have to think twice about owning one, if they do.

28 theregistrysf.com

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San Francisco has done well in avoiding gross volumes of short sales and foreclosures. However, that trend may be reversing. The number of foreclosures in lower price point communities has fallen, but in markets with an $800,000 or greater median price, foreclosures have risen 65.7 percent in the past year, according to DataQuick. Foreclosure re-sales in San Francisco were at 9.5 percent last quarter. Notices of default are down, however, in San Francisco year over year by 26.8 percent.

Some of this decline may be attributed to loan modification programs or to monthly payment reductions due to ARM rates dropping.

What concerns many experts is the volume of adjustable rate mortgages that will reset between the remainder of 2010 and 2012. During that time, Credit Suisse estimates that over $1 trillion in ARMs will reset. California is one of four states that account for 75 percent of all ARMs issued nationwide, so the state stands to be affected significantly. Assessing the impact of these resets is the tough part. Truly, the devil is in the details. Some of these loans are already in default or have foreclosed, while some have already reset to historically low rates. Of those that have foreclosed, some are part of our shadow inventory, which will apply downward force on pricing moving forward. The folks that reset their mortgages, unless they were moved to fixed-rate, will only delay trouble until the rates come up over the next couple of years. They may then find themselves in situations where they can’t refinance due to a lack of equity.

The human factor should not be overlooked, either.

Americans love to keep up with the Joneses. When the Joneses buy a 50” flat screen, so does their next door neighbor. Likewise, when the Jones family decides to walk away from its home because it’s worth one-half of what the family owes on it, so does the neighbor. We are going to continue seeing owners that find no good reason (affordable payment or not) to stay in their homes.

Is there any good news, Rob? One helpful factor for sellers is that a recent Credit Suisse study shows that the gap between owning vs. renting in San Francisco has shrunk. In one example that factors in tax implications, homeowners’ association fees and a 20 percent down payment, the study contrasts two comparable properties less than half a mile apart in South Beach.

The condo ended up costing $3.34/square foot to own with a 30-year fixed mortgage. The apartment was $3.40/square foot to rent!!

Another notion is that San Francisco is not a suburban sprawl of identical tract homes. Ignoring some of the more recent large scale high-rise projects, we are a unique city. Many homes are one-of-a-kind, which greatly helps in maintaining their value. When you just can’t buy the one down the block because it’s not the same house, it limits buyer confidence. And the closer we get buyers to sellers, the healthier our market will be. n Rob La Eace can be reached at 415.290.7228 or rob@roblaeace.com.

activity

Reports

commercial leaseS

City

Lease Sq. Ft.

Name of Tenant/Rep (Brokerage)

Name of Landlord/Rep (Brokerage)

Notes (ie. Lease type and/ or lease longevity)

1345 Doolittle Dr

San Leandro

143,852

Sloat Brothers, Ltd., DBA The Annex/ Paul Mueller (Cornish & Carey Commercial Newmark Knight Frank)

AMB Property

Warehouse

30955 Huntwood Ave

Hayward

62,031

Legett & Platt (Beeline Group)/ Unknown

Cabot Properties/ Conor Famulener (CB Richard Ellis)

R&D/Flex, New Lease

4770 Willow Rd

Pleasanton

56,206

24 Hour Fitness USA Inc/ Terranomics Retail Services Burlingame

24 Ventures LLC/Gabe Arechaederra, Ted Helgans & Brian Lagomarsino (Colliers International-Pleasanton)

Office/Flex Direct Lease. To build a 24Hour Fitness Super Sport Facility

6909 Las Positas Rd

Livermore

42,624

Country Floral Supply Inc/ Lee & Associates Pleasanton

Catellus Finance I, LLC/Michael Lloyd, SIOR (Colliers International-Pleasanton)

Warehouse/ Distribution Renewal

49026 Milmont Dr

Fremont

40,322

BioGenex Laboratories Inc/John Hone, Nick Gallery (Colliers International-Pleasanton)

Asilomar Partners Milmonth LLC

R&D Direct Lease

4385 Hopyard Rd

Pleasanton

37,143

Xradia Inc/Mike Carrigg (Colliers International-Pleasanton)

Britannia Hacienda II Ltd/ Cornish & Carey Pleasanton

Office/Flex Direct Lease

3178 Laurelview Ct

Fremont

36,200

Optoma Technology, Inc./Steve Bouret, Mike Webber & Robin Santiago (GVA Kidder Matthews)

