Apple of Cupertino’s Eye Success Begets Success pg. 10
THE
Oakland Transit Village
State of Flux
Jump-starting Change pg. 12
Buildings’ Sale Languishes pg. 14
Final Offer with Adam Engelskirchen History of Success pg. 32
Registry
BAY AREA real estate JOURNAL
Clean California pg. 16
Real Estate Gets a Cleaning pg. 18
Sating Energy Hogs pg. 20
Word on the Street pg. 22
FEBRUARY 2011
Contents FEBRUARY 2011
THE CLEAN IMPERATIVE pg. 16
6 News Desk A summary of recent planning decisions from select cities, news about the industry and people on the move
8 Residential Market Report
Deluxe Decline
10 Commercial Market Report Shiny Apple, Rotten Apple
12 Hot Lot | East Bay
Oakland Transit Village Is Rising
14 Government
• The Cleantech Imperative
16 Feature Package
27 By the Numbers And They’re Off
• C lean Shoots • D e-energizing Information Generation • W ord On the Street
28 Rob’s REality Not Yet Plugged In
23 Accounting
29 Calendar of Events
An Accurate Accounting
30 Commercial Lease Report
24 Finance We’ll Eat Like Kings
31 Commercial Sales Report
26 Retail There’s No Place Like Home
32 Final Offer Adam Egelskirchen Holding Down the Fort
O pportunity Cost
T o p : Ph o t o C o u r t e s y o f E q u i n i x Inc . ; B o tt o m L e f t : Ph o t o C o u r t e s y o f T esla M otors ; B o tt o m R i g ht : Ph o t o C o u r t e s y o f B r i dgel u x Inc .
THE
Registry
P.O. Box 1184 San Mateo, CA 94403 415.738.6434
Media Partners The Registry would like to acknowledge its partnerships with the following organizations:
Mission Statement The Registry is a real estate journal that aspires to fulfill the need of Bay Area professionals for accurate, unbiased and timely news, analysis and information.
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
Design Jelena Krzanicki Janet Raugust
Photographer Chad Ziemendorf
Writers Robert Celaschi, Michael Fitzhugh, Emma Ritch, Sharon Simonson, Sasha Vasilyuk
Contributors Doug Buenz, Sean Daugherty, Peter Ingersoll, Rob La Eace, John McNellis
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. Š2011 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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www.norcal-ai.org
Editorial Boards 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.
NORTH
Stephen Austin, RPA
Regional Property Manager Boston Properties
Daniel Myers
Partner, Real Estate Practice Group Leader Wendel, Rosen, Black & Dean LLP
Marc Cunningham President AllWest
Jeanne Myerson
Bruce Dorfman
Principal Thompson | Dorfman Partners, LLC
Anton Qiu
President & Chief Executive Officer The Swig Company
Principal TRI Commercial
Jennifer Dizon, CPA
Erik W. Doyle
Daniel Huntsman, LEED AP
President & Founding Principal Huntsman Architectural Group
Phil Williams, P.E., LEED AP Vice President Webcor Builders
Jesshill E. Love III Partner Ropers, Majeski, Kohn & Bentley
Paul Zeger
Principal, President & CEO Pacific Marketing Associates
SOUTH
Terry de la Cuesta, IIDA, LEED AP
Director of Healthcare Synergy 4 Health, a One Workplace Company
Norman C. Hulberg, MAI
President Hulberg & Associates, Inc.
Audit & Advisory Partner Hood & Strong, LLP
Robert Kraiss, CFM
Director of Corporate Facilities & Real Estate Adaptec, Inc.
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
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Letter from the Publisher Dear Reader, The cold, damp weather passing through the Bay Area will soon be replaced by dryer air and warmer, longer days. I believe that the Bay Area economy will experience a similar thaw at almost the same time. There are many indications, albeit the cocktail-party kind, that point to this manifestation, but I tend to give those serious credence. Almost universally across the industry people are busier. That’s a good sign. Companies are beginning to hire. Another positive thing. Industries across the Bay Area are maturing and getting national visibility, while others are opening offices here to tap into our talent pool. All this is very good. The best indicator, however, is that the Bay Area is home to a new kind of industrial revolution, the green one, which is the focus of our feature package this month. Cleantech is a broad and encompassing term that generally defines efforts to reduce the environmental impact of our various activities. Cleantech companies focus on energy production (solar, wind, biofuels), energyefficiency technology (building materials, smart grid) and transportation (hybrid or electric vehicles), among other things. There are many companies in this space. In our article by Emma Ritch “The Cleantech Imperative,” on page 16, we focus on a number of them, showcasing the rich variety that the Bay Area offers by highlighting some companies that are a little less known. They are exciting; they are growing, raising money and hiring people—all good signs that the core innovation drive of the Bay Area economy is very much alive. A company that has orchestrated the most impressive come-back job in recent history is of course Apple. It has made impressive gains in market share and innovation, and most recently, it has grown—by nearly 100 acres. In the story by Michael Fitzhugh, “Shiny Apple, Rotten Apple,” on page 10, we look at how this behemoth of Cupertino is affecting the local property markets, both positively and negatively. With the purchase of HP’s former campus, Apple continues to dominate the geography of this Silicon Valley town. It is one of the primary reasons that workplace vacancy in Cupertino is extremely low and that its space comes at a premium. Yet, such influence may have its limitations, too. Another darling of Silicon Valley, and the Bay Area for that matter, has been data centers. Our propensity
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to process and store information in large and growing chunks continues to grow. Technology is becoming the backbone of everything we do, as we tote around our iPhones, always stay connected and provide a live feed of the minutiae of our personal, work and other lives. Data centers, the place where all that information is processed, however, are power hogs. They consume extreme amounts of energy to do what they do and also to keep the space nice and cool for the servers to operate efficiently. All this makes running a data center very expensive, so it is not surprising that efforts to increase effectiveness are coming to a data center near you. On page 20, in the article by Robert Celaschi, “De-Energizing Information Generation,” we explore how data centers are retooling their operations to consume less energy. They employ cutting edge design to accomplish this, and it’s starting to pay off nicely for large companies like Brocade, which is beginning to see utility bills lowered by as much as $200,000 annually. Data centers have found a fond place in our hearts; that is indisputable. At some point in the future, they will be a symbolic milestone of our progress, and perhaps even preservation efforts will be made to ensure that our way of life is memorialized in some historical context. In line with that, Sharon Simonson’s article “Opportunity Cost” looks at how one building of historical significance, the San Francisco Civic Center, is looking to extend its National Landmark status to World Heritage Site. The Civic Center is important also because it is one of the 11 large properties that the state of California wants to sell to private investors. To some, buildings are more than just physical structures, especially when history is made in them. This is an issue that is on Adam Engelskirchen’s mind daily. As head of the Presidio Trust, he is presiding over a significant portion of public real estate in The Presidio in San Francisco. In this month’s “Final Offer,” we look at the challenges that his organization faces as it works on a land-use template to carry it into the next 200 years of its existence. Whatever your thoughts on these issues, we hope you will find the stories thoughtprovoking. We do. Thank you again for your support. We hope that you will reach out to us with comments and feedback. Regards, Vladimir Bosanac
Contributors
Doug Buenz Deluxe Decline pg. 8 Doug Buenz is a broker associate with Alain Pinel Realtors who specializes in the sale of real estate in Pleasanton, Dublin, San Ramon and the Tri Valley. He has more than 20 years experience in luxury home sales and is an active writer and blogger on East Bay real estate.