ProLogis/Brian Erlanson

R&D

350 Lindbergh Ave

Livermore

35,000

Petra Air Works Industries Inc/Mike Donnelly (Colliers International-Pleasanton)

GC Lindbergh LLC & PC Lindbergh LLC/ Cassidy Turley Pleasanton

R&D/Flex Direct Lease

6870 Koll Center Parkway

Pleasanton

34,670

Acosta Properties/Jim Peterson (Cornish & Carey Commercial Newmark Knight Frank)

James Tong

Office

6230 Stoneridge Mall Rd

Pleasanton

31,490

Workday Inc/Griggs Resource Group Lafayette

UBS Realty/Brian Lagomarsino, Ted Helgan & Gabe Arechaederra (Colliers International-Pleasanton)

Class A Expansion

4140 Dublin Blvd

Dublin

30,000

SuperGen Inc/ Jones Lang LaSalle-Walnut Creek

Tishman Speyer/Brian Lagomarsino (Colliers International-Pleasanton)

Class A Renewal

4569 Las Positas Rd

Livermore

25,724

Cool Earth Solar/Michael Lloyd, SIOR (Colliers International-Pleasanton)

Arroyo/Livermore Business Park LP/Michael Lloyd, SIOR (Colliers International-Pleasanton)

Industrial Renewal & Expansion

30500 Union City Blvd

Union City

10,000

Green Light Auto Wholesale/ Dan Dowd (CB Richard Ellis)

Mr. Jospeh Franco/ Chris Schofield (Lee & Associates)

Warehouse/ Distribution, New Lease

1277 Treat Blvd

Walnut Creek

34,954

Paradigm Acquisition Corp./ Breck Lutz (Cornish & Carey Commercial Newmark Knight Frank)

Equity Office

Office

2121 Walnut Creek Blvd

Walnut Creek

33,203

Civil Service Employees Insurance

California Plaza at Walnut Creek, Inc./ Breck Lutz, Patrick Reilly & Tom Fehr (Cornish & Carey Commercial Newmark Knight Frank)

Office

503 Canal Blvd

Richmond

30,364

Black Diamond Video

Point Richmond R&D Associates II/ Bill Nork & Joel Maimon (Cornish & Carey Commercial Newmark Knight Frank)

Office

5060 Forni Dr

Concord

25,200

Mission Foods

Gonsalves & Santucci/Graden Travis (Cornish & Carey Commercial Newmark Knight Frank)

Industrial

Novato

20,000

Biomarin Pharmaceutical, Inc.

Lexington Lion Wood Hollow LP/Brian Eisberg, Haden Ongaro & Mark Carrington (Cornish & Carey Commercial Newmark Knight Frank)

Office

100 Grant Ave

San Francisco

54,392

Porshe Design

Geary Grant LLC/Julie Taylor & Tom Neuburger (Cornish & Carey Commercial Newmark Knight Frank)

Office

1455 Fillmore St

San Francisco

31,025

Club One, LLC

Fillmore Center Associates/Sheldon Pont (GVA Gidder Matthews)

Retail

55 Francisco

San Francisco

21,163

Jackson Jenkins Renstrom, LLP/ Dan Gronan (GVA Kidder Matthews)

TR 55 Francisco, LLC

Office

642 Harrison St

San Francisco

10,577

Limelight Networks/ Luke Ogelsby (CB Richard Ellis)

642 Harrison Ownership/ Dave Kuchinsky (Grubb & Ellis)

Class B Office, New Lease

100 Utah Ave

South San Francisco

124,100

Harrigan Weidenmuller & WM Hurwick/ William Hurwick (Harrigan Weidenmuller Co)

Kizan International/Mark Melbye (GVA Kidder Matthews)

Industrial

740 Bay Rd

Redwood City

60,861

Arstasis/Dino Perazzo (CB Richard Ellis)

EB3/Unknown

R&D/Flex, New Lease

2000 Seaport Blvd

Redwood City

51,063

NIKU/Cassidy Turley BT Commercial

Informatica Corporation/Steve Bouret (GVA Kidder Matthews)

Office

2000 Seaport Blvd

Redwood City

34,074

Panalogic,Inc/Cassidy Turley BT Commercial & CRESA Partners

Informatica Corporation/Steve Bouret (GVA Kidder Matthews)

Office

Address Alameda County

Contra Costa County

Marin County 100 Wood Hollow Dr

San Francisco County

San Mateo County

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commercial Leases Continued City

Lease Sq. Ft.

Name of Tenant/Rep (Brokerage)

Name of Landlord/Rep (Brokerage)

Notes (ie. Lease type and/ or lease longevity)

480 Abbot Ave

Milpitas

102,407

Extron Inc./Chip Wiser, Mark Sweeney, Steve Kapp & Andrew Zink (Cornish & Carey Commercial Newmark Knight Frank)

LBA Realty

Warehouse

3047 Orchard Pkwy & 3051 N 1st St

San Jose

33,534

Dfine, Inc/Gregg Domanico, Mary Hines & Jennifer Berrueta (GVA Kidder Matthews)

ECI Montague, LLC/Boyd Smith (Cassidy Turley BT Commercial)

Office

330 Gibraltar Dr

Sunnyvale

19,996

Aerohive Networks Inc/Jim Abarta (Colliers International-Pleasanton)

Batton Associates LLC/ Cassidy Turley CPS Santa Clara

R&D Direct Lease

109 Component Dr

San Jose

17,265

Euro Space USA/Unknown

AMP Property II LP/ Chip Sutherlandand Paul Lyles (CB Richard Ellis)

Warehouse/ Distribution, New Lease

1858 Mabury Rd, Ste D

San Jose

10,080

Solution Office Interiors/Justin Hedberg (GVA Kidder Matthews)

US REIF, LLC

Industrial

5195 Redwood Dr

Rohnert Park

45,139

Escape Enterprises, LLC/Shawn Jackson (CA Business Development)

Tiffany Manor, LP/Tom Laugero (Keegan & Coppin Co., Inc.)

Retail Gross Lease

250 Dutton Ave

Santa Rosa

21,825

Advanced Nutrients, LLC/Nick Abbott (North Bay Property Advisors)

Cattlemen’s/Gil Saydah (Keegan & Coppin Co., Inc.)

Industrial Gross Lease

565 Rohnert Park Expwy

Rohnert Park

14,000

Spirit Halloween/Tom Laugero (Keegan & Coppin Co., Inc.)

Expressway Partners

Retail Gross Lease

475 Aviation Blvd

Santa Rosa

12,315

Brelje & Race, Consulting Engineers/ Barry Palma (Cornish & Carey Commercial Newmark Knight Frank)

Oak Valley, LP/Shawn Johnson & Danny Jones (Keegan & Coppin Co., Inc.)

Office Full Service Lease

3510 Unocal Pl

Santa Rosa

10,270

Zainer Rinehart Clarke, CPA’s/ Kevin Doran (Keegan & Coppin Co., Inc.)

3510 Unocal Place Corp./Sue Lyon (Sleepy Hollow Property Management)

Office Full Service Lease

2805 Santa Rosa Ave

Santa Rosa

10,000

Spirit Halloween/Tom Laugero (Keegan & Coppin Co., Inc.)

Santa Rosa Town Center, LLC

Retail Gross Lease

Address Santa Clara County

Sonoma County

commercial SALES City

Property Size (Sq. Ft.)

Buyer

Seller

Sale Price ($)

Price/ Sq. Ft.

Project Type

Brokers

1625 Chestnut St

Livermore

33,577

City of Livermore Redevelopment Agency

CRP Properties/ Hyland-Stephens

2,500,000

74.46

Office

Buyer: John Steinbuch, SIOR (Colliers International-Pleasanton); Seller: Hyland Stephens Partners Oakland

1200 Business Center Dr

San Leandro

N/A

Hong Ma

Steve K Sr Owen

1,688,000

N/A

Warehouse

N/A

Moraga

N/A

Lbis Exchange INC

Littman Michael A Trust

1,350,000

N/A

Medical Building

N/A

180 Rowland Blvd

Novato

N/A

Rakesh Kumar

Taco Bell Corporation

1,575,000

N/A

Commercial (nec)