Rob La Eace Not Yet Plugged In pg. 28
Scott Daugherty An Accurate Accounting pg. 23 Scott Daugherty is the managing director of Colliers Lease Restructuring Specialty Group and is Colliers National Expert on the forthcoming changes in lease accounting. He is a former chief financial officer of a $120 million Silicon Valley firm, holds a master’s degree in business administration from the Kellogg School of Management at Northwestern University and is a certified public accountant who previously worked for PricewaterhouseCoopers. His focus is the exclusive representation of tenants. He is a founder and organizer of Focus Business Bank in San Jose and is a member of the Silicon Valley Chapter of Financial Executives International.
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 everyday. Today, these same skills are an asset to those who work with this San Francisco native in his career as a broker associate with Paragon Real Estate Group. 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.
John McNellis There’s No Place Like Home pg. 26
Peter Ingersoll We’ll Eat Like Kings pg. 24 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 book, “The Real Estate Tsunami Survivor’s Guide.” 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.”
John McNellis is a Palo Alto-based retail developer and property owner. He practiced law in San Francisco with Landels, Ripley and Diamond and co-founded McNellis Partners in 1982. A graduate of UC Berkeley and the University of California’s Hastings College of The Law, McNellis is a member of the Urban Land Institute and a founding member of both its Environmental Task Force and Environmental Coordinating Committee. He is also a member of the International Council of Shopping Centers. He has served as the chair of ULI’s Small Scale Development Council and is a member of ULI’s Board of Governors. He is also a lecturer for both the ULI and ICSC. n
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News
SENT to us
Desk
More SOMA Buildings Sell San Francisco’s New Urban Properties LLC has acquired more than 50,000 square feet in two historic buildings in San Francisco’s South of Market district for more than $10 million. The real estate operating company specializes in historical properties throughout California. The buildings will become substantially vacant at the end of February as Patelco Credit Union moves its headquarters to Livermore. The two buildings are at 144-154 Second St. and 156-160 Second St. David Klein and Jennifer Essner of Cassidy Turley BT Commercial represented the seller. Patrick Hubbard and Robert Dumas of Sansome Street Advisors represented New Urban Properties. Tom Owens, chief executive for New Urban, said in a prepared statement that the buildings would be marketed to single users, as well as smaller tenants, and primarily to technology companies, which have dominated the office landscape along SoMa’s active Second Street corridor. The buildings are adjacent to the west end of the new $4.2 billion Transbay Transit Center, which broke ground last August with completion anticipated in 2017.
Cool Earth Solar Expands Operations Cool Earth Solar has expanded its corporate headquarters and production facility in Livermore. The company has signed a 25,000 square foot multi-year lease in the Arroyo Business Center at 4569 Las Positas Road, adding 13,000 square feet to the existing office. Michael Lloyd, SIOR of Colliers International, represented both Cool Earth Solar and the property owner, Pell Development, in the transaction.
South Bay Chamber of Commerce Chief to Depart After six years as chief executive officer of the San Jose-Silicon Valley Chamber of Commerce, Pat Dando will leave the organization effective April 1, 2011. A search committee, led by current chair Gerry DeYoung and made up of a cross-section of former chairs, current officers and community leaders, has initiated a nationwide search for Dando’s successor.
San Francisco Among Nationally Recognized Sustainable Communities The U.S. Environmental Protection Agency has recognized Mint Plaza in San Francisco as one of five projects given its 2010 National Award for Smart Growth Achievement. The prize acknowledges the projects’ comprehensive approach to improving quality of life by making cities safer and more pleasant for pedestrians and bicyclists, by managing growth to ensure long-term prosperity and health and by revitalizing an existing neighborhood. Other projects noted were in New York City; Baltimore; Portland, Oregon; and Maine.
Firm Buys Senior Housing, Plans Upgrade Seattle-based affordable housing developer Vitus Group has acquired San Francisco’s Crescent Manor Apartments in the city’s historic upper Tenderloin District and plans a $5 million renovation. The property at 467 Turk St., near Hyde Street, is home to a community of seniors who live in its 94 efficiency units. Vitus Group will upgrade the building with comprehensive seismic strengthening, installing structural steel elements to the building’s wood framing, adding additional floor sheathing and strengthened interior concrete shear walls. The renovation and seismic plans were developed by Basis Architecture and Rivera Consulting. Highland Construction is the general contractor.
Nanotechnology Provider Expands Manufacturing in South San Jose A $500,000 grant from the San Jose Redevelopment Agency is helping Shocking Technologies to open its first manufacturing plant to produce a first-of-its-kind polymer material that helps protect electronic gadgets such as cell phones from harmful electrostatic discharge. Shocking Technologies currently has 43 employees and is expected to nearly double over the next few years. The company has raised $32 million in funding from Silicon Valley venture capital firms.
Law Firm Releases Annual Real Estate Supplement Real estate law firm Miller Starr Regalia has released the annual supplement of 6 theregistrysf.com
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Miller & Starr California Real Estate 3d, with rewritten and expanded key chapters. The treatise is an encyclopedic work on real estate law. It includes updated coverage of regulated real estate industry professions in light of new legislation and interest stemming from the real estate crisis. The annual supplement also features new sections that include California’s 2008 Perata Mortgage Relief Act, federal mortgage-loan modification programs, short sales and assignments under the mortgage electronic registration system, also known as MERS.
Brokerage Moves San Jose, Santa Clara Offices to Santana Row Cassidy Turley BT Commercial will merge its San Jose and Santa Clara offices and relocate to 300 Santana Row this summer. The brokerage will occupy the top floor of the newly-constructed five-story office building, about 16,000 square feet. Santana Row is the popular shopping, dining and entertainment center in San Jose owned by Federal Realty Investment Trust.
Mountain View Apartments Sell Marcus & Millichap Real Estate Investment Services has sold Villa Patio Apartments, a 16-unit Mountain View property, for $2.33 million. Michael Hensha, an investment specialist in Marcus & Millichap’s Palo Alto office, had the exclusive listing. The buyer, a limited liability company, was represented by investment specialists Stanford Jones, Philip A. Saglimbeni and Salvatore S. Saglimbeni of The Jones-Saglimbeni Group.
Specialty Brokerage Bought By Larger Rival Colliers International has acquired San Francisco retail brokerage firm Johnson Hoke. Johnson Hoke executives including Vikki Johnson, Karen Hoke and Pamela Mendelsohn will become part of Colliers’ expanding Retail Services Group, which has more than 350 professionals in North America and more than 450 worldwide. Founded in 1997 in San Francisco as a boutique retail services firm, Johnson Hoke has become one of the savviest and most successful firms in their niche market of urban specialty retail. With a focus on the upper end of the retail market, the firm advises and consults with developers, landlords and tenants throughout the region. There will be no staffing changes at either Johnson Hoke or Colliers based on the acquisition.
Palo Alto Building Sells San Rafael-based W3 Partners has bought a three-story office building in downtown Palo Alto, one of the hottest commercial real estate markets in the country today. Chris Hunt, a managing partner, said W3 acquired 555 Hamilton Ave. in an off-market transaction with a private owner that had held the building for more than 20 years. The 13,000 square-foot building is 100 percent leased including two floors to BMW Technology Office USA. The transaction closed Jan. 4. “It fits right in with our value-add strategy of buying good-quality, well-located office buildings that need some help in terms of capital improvements,” Hunt said. n
PEOPLE on the move Cornish Adds to Global Corporate Services Team Andrew Hueser has joined Cornish & Carey Commercial Newmark Knight Frank’s Global Corporate Services team as a senior vice president. Hueser, who is based in the firm’s Santa Clara office, is focused on providing strategic planning and advisory services to clients throughout Northern California. He brings more than 15 years’ experience in the industry, spending the majority of his real estate career at Trammell Crow Co., providing leasing, development, capital markets and advisory services to corporations, investors and public institutions.