N/A

15 2nd St

Sausalito

N/A

Morse Family Trust

Lai Chi-te Trust

3,050,000

N/A

Multi Family Dwelling

N/A

2585 E. Bayshore Rd

Palo Alto

16,560

1880 Embarcadero LLC

The Milla & Raymond/ Handley 1992 Trust

2,815,200

$170

Flex building

Buyer: Brian McCarthy (Cassidy Turley BT Commercial); Seller: Renault & Handley

2595 E. Bayshore Rd

Palo Alto

16,032

Stella Capital

The Milla & Raymond/Handley 1992 Trust

2,725,000

$170

Office building

Buyer: Mark Stevens; Seller: Renault & Handley

481 Auzerais Ave

San Jose

8,400

Frank Berro

Earl & Joan Bailey Trust

N/A

N/A

Industrial

Buyer: Carlos Lorente & Jennifer Berrueta (GVA Kidder Matthews); Seller: Clark Freitag (CF Commercial)

101 1st St

Los Altos

N/A

Harvey Ziff

Michael Sieber

1,825,000

N/A

Business Park

N/A N/A

Address Alameda County

Contra Costa County 1002 Country Club Dr

Marin County

Santa Clara County

San Jose

N/A

Wittner Eric W Trust

Wen-Lung Chow

1,100,000

N/A

Multi Family 10 Units Less

3753 Santa Rosa Ave

Santa Rosa

87,120

MM Motors

Marine Max, Inc.

1,300,000

$14.92

Industrial Land

Dino D’Argenzio (Keegan & Coppin Co., Inc.)

3725 Mayette Ave

Santa Rosa

19,200

Louis & Janis Ferrari

M Capital

2,800,000

$145.83

Apartment

Buyer: Mitchelle Hooshyari (Coldwell Banker); Seller: Annette Cooper & Joel Jaman (Keegan & Coppin Co., Inc.)

1685 Brookvale Dr

Sonoma County

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Real S C E N E

O F

T H E

S E E N Left: Nancy Morse, Grubb & Ellis Company (Chairman of the VIP Event); Rob Larman, Cochan Volant Catering, and Meade Boutwell, CBRE (Premier Sponsor)

CoreNet Global Northern California Chapter’s Annual VIP Appreciation Event Above: Roxanne Bell, Majestic Floors (Premier Sponsor); Chris Ross, HP; Chris Chandlee, AT&T; Sandy Heistand, Avent Software (Co-Chairman of Commmunications) & Denise deVille, Ellerbe Becket (Premier Sponsor, Chapter President)

Right: Natalie Waterbury, AlphaTech (Signature Sponsor) & Nancy Morse, Grubb & Ellis (Co-Chairman of Sponsorship)

CoreNet Global Northern California Chapter, one of CoreNet’s largest chapters in the world, hosted an event to honor their largest annual sponsors on September 9th at Terra Meade in Sonoma, the vacation home of Meade and Terri Boutwell. Over 80 people including the Signature Sponsors, Partnership Sponsors, Board of Directors, Chapter Leadership, Advisory Committee and Top CRE Executives attended the sponsorship appreciation event of wine tasting and a country BBQ.

Right: Mario Wijtman, XL Construction (Signature Sponsor) Left: Mark Flax, HOK (Premier Sponsor); Aimee Hallgrimson, Skyline Construction (Premier Sponsor) & Ken Baugh, Pivot Interiors (Signature Sponsor)

Right middle: Leina Zimmerman, Skyline Construction (Premier Sponsor) & Steve Hogis, HOK (Premier Sponsor, Advisory Committee) Left: Nancy Morse, Grubb & Ellis Company; Barbara Lambing, XL Construction (Premier Sponsor, Co-Chairman of Corporate Reinvestment) & Barbara Donaldson, Synopsis (Past President and Co-Chairman of Community Reinvestment)

Right: Clockwise from bottom: Leina Zimmerman, Skyline Construction (Premier Sponsor); Fernando Iniguez, GCI General Contractors (Premier Sponsor); Robert Hayes, SmithGroup (Premier Sponsor); Sean Hogan, Hoem Associates (Premier Sponsor); Michael Valerio, Hoem Associates (Premier Sponsor); James Jenkins, GCI General Contractors (Premier Sponsor) & Brad Gates, BCCI Construction (Premier Sponsor)

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SENT to us

continued from page 6

Redwood City Contractor Looks South W. L. Butler Construction Inc., a Redwood City-based general contractor, has opened a San Diego office, the fifth for the 35-year-old company. Other locations are in Stockton, Irvine and Palm Desert. The company employs more than 150 people.

W. L. Butler does ground-up construction and tenant improvements for car dealerships, retail centers, medical offices, industrial warehouses, hospitality clients, corporate campuses and educational facilities.

Cohen Financial Awarded S&Ps Select Servicer Status Cohen Financial, a national real estate capital services firm, has been added to the Standard & Poor’s Select Servicer group as a commercial primary and special servicer. The company was named based on its operational capabilities for servicing and working out performing and defaulted commercial mortgage loans and asset-backed portfolios. Cohen’s loan administration clients include portfolio lenders, such as life insurers, banks and pension funds, as well as institutional and opportunistic commercial real estate investors, including hedge funds, private equity firms and high net-worth individuals.

In September, Cohen partnered with an opportunistic commercial real estate fund that acquired a $760 million portfolio of more than 1,100 distressed real estate loans in a joint venture with the Federal Deposit Insurance Corp. The company is to provide all loan servicing, loan accounting and special servicing for the joint venture.

San Jose Company Launches Web-Based Home Improvement Consultancy HomeProHub LLC has launched a Web site to connect homeowners seeking home improvement services and vetted contractors through a controlled, on-line bidding process.

The company, founded by Steve Miller and Troy Scott, uses a professional home improvement consultant to prepare project specifications. Those specifications are posted online to the homeowner’s custom project page.

Contractors then bid on the work. At launch, HomeProHub will consult on home-window installations. Garage doors, roofing, solar and siding consultation is planned. HomeProHub is privately held. n

PEOPLE on the move continued from page 7 Brokerage Adds Investment Team to East Bay Office; Office Group Expands Richard P. Bland and Raul Alcaraz have joined Grubb & Ellis Co.’s Investment Group as senior vice president and associate, respectively. Bland and Alcaraz will be part of the company’s Private Capital Markets group.

Bland joins Grubb after 12 years with CB Richard Ellis as a first vice president in the firm’s institutional and private-client groups. He is one of 12 founding members of the company’s national healthcare capital markets group and will continue to specialize in the sector.

John A. Dolby and Michael J. McCormac have joined Grubb & Ellis as a senior vice president and a vice president in its office group. Dolby will focus on the Oakland, Emeryville, Berkeley and Hayward markets. McCormac will be based in the company’s San Francisco Peninsula office.

Dolby spent 13 years as a vice president of Shorenstein Realty Services, where he served as the leasing and marketing vice president of City Center, a 1.6 million-square-foot Class A office and retail center in downtown Oakland.

McCormac rejoins Grubb & Ellis from Glenborough LLC, where he spent the past four years as a regional leasing director of the firm’s San Mateo office.

Previously, he was the leasing director for Hines Interests L.P. and Prometheus Real Estate Group. He began his career in commercial real estate with Grubb & Ellis in 1994. n

10 Calendar

january february march april may june july august september october november december

1

ULI San Francisco will host a breakfast panel discussion called Affordable Housing’s Challenges and Ingredients Needed for Success from 8 a.m. – 9:30 a.m. at GAIA Building, 2116 Allston Way, Berkeley. Visit www.ulisf.org for more information.

Appraisal Institute Northern California Chapter will host a Business Practices and Ethics course at Carr America Conference Center, Pleasanton.

Members $205 and non-members $235. Visit www.norcal-ai.org for more information.

5

CREW Silicon Valley will host Oktoberfest.

Visit www.crewsv.org for more information.

CoreNet Global Northern California Chapter will host a Young Leaders Educational Event for more information visit http://nocal.corenetglobal.org/ CORENETGLOBAL/NorthernCalifornia/Home/.

5-8

Appraisal Institute Northern California Chapter will host a General Appraiser Site Valuation and Cost Approach course at University of Phoenix, Oakland. Members $570 and nonmembers $670. Visit www.norcal-ai.org for more information.

6

BOMA San Francisco will host the Government Affairs Forum from 8:30 a.m. – 11:30 a.m. at San Francisco State Downtown Center, 835 Market St., Room 609, San Francisco.

Visit www.bomasf.org for more information.