Real Estate Attorneys Name Shareholder Matt Henderson has been elected as the newest shareholder at Bay Area law firm Miller Starr Regalia. Henderson is a litigator in the firm’s Walnut Creek office. He joined Miller Starr as a summer associate in 2002 and as a litigation associate in 2003. He represents clients in litigation related to lending, mortgage and a range of title issues, including quiet-title actions.
Brokerage Adds Expertise in Redwood City Sean Lee Jenkins has joined the Colliers International Redwood City office, bringing an extensive background in finance, marketing and technology to the commercial real estate company. He will specialize in investment sales and leasing. Prior to joining Colliers, Jenkins worked in the financial industry, assisting firms in business development, raising capital and marketing.
Newmeyer & Dillion Adds Partner to Walnut Creek Office Quinlan S. Tom has joined the expanding Walnut Creek office of business and real-estate law firm Newmeyer & Dillion LLP as its newest partner. Tom has significant experience in all aspects of construction-dispute resolution and has represented general contractors, owners, developers, subcontractors, architects, construction managers, sureties and materials suppliers. Prior to joining Newmeyer & Dillion, Tom had his own practice and most recently was a shareholder at McInerney & Dillon.
Construction Company Welcomes New Employees San Francisco’s Dome Construction Corp. has hired Melissa Berg as a new project manager and Fran O’Sullivan (pictured) as controller. Berg is a graduate of the Milwaukee School of Engineering. O’Sullivan is an experienced certified public accountant who has a graduate degree in taxation from Golden Gate University. She served as the vice president of finance for an engineering and building services company and has extensive experience in accounting, finance and human resources.
Design, Construction Industry Veteran Joins Furniture Company Furniture management and facilities-services company Unisource Solutions has hired Karla Erovick. Erovick brings 20 years of marketing and business development expertise from the design and construction industries. At Unisource, she will be responsible for expanding the firm’s client base in Northern California. Erovick serves on the board for the Commercial Interiors Contractors Awards Foundation, an organization that recognizes excellence in construction practices for the commercial interiors construction industry.
Contractor Adds Business Development Manager in Palo Alto BCCI Construction Co. hired Matt Mueller as business development manager to continue BCCI’s expansion in the Peninsula and San JoseSilicon Valley region. Mueller, a South Bay native, most recently worked for South Bay Construction where he managed tenant-improvement projects for Lockheed Martin Corp., Trident Microsystems Inc., Apple Inc. and Old Republic Title.
Contractor Hires Technical Talent NOVO Construction has hired Jason Beck as a project executive to lead the team that delivers services to its long-time client Genentech Inc. Beck has extensive experience working as both a contractor and an owner’s representative in current good manufacturing practices, also known as cGMP, in biopharmaceutical facilities. Beck also brings substantial experience building data centers as well as microelectronics, petrochemical and distribution facilities. The International Society of Pharmaceutical Engineering has honored two of Beck’s projects, one for Abgenix Pharmaceutical and a second for Genetech in Oceanside. Beck, 38, most recently was a senior project manager at Yonkers Industries, a biotech and pharmaceutical construction management firm headquartered in North Carolina.
CREW San Francisco Elects a New President Kim Havens, a project manager for San Francisco’s Wilson Meany Sullivan, will serve as the 2011 president of Commercial Real Estate Women – San Francisco. Havens has been a member of CREW-SF for four years. At Wilson Meany, she focuses on entitlement, public-debt financing and project management for mixed-use developments in Northern California. As a project manager for San Mateo’s Bay Meadows, an 83-acre redevelopment, she was responsible for the design development and approval of 625 mid-rise market-rate and luxury condominiums and 10,000 square feet of retail. She also managed the formation of the community facilities district and will oversee the public bond issuance for it. CREW-SF was founded in 1984 and provides a meeting place for professional women in diverse commercial real estate specialties. It promotes the influence and success of its members through professional and business development, educational programs and the ongoing exchange of information. n
RESIDENTIAL MARKET REPORT
Deluxe Decline Skeptics question when—and if— luxury housing will recover its luster. By Doug Buenz
East Bay Luxury Home Sales YOY Percent Change 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
$1 to $2 million Over $2 million 2007
2008
2009
2010
East Bay Luxury Home Sales Units Sold 2010 $1 to $2 million Over $2 million
2009 2008 2007 2006 0
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1500
2000
2500
3000
Ph o t o b y C had Z i emendorf
I
t is not unusual in a recession to hear experts predict the decline of the housing market in general and the luxury segment in particular. And, as we all know, this recession has been exceptionally harsh, implying an extraordinary impact. On the one hand, if the past is a guide, this recession, too, shall pass, and once the economy starts showing strong growth, there will be renewed strength in demand for housing, including luxury homes. But there is a second narrative circulating among some academics and economists. Its logic holds that there has been a paradigm shift in U.S. consumption and lifestyle. With an aging population (the first Boomers hit 65 this year), economic uncertainty, increased global competition and a renewed focus on living simpler (and greener) lives, some believe that the golden age of luxury housing, especially the suburban variety, may be over; the market might never recover. The luxury market does not move with the same velocity as the lowerend. There are just fewer buyers capable of purchasing luxury homes. As a result, demand weakens as you move up the price ladder. But make no mistake about it. There are buyers with money in today’s market. Uncertainty and the expectation of lower prices in the months ahead have made them cautious and slow to act. But act they will, especially on homes that are exceptional values. It is not uncommon to see properties in ritzy Alamo or well-heeled Ruby Hill sit on the market for six months or a year with little or no interest, then to see a comparable home hit the market and sell in a matter of days with multiple offers, often over asking price. Typically, they are distressed sales, either short sales or bank-owned properties, and priced at bargain levels. The driver here is value. Homes priced aggressively get strong attention. Homes priced at the high end of market value are greeted with a collective yawn. With a one- to three-year supply of luxury inventory on the market in many East Bay communities, buyers have a weak sense of urgency. But they are demonstrating that they will return to market to take advantage of lower prices. Yes, sales in 2010 were down sharply from the 2006 peak, with half as many homes selling in Alameda and Contra Costa counties between $1 million and $2 million and a third as many homes selling for above $2 million. But luxury home sales were up in 2010, with a 27 percent increase in sales volume compared to 2009 for homes valued from $1 million to $2 million. The 500-pound elephant in the room is whether prices have stabilized or will continue to fall, whether the market’s shift is cyclical or something more. The luxury-home market is the fastest-growing segment of
Homes priced aggressively get strong attention. Homes priced at the high end of market value are greeted with a collective yawn. The driver is value. the foreclosure market, with many interest-only and stated-income loans due to adjust. Many buyers in the past 10 years took advantage of low rates and liberal underwriting to stretch their qualifications and get into their “dream home,� only to be faced with ebbing in their equity and sharp increases in monthly payments. These circumstances could continue to weigh on the market going forward and exert downward pressure on prices, unless we see a turnaround in the market overall. The luxury market has seen a steady ebbing in prices since 2007 with a 25 percent to 35 percent decline from the peak. Some of this decline has been masked by the stubbornness of some sellers, who have the assets and the staying power to cling to unrealistic prices. But as time goes on, there seem to be fewer luxury sellers who are willing, or able, to wait out the market. In the early 2000s, moving up was the trend du jour. The economy was moving, rates were good, the market was going up, and a strong moveup market propelled demand in the luxury segment. Now, most of the movement is in the opposite direction. Many sellers want to downsize, to reduce their debt level or to diversify their assets. When the market is declining, it changes the math significantly on luxury real estate. It is one thing to absorb $10,000 or $20,000 a month in carrying costs when your home is increasing in value every year. When the asset is declining in value, it becomes much less palatable. There are still buyers looking to trade up, and one could argue that it is a fabulous time to do so, with ample supply, weak demand and attractive pricing on much of the inventory. But, in the luxury-home segment, I think it is most accurate to talk in terms of pent-up supply: Any sales surge in the luxury-home market will likely immediately be met with ample new offerings, as discouraged sellers are prompted to try again. Consequently, the question becomes: Will there be enough market demand to stabilize prices or will the sea-change in public sentiment toward smaller, less expensive and more urban homes lead to continued downward pressure on prices? The answers await all of us in Oz where the Great Wizard resides. Until we get there, what seems clear is that if economic and job growth remain sluggish, luxury-home prices will likely continue to erode. But if we see improvement in the economy, especially Silicon Valley’s, along with a surge in the stock market, prices could stabilize, and the yellow brick road to recovery would be before us. n
Doug Buenz can be reached at 925.463.2000 or Doug@680Homes.com.
COMMERCIAL MARKET REPORT
“Cupertino is becoming a one-horse town. That’s fine, as long as the horse is healthy.” Phil Mahoney, executive vice president, Cornish & Carey Commercial Newmark Knight Frank
Shiny Apple, Rotten Apple Apple’s expansion repels and attracts new tenants to Cupertino. By Michael Fitzhugh
C
upertino has been a tech town for years, but with the departures of Hewlett-Packard Co., Symantec Corp. and other companies, and the steroidal growth of Apple Inc., its identity as Apple’s company town has grown steadily stronger. The global computing and entertainment giant owns more than three million square feet of office space in Cupertino. That includes its most recent purchase of a 98-acre campus from HP for $415 million, according to Cassidy Turley Commercial Real Estate Services. That site, plus adjacent property that Apple bought in 2006 is slated to become the location of the company’s new campus, which some have now dubbed “Apple City.” “Cupertino is becoming a one-horse town,” said Phil Mahoney, executive vice president for Cornish & Carey Commercial Newmark Knight Frank in Silicon Valley. “That’s fine, as long as the horse is healthy. When they get sick, it’s another story.”
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Apple’s current strength is irreproachable. The company has seen its shares skyrocket from below $50 in 2005 to more than $300 a share during the last few months of 2010. It is now the second-largest company in the United States after Exxon Mobil Corp., as measured by market capitalization. But all companies stumble at some point, as Apple did in the mid-1990s. Mahoney recalls the examples of Allentown, Penn., after the closure of Bethlehem Steel and Detroit following the implosion of the Big 3 automakers. “Nobody is seeing Apple stumble in the next few years,” he said. But clearly, even the most successful stories have sour chapters, and Apple is no exception. “It’s much like we’re seeing in Bayshore with Google. Other tenants will move and get out of their way. They just don’t want to compete with them for space,” said Mahoney.
The flip side of the risk Apple creates for Cupertino can be easily seen in the city’s low vacancy rate for work space. Cornish & Carey’s most recent survey of the market showed less than 4 percent vacancy in the town’s six million square foot R&D market and less than 14 percent vacancy in its four million square feet of offices. That compared to neighboring cities such as Campbell, where office and R&D buildings are nearly 20 percent vacant, and Sunnyvale with an eye-opening 32 percent office vacancy. “In a lot of places, office space was overbuilt, and there has been downsizing. We find that our space has been at a premium,” said Kelly Kline, economic development manager for the city of Cupertino. She points to the successful growth of companies on Cupertino’s Bubb Road, the street on which Apple was born, such as ArcSight Inc. and Durect Corp., as proof that other innovators have not been pushed out. Some companies, far from being driven from Cupertino by Apple’s growing footprint, have been drawn there, Kline said. She cites the top hard-drive maker Seagate Technology LLC. It is moving employees from Scotts Valley to its new 10200 S. DeAnza Blvd. location, in part to be nearer to Apple because of the close business relationship the companies share. Another company, Verigy Ltd., which makes semiconductor test systems, is also seeing monumental growth in the city, Kline said. Apple’s growth has created new supports for hoteliers and restaurants too, said Kline. Occupancy rates have been strong at the Cypress Hotel, Hilton Garden Inn, Marriott Courtyard and Cupertino Inn. “And we have several other hotels waiting in the wings for financing.” The Cupertino housing market, always buoyed by the local schools’ reputation for excellence, has not seen an obvious leg-up from Apple’s meteoric growth, said David Blockhus, a Silicon Valley Realtor with Coldwell Banker Residential Brokerage. After Mountain View’s Google Inc. went public nearly six years ago, Google buyers were an obvious factor in the market. “We had agents saying, ‘I am working with buyers from Google,’” Blockhus said. That has not happened with Apple, despite the stock’s spectacular rise in the last seven or eight years. That said, the housing market overall has obviously experienced a tough row to hoe in the last several years, with the move-up housing market and jumbo-mortgage market both being hit, he said. “We have a few agents in our office who have invested in Apple stock and done well, but they have made more money investing in Apple than Apple clients buying homes,” he said. Cupertino’s city council has been accommodating of Apple’s desire to grow. It agreed to add nearly 490,000 square feet of office development capacity to the city in fall 2009 to help support the growth of major companies, including Apple and HP, which had not decided to leave the city yet. The total office inventory available for development in Cupertino had fallen to less than 350,000 square feet at that time and the additional inventory pushed the total development capacity for offices in the city to 829,000 square feet. What shape “Apple City” takes and what its impact will be on the rest of Cupertino’s real estate market will only begin to come clear when Apple unveils the next chapter of its expansion plans in the city. The highly secretive company said it would build a new campus after its 2006, 50-acre purchase, too, though it never did, choosing to buy and upgrade existing buildings and to lease others. But Apple has retained famed architect Norman Foster to design a sustainable wonder of modern corporate responsibility. Whether the result is sustainable for the rest of Cupertino’s commercial office users will only be revealed on Apple’s timeline. n
HOT LOT | EAST BAY
Oakland Transit Village Is Rising City planners and BART officials pin renewal and ridership hopes on new development. By Sasha Vasilyuk
This page Top Left: Future MacArthur transit village Top Right: Current MacArthur BART station Bottom Left: Telegraph Avenue Opposite Page Top to Bottom: MacArthur Transit Village parking structure, Current MacArthur Bart station & parking lot
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r e nd e r i n g c o u r t e s y o f M V E & Partners ; Ph o t o s b y C had Z i emendorf
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he area surrounding Oakland’s MacArthur BART station, while located near the major intersection of Highway 24 and Interstate 580, has not been a model of urban glory. The neighborhood currently features a below streetgrade parking lot, a small strip mall, a surgery center, a church and single-family homes. But developers of the new MacArthur BART transit village hope the $370 million, 7.76-acre project will do much to change the area’s look. The new community is to include affordable and market-rate housing, retail, a parking garage and a child care center. Fingers are crossed that the development expands upon the success of the nearby Temescal district. “The Temescal-area retailers are already expanding on their own, but there is a dead area now on Telegraph [Avenue] where there is a lot of vacancy, and we are hoping that that stretch will be helped,” said Kathy Kleinbaum, project manager at the city’s redevelopment agency. “You put 624 housing units and a major destination—the BART station—and we think those people are going to shop in the Temescal district.” First to be constructed is the 480-car garage that will replace BART’s surface parking lot. The site’s main developer, affordable housing giant Bridge Housing, will then build 108 affordable housing units starting this fall, with an expected completion date of 2014. The 516 market-rate housing units with 42,500 square feet of retail space and 5,000 square-foot child care facility will be built last. The market-rate developer has not been chosen yet, but construction is planned to start before 2014. The MacArthur transit village has been a long time coming, but it is one of a growing number of transit-oriented developments being built on BART property around the bay. Oakland city documents note that the MacArthur project has been grinding forward since 1993 and has gone through multiple iterations. Bridge Housing, along with its Oakland-based partner McGrath Properties, started work on the development in 2004. “This is a pretty complex project,” said Cynthia Parker, president and chief executive of Bridge, which has worked on previous transit-oriented developments in Fremont and San Francisco. “The entitlement process is quite lengthy in the Bay Area, and the complexity of dealing with multiple government agencies takes some time. The financial crisis was slowing things down as well.”