USGBC Northern California Chapter will host an event called Leasing Challenges and Opportunities for LEED Projects – BAyLUG from 5:30 p.m. – 7:30 p.m. at Charles Salter Offices, 130 Sutter St., 6th Floor, San Francisco. Members $5 and non-members $15. Contact Ryan Potvin at ryan@ebsconsultants.net for more information or visit www.usgbc-ncc.org.

7

BOMA Silicon Valley will host the Celebration of Commercial Real Estate Awards Dinner starting at 5:30 p.m. at Crowne Plaza San Jose – Downtown, 282 Almaden Blvd., San Jose. The cost is $65 for both members and guests. Visit www.boma-sv.org for more information.

8

USGBC Northern California Chapter will host a Comprehensive Energy Retrofits on Existing Buildings course from 9 a.m. – 3 p.m. at PG&E, 851 Howard St., San Francisco.

The course fee is $75. For more information, visit www.usgbc-ncc.org.

12

CCIM Northern California Chapter will host an event and luncheon titled Commercial Development: A Planner’s Perspective from 9 a.m. - 1:30 p.m. The event will be held at the Sequoyah Country Club in Oakland. The cost is $40 members, $50 nonmembers and walk-ins. For more information go to http://chapters.ccim.com/northerncalifornia, click on Events or contact NCalCCIM@ccim.net or 866.588.CCIM. USGBC Northern California Chapter will host International LEED Projects and Challenges from 5:30 p.m. – 8 p.m. at Symantec V-Café, 350 Ellis St., Mountain View. Members $15 and nonmembers $30. Contact Ron Fong at greenronfong@gmail.com or visit www.usgbc-ncc.org for more information.

13

BOMA Silicon Valley will host a LEED Green Associate Exam Prep course at BOMA SV office, 63 Metro Drive, San Jose. Visit www.boma-sv.org for more information.

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14

USGBC Northern California Chapter will host a LEED Green Associate Exam Prep workshop from 8:30 a.m. – 5 p.m. at Rudolph and Sletten, 1600 Seaport Blvd., Ste. 350, Redwood City. Visit www.usgbc-ncc.org for more information.

USGBC Northern California Chapter will host an event called Prefab, LEED and Net Zero Energy Buildings from 5:30 p.m. – 7:30 p.m. at ZETA Communities Facility, 3140 Peacekeeper Way, McClellan Business Park, North Highlands.

Members $15 and non-members $30. Contact Sophia Hartkopf at hartkopf@h-m-g.com or visit www.usgbc-ncc.org for more information.

BOMA San Francisco will host an Annual Membership Meeting and Member Recognition Luncheon from 11:30 a.m. – 1:30 p.m. at The City Club, Main Dining Room, 155 Sansome St., 11th Floor, San Francisco. Members $55 and nonmembers $70. Visit www.bomasf.org for more information.

BOMA Oakland/East Bay will host a Professional Restoration Equipment course from 10 a.m. – 11 a.m. at Scott’s Seafood, 2 Broadway (Jack London Square), Oakland. Members $5 and non-members $25. Visit www.bomaoeb.org for more information.

BOMA Oakland/East Bay will host a luncheon called Veteran to Talk about Their Experiences in Oakland. Visit www.bomaoeb.org for more information.

14-15

BOMA Silicon Valley will host a LEED AP Operations and Maintenance Exam Prep course at BOMA SV office, 63 Metro Drive, San Jose. Visit www.boma-sv.org for more information.

18

BOMA Oakland/East Bay will host the 3rd Annual Walter Finch Golf Tournament starting at 9:30 a.m. at The Course at Wente Vineyards, 5050 Arroyo Rd., Livermore.

Visit www.bomaoeb.org for more information.

19

NAIOP San Francisco will host the 11th Annual Harold A. Ellis Jr. Lifetime of Building Awards honoring Bill Poland from 6 p.m. – 9 p.m. at Four Seasons Hotel, 757 Market St., San Francisco. Members $150 and non-members $195. Visit www.naiopsfba.org for more information.

20

Appraisal Institute Northern California Chapter will host the 2010 Annual Fall Conference – Appraisal and Real Estate Symposium at Hilton, 333 O’Farrell St., San Francisco. Visit www.norcal-ai.org for more information.

BICB will host a luncheon. Visit www.bicb.us for more information.

IFMA Silicon Valley will host Future Trends in Facility Management from 5 p.m. – 8 p.m. Visit www.ifmasv.org for more information.

20-22

BOMA San Francisco will host a Leasing and Marketing course from 8 a.m. – 5 p.m. at 44 Montgomery St., Lower Level Conference Center, San Francisco. Members $1,010 and non-members $1,110. Visit www.bomasf.org for more information.

20-23

CREW will host CREW Network Convention and Marketplace, San Francisco Marriott, 55 Fourth St., San Francisco.

Visit www.crewnetwork.org or call 785.832.1808 for more information.

21

BOMA Silicon Valley will host a Emerging Leaders in Commercial Real Estate Council Educational seminar. Visit www.boma-sv.org for more information.

CoreNet Global Northern California Chapter will host a Chapter Meeting from 3:30 p.m. – 7:30 p.m. Visit http://nocal.corenetglobal.org/ CORENETGLOBAL/NorthernCalifornia/Home/ for more information.

22

BOMA Silicon Valley will host Ethics is Good Business Short Course from 8:30 a.m. – 5 p.m. at BOMA SV Office, 63 Metro Drive, San Jose. Visit www.boma-sv.org for more information.

CREW East Bay will host a reception for the CREW Convention. Visit www.eastbaycrew.org for more information.

26

Appraisal Institute Northern California Chapter will host an event at Fort Washington Country Club in Fresno for the area appraisers. Visit www.norcal-ai.org for more information.

CCIM Northern California Chapter will host a CI intro class from 8:30 a.m. - 5:30 p.m. at the Oakland Association of Realtors, 1528 Webster Street, Oakland. The cost is $395 early bird, before Oct. 22. For more information go to http://chapters.ccim.com/northerncalifornia, click on Events or contact NCalCCIM@ccim.net or 866.588.CCIM. ULI SF Young Leaders Group will host a Peer to Peer Workshop: California Land Use Entitlements 101 from 5:30 p.m. – 7 p.m. at Holme Roberts & Owen, LLP, 560 Mission St., 25th Floor, San Francisco. This is a members-only event and the cost is $10 per person. Visit www.ulisf.org for more information.

27

ULI San Francisco will host an event called Podcar City: San Jose, Innovating Sustainable Communities at San Jose City Hall, 200 East Santa Clara St., San Jose. Visit www.ulisf.org for more information.

ULI San Francisco will host an East Bay Tour – New Californian Apartments (Trader Joe’s Building) Berkeley from 8 a.m. – 9:30 a.m. at 1930 Martin Luther King Jr. Way, Berkeley. Visit www.ulisf.org for more information.

USGBC Northern California Chapter will host a LEED Green Associate Exam Prep workshop from 8:30 a.m. – 5 p.m. at Rancho Cordova City Hall, 2729 Prospect Park Dr., American River South Room, Rancho Cordova. Visit www.usgbc-ncc.org for more information.

28

BOMA Silicon Valley will host a Fall Harvest Membership Mixer from 5:30 p.m. – 8:30 p.m. at Paul Davis Restoration and Remodeling, 1880 Dobbin Dr., San Jose. Members $15 or if you bring prospective principal member, then you and your guest(s) are free. Visit www.boma-sv.org for more information.

NAIOP Silicon Valley Chapter will host a Developers Panel Luncheon from 11:30 a.m. – 1:30 p.m. at Hyatt Regency Hotel, 5101 Great America Pkwy., Santa Clara. Members $60 and nonmembers $75. Visit www.naiopsv.org for more information.

29

USGBC Northern California Chapter will host the 4th Annual Green Building Super Heroes Awards Gala from 7 p.m.

– 11:30 p.m. at California Academy of Sciences, Golden Gate Park, 55 Music Concourse Dr., San Francisco. Visit www.usgbc-ncc.org for more information.

FINAL OFFER Seeking Renewal

❯ JOHN WEIS

By Sharon Simonson

When John Weis came to work for the San Jose Redevelopment Agency in 1994, downtown San Jose, a long-term focus of the agency’s efforts, bore only a passing resemblance to the place it is today. There were no high-rise condominium towers. Adobe Systems Inc. had yet to build its three-tower, 1 million square-foot office complex. The San Jose Repertory Theatre and new Tech Museum of Innovation were not yet done. The spectacular California Theatre rehabilitation and the new Richard Meier City Hall were both in the future. The 10-story, $177.5 million Martin Luther King Jr. library, a joint redevelopment agency, San Jose State University and private funding effort, was still on the horizon. While he was not the project manager for all of these projects, Weis had a vision for downtown that he inherited from the agency’s former director, Frank Taylor. Sixteen years later, as Silicon Valley finds its way in a new century, Weis embarks on a new life chapter in eastern Massachusetts.