r e nd e r i n g C o u r t e s y o f L o w ne y A rch i tect u re ; Ph o t o s b y C had Z i emendorf
EAST BAY | HOT LOT
Bridge also has had to secure the necessary funding—about $80 million for the garage and the affordable housing piece, which is coming from tax-credit investments, the redevelopment agency and Prop. 1C, a $2.85 billion state program to fund infill and transit-oriented projects. As part of a complicated land swap, BART is giving away the surface parking lot in exchange for the new garage and improvements to the MacArthur station. The value of the improvements and the new garage exceed the value of BART’s land, so no money is changing hands in the transaction, Kleinbaum said. Bridge Housing is hoping that once built, the affordable units will attract other developers for the approximately 4.5 acres set aside for market-rate housing. The MacArthur project is one of a growing number of transit-oriented developments built on BART property around the bay. Similar TODs have already been completed at Hayward, Pleasant Hill, Castro Valley, Fruitvale and Dublin Pleasanton stations. More are under construction around Richmond, Ashby and Walnut Creek stations, and BART is considering developments at West Dublin and the new Warm Springs stations. At the city of Oakland, a formal policy calls for revitalizing the areas around its BART stations as part of its larger economic development efforts, said Kleinbaum. The city began the planning process for the Lake Merritt Station Area in November 2009, for instance, and hopes to complete it by the end of this year, according to its Web site. The goals include increasing the adjacent housing supply and improving services and retail offerings. In addition, the city is pursing high-density housing around the Fruitvale BART station near downtown. Patrick Van Ness, a vice president for Signature Development Group, says his company is pursuing financing for new Fruitvale housing, and, if all goes well, could start construction as early as mid-2012. The 275-unit development is a mix of affordable and market-rate homes. Signature would develop the market-rate portion. Proximity to transit and the Bay Area’s seemingly insatiable demand for housing are at the forefront of the developer’s logic for pursuing the project, Van Ness said, but the preceding investment around the Fruitvale station matters too, in part because it begins the process of forging the area into a destination. “Current economic conditions aside, the San Francisco Bay Area is an area with an inherent demand for housing, and people want to be close to transit,” Van Ness said. “But there has been lots of other investment and development, and the area has a lot of potential; that is a factor, too.” BART thinks TODs can increase ridership based on a 2004 California Department of Transportation study, which determined that people who live near transit are five times more likely to use it rather than those who live farther away, while people who work near transit are more than three times more likely to use it. “Transit-oriented developments promote alternative means of travel and help put revenue into our system, which means we can continue to grow and thrive,” said BART spokesperson Jim Allison. BART has developed an official transit-oriented development policy that states as its goal to “increase transit ridership and enhance quality of life at and around BART stations by encouraging and supporting high quality transit-oriented development within walking distance of BART stations.” For MacArthur, stakeholders are hoping the new development will not only increase public transit use, but also help revitalize the larger neighborhood. The developers are currently in negotiations with several businesses occupying the redevelopment area, including two motels and several retail businesses along Telegraph Avenue. All of the existing structures on the 7.76-acre site are slated to be demolished. Kleinbaum said the motels have had crime issues and one of the retailers turned out to be an illegal massage parlor, which has since been closed. “We’re putting in additional bodies in an area that needs more people on the street. We’re optimistic about the impact this project is going to have,” Kleinbaum said. n
The MacArthur transit village is one of a growing number of transit-oriented developments built on BART property around the bay.
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GOVERNMENT
Opportunity Cost The state’s proposed sale of a National Landmark building raises the question of how far is too far.
“We are talking about intangibles and the meaning of public space. They are not, narrowly speaking, only historic preservation questions.” Anthony Veerkamp, director of programs, San Francisco regional office, National Trust for Historic Preservation
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n the months before his death late last year from leukemia, Bill Hough of Berkeley’s Philip and Sala Burton Center for Human Rights was embarked on what some might frame as a quixotic mission: He sought World Heritage Site status for the San Francisco Civic Center. World Heritage Sites are designated by the United Nations Educational, Scientific and Cultural Organization and selected for their universal human value. The Egyptian pyramids are World Heritage Sites. So are Australia’s Great Barrier Reef, Machu Picchu in Peru and the Statue of Liberty. The Civic Center is already designated National Landmark status by the U.S. Department of the Interior based on its architecture and “international importance as the scene of the founding of the United Nations and the drafting and signing of the post-World War II peace treaties with Japan,” according to its 1984 application for historic recognition by the federal government. Landmark status is magnitudes more prestigious than listing on the National Register of Historic Places. Scrutiny before admission to this elite club of 2,500 sites far exceeds that for the nearly 90,000 properties and 1.6 million “contributing resources” enumerated on the National Register. “National Historic Landmark is a high bar to cross. It is really significant,” says Jay Correia in the California Office
of Historic Preservation. National Register-listed buildings and locations are mostly of local significance, he says. But Landmark structures and places bear national import. “It would be very prestigious to acquire a building like that,” Correia says. Indeed. That is not far from what will happen should California move forward with its $2.3 billion sale of 11 state-owned buildings. Those on the block include San Francisco’s 1922 Earl Warren Building, a contributing structure to the Civic Center’s National Landmark status and to consideration for World Heritage Site. Debate around the buildings’ disposition reached crescendo late last year as the Schwarzenegger administration raced to consummate the deal in its final days in office. An eleventh-hour lawsuit thwarted the drive and a state appellate court in San Jose put the sale on hold. The warring parties struck agreement to push a late January hearing to after Feb. 17 to give the incoming Brown administration time to review the transaction. Perhaps ironically, one of the more notable buildings slated for sale is the distinctive round-shouldered California Public Utilities Commission Building at San Francisco’s 505 Van Ness Ave. The 271,000 square-foot structure is also known as the Gov. Edmund
Ph o t o s B Y C had Z i emendorf
By Sharon Simonson
GOVERNMENT
G. Brown Building; Edmund “Pat” Brown is the current governor’s father. The sale was precipitated by the state financial crisis and would raise $2.3 billion, well more than the $660 million originally estimated. Still, it is instructive to note that the state’s annual operating budget has ranged from $86 billion to $103 billion over the last six years, meaning the one-time, $1.2 billion revenue boost after the buildings’ debts are paid would contribute something on the order of 1 percent to one year of state operations. The state is expected to continue to lease the buildings for decades after the sale, but under the current agreement, the buildings will pass into private hands if the state does not buy them back. The buyer is California First LLC, a partnership led by the Hines company and Antarctica Capital Real Estate LLC. Among the nearly 400 bids the state received and ultimately rejected, several offered terms where the buildings remained the state’s. Besides the historic Earl Warren building, the sale includes one other recognized historic structure of lesser status: the Junipero Serra State Building in Los Angeles. The 432,000 square-foot building is part of L.A.’s Broadway Theater and Commercial District, the “premier shopping and movie-going destination for Los Angeles residents and tourists” in the first decades of the 20th century, according to public record. It has been on the National Register for more than 30 years. It houses a spectrum of state agencies. Jay Correia in the California Office of Historic Preservation says to his knowledge his office has not reviewed the two historic buildings’ sale, something he believes it should do by law. There is nothing wrong with private ownership of historic structures, and the private sector is often a better equipped steward, says Anthony Veerkamp, a program
director in the San Francisco regional offices of the National Trust for Historic Preservation. The issue, as Veerkamp sees it, is at what point a building’s public purpose becomes so compelling that the mission is conflated with the building itself. “We are talking about intangibles and the meaning of public space. They are not, narrowly speaking, only historic preservation questions,” he says. San Francisco’s Earl Warren Building houses the California Supreme Court. Earl Warren himself, besides being the chief justice of the U.S. Supreme Court that issued the 1954 decision Brown v. Board of Education, was California governor three times, state attorney general and a former Alameda County district attorney. Veerkamp notes that designation as a National Landmark or listing on the National Register offers limited protections to historic buildings. The state’s Correia says, “Although the state doesn’t always manage its historic resources well, there is some oversight.” In private hands, preventing their demolition ultimately falls to local landmark protections, which can be vulnerable to political whim. The National Trust has taken no official position on the sale but is aware of its progress, Veerkamp says. “Our role is to raise the flag and to remind the public this is not just a real estate asset.” He has no reason to believe the winning bidders for the properties would prove anything but ideal stewards of their charge, Veerkamp says. An argument might be made that they would be better. The buildings have an aggregate of nearly $30 million in deferred maintenance, according to public record. The California PUC-Edmund Brown building, has nearly $6.5 million in deferred work, the most of the lot. Whether any of the other nine properties offered for sale has potential historic significance is hazy, at least for a lay person reading the public offering documents and viewing the photographs. The sales brochure makes no mention of the known historic status of the two properties nor gives characteristic details about the other buildings that might lend insight into their architectural or cultural significance.
Left Page Top Left: Elihu M. Harris State Building, Oakland Top Right: Exterior of 350 McAllister, San Francisco Bottom Left: Meeting room of the judicial council This Page (Clockwise from top) Lobby of 455 Golden Gate, San Francisco The Milton Marks Conference Center Auditorium, Hiram W. Johnson State Office Building, Lobby of 455 Golden Gate
continued on page 29
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Driven by economic and environmental forces, cleantech is small, but diverse and growing.
“Cleantech is the thirdlargest category for venture investment in the United States behind software and biotechnology, securing $5.8 billion in the first three quarters of 2010.�
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T o p L e f t : I m a g e C o u r t e s y o f S olar C i t y ; B o tt o m L e f t : I m a g e C o u r t e s y o f E QUI N IX ; B o tt o m RIG H T : I m a g e C o u r t e s y o f T esla M otors
By Emma Ritch
C
alifornia’s economy is beginning to reap the rewards of the emerging clean technology industry, nowhere more visibly than in the Bay Area. California-based companies are taking the lion’s share of venture-capital investment, and the Bay Area is the country’s leading location for cleantech startups, jobs and investors. As the industry matures, it is creating demand for offices, industrial space and employees. The terms “cleantech” and “greentech” encompass technologies that reduce the environmental impact of economic and other activities. Cleantech is most adequately described as three industry sectors: commodity manufacturing, biotechnology and information technology. Cleantech companies focus on energy generation, such as solar, wind and biofuels; on energy efficiency technologies in lighting, building materials and the smart grid; on transportation, including electric, hybrid and hydrogen vehicles; on water purification and conservation; and on agriculture and recycling/waste. Bay Area clusters of cleantech industries have already begun to develop; solar is concentrated in San Jose, Santa Clara and Sunnyvale; biofuels in South San Francisco and parts of the East Bay; and smart grid and efficiency companies between Mountain View and Redwood City. The San Francisco Bay Area has approximately 120,000 green jobs, comprising 4.4 percent of the region’s workforce, according to California’s Green Economy, an October 2010 report by the state’s Labor Market Information Division. The report estimates a total of 430,000 green jobs statewide, making up 3.4 percent of total employment in California. That makes the green sector slightly smaller than the finance and insurance industries. Green jobs exist in all of the state’s 20 major industry sectors but nearly 60 percent fall in five categories: manufacturing, construction, professional, wholesale trade and agriculture/forestry. Clean Edge, which ranks U.S. metropolitan areas on factors including job postings, investment activity and patent activity, names the Bay Area as the top spot for cleantech jobs for the second year in a row in The Clean Tech Job Trends 2010 report. The region ranked ahead of Los Angeles, Boston, New York and Denver. The U.S. government has promised nearly $2.6 billion in stimulus funds to California cleantech companies, including BrightSource Energy, Tesla Motors, SunRun and Coulomb Technologies. In addition, 125 California-based cleantech companies secured $2.63 billion in venture capital in the first nine months of 2010—nearly half the total invested in the sector globally, according to Cleantech Group and Deloitte data. Much of the job growth is due to public and private investment in companies based here, said Bob Hines, vice president of energy at the Silicon Valley Leadership Group, a San Jose-based business organization representing 300 companies. Startups locate in the Bay Area because of access to skilled workers, venture capital and potential partners such as Cisco Inc., Yahoo Inc. and Google Inc., Hines said. Cleantech is the third-largest category for venture investment in the United States behind software and biotechnology, securing $5.8 billion in the first three quarters of 2010. VCs were on track to invest $7.3 billion globally for the year in 650 startups, with 68 percent going to the United States. Since 2005, there have been 637 funding rounds for California cleantech companies, totaling $12.5 billion in investment. The news is not all positive. The stagnant economy and lack of exits in cleantech resulted in smaller average funding rounds in 2009 and 2010. That forced startups to use cash more efficiently, a practice expected to
continue during the next 18 months. Nowhere is the tightening more notable than solar. Solar has been the top cleantech subsector for investment in California, receiving 37 percent of funding, or $4.62 billion since 2005. The sector hit its lowest level of venture-capital investment in four years in the third quarter of 2010, according to San Francisco-based market research firm Cleantech Group and consultancy Deloitte. Yet Bay Area companies continue to dominate fund raising; Fremontbased Solyndra has raised nearly $1 billion, and San Jose-based Nanosolar has amassed $462 million. The region is also innovating in the service side of solar with power-purchase agreements, or PPAs, which take away the upfront cost of solar for commercial and residential customers. California’s solar PPA providers have raised more than half a billion dollars since 2005, including Bay Area startups Recurrent Energy, SunRun, Solar Power Partners, SolarCity, Borrego Solar Systems and Tioga Energy. “Solar companies really helped when the market was soft, because you had companies coming in and taking old abandoned buildings and putting them to use,” said Ben Stern, vice president at Cornish & Carey Commercial Newmark Knight Frank, a real estate services firm. Now solar has entered a new phase. “We’re not seeing much growth in solar as we did a few years ago. Companies are hunkered down while trying to raise additional rounds of funding and shore up operations and make their funding last,” he said. Transportation is the second-largest sector for cleantech investment in California, securing 15 percent of funding, or $1.85 billion in the past five years. Some of the best-known and top-funded startups in transportation come from the Bay Area, including Tesla Motors and Better Place, which is building electric charging stations. However, a number of under-the-radar startups are reporting growth, including Redwood Shores-based GreenRoad Technologies, which develops software to improve the driving efficiency of fleets, and Berkeley’s Sensys Networks, which is deploying traffic-management technology. Stern said biofuel companies are generating an active market for real estate, with South San Francisco-based Solazyme recently expanding into 75,000 square feet after securing venture backing and government contracts. South San Francisco-based LS9 and Emeryville-based Amyris, which held an initial public offering in October, are recognized as top companies in the sector, securing almost $1.4 billion in venture funding. “Companies in biofuels have a lot of momentum right now,” Stern said. “There’s not as many [companies as in solar], so there’s not as much impact on the market, but biofuel companies are doing well.” Stern said the other major drivers of real estate growth in cleantech are the energy efficiency and smart-grid sectors, collectively with about $1.6 billion in venture investment in California during the past five years, according to Cleantech Group/Deloitte. Many companies within these categories are software and information technology-based—the backbone of Silicon Valley. This includes software and IT smart-grid companies such as Silver Spring, Trilliant and eMeter; lighting software startups Redwood Systems, Adura Technologies and Daintree Networks; and energy-management firms Hara, EcoFactor and Agilewaves. Cleantech companies collectively use a fraction of the real estate that biotech and other industries do, Stern said. But cleantech days are early. “Cleantech is not going away, ... these companies are doing well, expanding and taking real estate that otherwise might be vacant,” he said. n
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Bay Area start-ups rise to address demand for cleaner building materials and operations.