The veteran redevelopment chief, who left the RDA this summer, is teaching at Boston University and pursuing research.

Ever tethered to clearer understanding of economic decline and renewal, he is evaluating the state’s early manufacturing cluster of textile mills in towns along the Merrimack River, seeking lessons for current industrial concentrations and how infrastructure, including real estate, gets re-used. It is a scenario not so removed from some Silicon Valley geographies where high concentrations of older-generation research and development space have remained empty since the Silicon Valley-concentrated dot-com bust. Weis originally headed the RDA’s neighborhood and industrial development division.

In 2000, he became head of housing and real estate. He was lead negotiator in acquisition efforts for property to accommodate the new A’s baseball stadium. Before the RDA, he was a Boston developer for 12 years mostly pursuing historic rehabilitation. He taught at BU during the same time.

What are you doing at Boston University?

What about Santana Row?

JW❯ I am teaching a course each semester and doing research on early industrial cities like Lawrence, Lowell and New Bedford.

I am teaching a course on the development process, looking at it from a developer perspective. So if you are a real estate developer, how do you approach a project, the culture of the developer and the culture of a regulator, and how they meet and mix. I am trying to teach planners the real-life attributes of developers and entrepreneurs. [San Jose Mayor Chuck] Reed understands it. [Mayor Reed’s senior economic development advisor] Ru [Weerakoon] gets it. There are lots of people who don’t get it. The second course I will be teaching next semester looks at housing and development.

JW❯ There is no doubt that Santana Row is a great success for the city. It has produced lots of sales taxes. But there is also no doubt that it has not had a positive effect on downtown. You can’t do suburban development and downtown renewal at the same time.

How do you feel about your tenure at the San Jose Redevelopment Agency?

Are you concerned about the future of Silicon Valley?

JW❯ I think we accomplished quite a bit. When I got there, the industrial focus was on trying to attract companies from the outside to come to Silicon Valley. We shifted that to working with new companies and creating emerging-technology companies. The culmination of that was the construction of the San Jose BioCenter in [south San Jose industrial center] Edenvale about five years ago and support for the incubator [San Jose Innovation Center in downtown]. If I had any disappointment it is the role the state plays. The state of California is a non-player in the economic development game.

What are your observations about downtown San Jose?

JW❯ The future of downtown is more housing, and the city and the agency can’t lose sight of that. I was very happy with the work I was able to do to attract four high-rise condo developments (the 88, the Axis, Three Sixty Residences and City Heights). Their financial success is a function of the market, and it will take a while to absorb that. What downtown needs is numbers. We set a goal at 10,000 units, and we are at about 6,000, so we are about 4,000 short of where we should be to form a community base for retail. Downtown won’t ever compete with [Westfield] Valley Fair, but it will provide the base for a decent amount of service and shopping opportunities. There is still a lot of work to be done.

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And what about North San Jose?

JW❯ The plan for North San Jose is important for the city’s future, and it doesn’t compete with downtown. The idea is to put together much more of a community. For years the agency wanted only industry out there, and that is not going to work.

We responded to what we were hearing from corporations.

JW❯ The economy is going through drastic changes, no doubt.

But I am still buoyed by the fact that America is a great entrepreneurial country. Federal policy toward immigration and education have to be competitive over the next 30 years.

Everyone is grappling with these issues, but no one is solving them. In real estate, there is a lot of restructuring going on. People who have high expectations for land values are going to have to adjust, and banks and other investors are going to have to have their expectations change. I am not sure when real estate will find a sweet spot again.

What are your thoughts about the new San Jose ballpark for the Oakland As? JW❯ It is my major unfinished business. Psychologically, it would be a huge boost for San Jose. We thought major league baseball was going to make a decision last year in the summer, and we are still waiting. A study that we commissioned last year found that the ballpark had significant economic benefit in terms of first and secondary impacts to the market and to local government, and that is really just with the As there and maybe two concerts a year. When I left, we had acquired about 45 percent of the site geographically, or 11 out of 14 parcels. The last three of them were owned by the same party, AT&T. n