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reen buildings are the big promise of real estate, with the potential to garner higher rents and selling prices, improved occupancy rates and reduced operating costs. A vast swath of innovative technologies are making this promise a reality. While many technologies that could make the biggest impact have yet to prove their worth, the Bay Area, as the industry’s epicenter, stands to benefit from the ultimate outcome. Commercial and residential buildings consume nearly 40 percent of U.S. energy, according to the U.S. Department of Energy. Green buildings are one of the most cost-effective and direct methods of improving U.S. efficiency, fueling an appetite for sustainable real estate from public and private sectors and demand for everything from energy-efficiency audits to building retrofits and energy services. The green-building construction market alone is projected to nearly double by 2015 to $135 billion, according to the Green Outlook 2011 report by McGraw-Hill Construction. Despite the sluggish economy, green building starts in the United States were estimated at $71 billion in 2010—up 50 percent from 2008. A broad collection of Bay Area companies are seeking to cash in on the burgeoning demand. “It’s a slow time in the building industry, and people are hungry and trying to find ways they can differentiate themselves,” said Erich Klawuhn, vice president of business development at Milpitasbased Soladigm Inc., which develops intelligent windows. Soladigm closed a $30 million Series C round in December from DBL Investors, Nano Dimension, General Electric, Khosla Ventures and Sigma Partners, bringing the company’s total equity raise to $60 million. The low-hanging fruit in commercial buildings, especially in renovations and retrofits, are heating, ventilation and cooling systems, lighting and appliances. Together they account for 86 percent of energy use, according to the DOE. Replacing HVAC systems is the top request from
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clients during energy-efficiency retrofits, said Kevin Vaughn, program manager of the Federal Energy Solutions Group in the Schneider Electric Buildings Business. A raft of area companies are creating products to address the need. Many HVAC systems are too large for the buildings they serve, said Andrew DeGuire, vice president of strategy at Johnson Controls. San Rafaelbased Autodesk Inc.’s design software can simulate a building’s energy use and cooling needs based on climate, orientation to the sun, window space and occupancy patterns. The software models real-world conditions and airflow so that the best operationally efficient HVAC unit is installed. Significant efficiency losses can occur when windows, doors, concrete and drywall don’t effectively insulate. Milpitas-based Soladigm is solving that through electrochromism. Its windows contain low-voltage electrical wiring that is connected to the building’s electrical system. When electricity is applied, the tint level of the glass changes to modify interior illumination and heat admitted from the daylight. While standard windows allow up to a third of solar heat to enter a building, tinted glass can reduce that to less than 10 percent, reducing the HVAC load by about 25 percent, said Klawuhn. Not only do buildings not need blinds and shades, this level of control means that the size of HVAC systems can be reduced, he said. Soladigm is currently looking for buildings for demonstration projects where it negotiates deals with property owners to receive free or lowcost windows in exchange for sharing information about performance and serving as a customer reference. The enormous market for light bulbs with higher efficiencies also has spawned a number of Bay Area startups. Leading the pack with $125 million in VC backing is Bridgelux Inc., which recently launched production of light-emitting diode, or LED, bulbs at its new Livermore factory. With 170 employees, Bridgelux plans to add 100 more workers in the next year.
L e f t t o R i g ht : I m a g e s C o u r t e s y o f S oly ndra , B etter P lace , O P O W E R , S olad i gm
By Emma Rich
“The green-building construction market is projected to nearly double by 2015 to $135 billion.” Green Outlook 2011, McGraw-Hill Construction
photo by C had Z i emendorf
Ph o t o C OUR T E S Y OF J es u s nava
Beyond the bulb, companies are using networking technology to reduce energy use in fluorescent and LED bulbs by as much as 75 percent by dimming lights and installing occupancy, daylight and scheduling sensors. A cluster of these startups has formed in Silicon Valley and the East Bay, with each boasting venture backing, partner endorsements and viable market niches. Changes in the way utilities calculate customer bills are also precipitating opportunity. Utilities historically charged customers a flat rate for electricity based on several tiers of usage. But the cost to procure energy varies widely over the course of a day and skyrockets during peak demand on the hottest days of the year. Utilities around the globe are beginning to adopt real-time pricing, tying the cost of electricity to demand at the time of consumption. That shift is creating a growing appetite among utilities and businesses for energy efficiency and smart-grid software. With about 170 employees, one of the hot startups in this software space is Arlington, Va.-based OPOWER Inc. The company opened its second office in spring 2010 in San Francisco. The city was chosen because of its engineering talent and proximity to clients, said Nadeem Sheikh, director of client solutions. The three-year-old company, whose expertise lies in data analytics and behavioral science, raised $50 million in Series C funding in November 2010. It is working with 45 utilities in 21 U.S. states, including the Sacramento Municipal Utility District. “We recognized that utility customers have many opportunities to save energy, but also face challenges and questions as smart meters come online,” Sheikh said. The company’s software helps utilities’ customers with solutions without pushing for costly renovations. Tips can be anything from adding an awning to shade a lobby to maintaining an air conditioning system, showing that energy efficiency can be low-tech too. n
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Data centers, which process the world’s virtual communications, are cutting power use.
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ata centers, demand for which has not been quenched by the recession, can use a tremendous amount of electricity, 25 times to 50 times as much as comparable office space, according to Pacific Gas & Electric Co. Most of it is to run the servers, but a lot also goes into keeping them cool. The cumulative power demand of data centers has been growing. The federal Environmental Protection Agency pegged the total at 61 billion kilowatt-hours in 2006, enough for 5.8 million average-sized homes. That was double the amount used in 2000, and the EPA predicted it would top 100 billion kWh by 2011. For a long time, energy conservation was not a priority. “A lot of things were built with a quick and fast dot-com mentality, and people put in a lot more air conditioning than you needed,” said William Dunckel, a PG&E energy solutions manager. There’s also a disconnect in the way some data centers are run. The electricity bill doesn’t go to the IT staff, said Mary Medeiros McEnroe, acting public benefit program manager for Silicon Valley Power. When performing an energy audit, it’s not unusual to find old servers plugged
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in, but not be able to find out whether anything is running on them, she said. Over the past five years, however, along with the rising emphasis on living greener, data center owners and operators have developed better practices—some decidedly low tech—to reduce the power bill. One tactic is the high-tech equivalent of opening the windows. As manufacturers have increased equipment’s tolerance for humidity, there’s less danger from drawing in cool outside air. It’s formally known as air-side economizing. “Northern California is one of the best climates for that. For many hours of the year we can use the outside air to cool the equipment,” said Pamela Brigham, global technology director for Equinix Inc., which this year expanded its data centers in San Jose. Building server racks the right way also can help. Servers pull cool air in the front and send hot air out the back. Alternate the rows of racks— fronts facing fronts, and backs facing backs—and a data center can segregate the air into hot aisles and cool aisles. “That keeps hot air coming off of the machines from mixing with cool air being delivered to machines to cool the servers,” said Steve Kundich, vice president of development services and construction design for Digital Realty Trust Inc., which builds and manages data centers. “You don’t end up cooling air twice, which increases energy efficiency.” Add some sort of containment such as chimney cabinets to draw hot air out the back, and “meat locker” style plastic curtains instead of doors, and a data center gains even more efficiency. A data center is also easier to cool when it has fewer servers. Thanks to “virtualization,” one server can do the work previously done by several. Software essentially divides the server into isolated segments, so if one segment is idle, another can still be working. Virtualization can turn a 200-server rack into a 10-server rack, Dunckel said. Cooling systems have become more sophisticated too. Traditionally, most motors in cooling systems either ran at full speed or nothing. Using variable-frequency drives instead can yield big savings. “For centrifugal fans and centrifugal pumps, if you cut the speed in half, the power is reduced by a factor of eight,” said Bob Rosenberger, director of essential infrastructure for DuPont Fabros Technology Inc., a developer, operator and manager of wholesale data centers. And it takes constant monitoring to keep it all running right. Fail to check the water chemistry and other parameters in a chiller, and the copper tubing can corrode or build up scale. It might stop working altogether in a couple of months, said Rosenberger. “We open the chillers and brush the tubes whether they need it or not, to make sure the copper is a good transfer surface,” he said. Data centers measure efficiency in “power usage effectiveness,” the amount of power going into the building divided by the amount used by the computers inside it. PUE was first proposed in 2007 by a consortium of IT companies called The Green Grid. A PUE of 1 would be 100 percent
T o p : I m a g e C o u r t e s y o f E q u i n i x Inc . ; B o tt o m : I m a g e C o u r t e s y o f B rocade
By Robert Celaschi
efficient. The industry average is between 2 and 3, Kundich said. Digital Realty Trust claims its data centers range from 1.3 to 1.5. CoreSite’s newest data center in Santa Clara has averaged a PUE of 1.4 and on occasion has dipped as low as 1.25, said David Dunn, senior vice president of strategy and marketing. “But so much of PUE depends on utilization of the mechanical and electrical systems,” he said. In the past, it was common to put generators and chillers inside the building. As much as half the space was set aside for non-server use, said Billie Haggard, senior vice president of data centers. Now CoreSite is trying to keep that down to no more than 30 percent by locating certain equipment outside and designing battery rooms, hallways and data center rooms more efficiently. Equinix designs its centers to perform at 1.6 or better, Brigham said. Its south San Jose data center has hit 1.26. For companies that run their own data centers, investing in lower PUE can pay off. For wholesale and retail co-location, payback is harder to measure. “We believe, long term, it will be a brand differentiator that will allow us to be brought to the table where our competitors won’t be,” said Jim Trout, whose Vantage Data Centers in Santa Clara is expanding a complex it acquired this year from Intel. Trout compared it to the way some office tenants are starting to insist on LEED certification before they’ll sign a lease. The idea is getting some traction among the Fortune 500 companies he’s targeting, he said.
“One tactic is the high-tech equivalent of opening the windows.” Put all the tactics together and the result would look something like Brocade Communications Systems Inc.’s new data and engineering campus in San Jose. Brocade consolidated three data centers into one, decommissioned 400 racks, or approximately 133 kilowatts worth of equipment, and is saving about $200,000 a year. It has a hot-row, cold-row configuration and hot-row containment. Cooling equipment has variable speed motors. Occupancy sensors control the lights. The data center is about 70 percent virtualized, said Victor Garcia, senior manager of facilities engineering. Brocade decided against air-side economization because half the building would have had to be made of louvers, Garcia said. Instead, the company went with a 2,000-ton water-side economizer, which works much like a radiator in a car. “When the temperature outside allows us to, we turn off our chillers and reject the heat through the cooling tower through this water side economizer that has no fans, no motors and doesn’t require additional pumping,” he said. Brocade’s design specs worked to a PUE of 1.3. In reality it’s closer to 1.2, Garcia said. But large data centers aren’t the entire picture. “The people we have the hardest time getting to are the small data centers,” PG&E’s Dunckel said. “There’s no way for us to know that a data center exists in a facility if that isn’t the full use of the facility. There may be a huge number of businesses that have a few hundred servers buried inside their operation. “It’s not their main business, and they aren’t that well designed and operated,” he said. n
By Robert Celaschi
The U.S. Department of Energy has tracked the energy savings at a couple of Bay Area data centers. Here are the tactics used and the results achieved.
Lucasfilm In 2007, the Energy Department studied Lucasfilm Ltd.’s 13,500-squarefoot data center in San Francisco’s Presidio. Inspectors made several recommendations to save power: • Remove redundant rack-mounted uninterruptible power supply systems; Lucasfilm already had a main UPS system to provide backup during an outage • Put in UPS bypass switches to avoid the conversion losses of going from AC to DC and back to AC • Turn off some servers between major movie projects • Turn on chillers in stages so each unit could run at its highest efficiency • Use hot and cold aisles • Use a water-side economizer to capture water produced by cooling towers, taking some of the load off the chillers • Install lighting controls Implementation Costs: $429,500 Cost Savings: $343,000 a year Energy Savings: 3.11 million kWh per year Payback: 1.2 Years
Sybase Sybase Inc. had an energy audit performed on its 16,000-square-foot data center in Dublin in 2005. With the help of PG&E, it made these changes in the way it operated the building: • Raised the chilled water temperature from 43 degrees to 52 degrees, saving at least 15 percent of the chiller energy; room temperature was raised from 69 degrees to 74 degrees. • Installed a high-efficiency chiller and cooling tower with variable frequency drive fans and temperature and humidity controls • Relocated perforated floor tiles or replaced them with solid tiles • Sealed raised-floor penetrations, cable ways, conduits, equipment stands and ramp skirts; sealed unused cut-outs inside the computer room air handlers to stop most bypass air • Installed variable frequency drive fans on all 20 computer room air handlers and created four zones for pressure feedback control; reduced fan power by 83 percent • Installed flow diverters on the hot side of server racks • Installed an air-side economizer with air ducted into the space • Eliminated unnecessary lighting Capital Costs: $710,000 Cost Savings: $262,000 a year Energy Savings: 2.3 million kW per year Utility Incentive: $130,000 (18% of capital cost) Payback: 2.2 years
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What excites you about Cleantech, and where do you see its application in your world?
Craig Allison President Plant Construction Company
Douglas A. Booth Principal nicholsbooth ARCHITECTS
John Lieu Senior Facilities Manager Yelp, Inc.
As we are in the business of building, renovating and maintaining the Bay Area’s buildings, we do well when local businesses do well. This means that people need jobs that pay well, and for that we need a continual development of new businesses and new industries. In a high-population, high-cost urban area with an educated workforce and complex business regulations such as the Bay Area, cleantech and greentech industries are the logical, maybe the only, avenues for significant industrial and business development. The emergence of the Bay Area as a leader in the cleantech industry is the single most promising sign of future success for local businesses like ours.
In the design world we see cleantech and greentech manifested through the increasing availability of new building materials made with recycled or rapidly renewable content, water-saving fixtures and equipment, and energy-saving technologies. As public opinion has pushed for regulatory guidelines, many new products and technologies are getting our clients’ attention, and the pay-back for them is getting better. Low-flow toilet room fixtures are making great strides, resulting in reduced water usage, sewage processing, and the vast amount of electricity that is required to move water around our world. For me, the most exciting emerging technologies are the “smart” lighting and power controls that are coming on the market, such as Adura Technologies’ wireless lighting controls and energy-management systems. These products are continually evolving, and it’s hard to know when to start investing your construction dollars into a maturing technology, but I think the time is right.
I think cleantech is obviously one of the hot topics right now and justifiably so. This could be a huge industry for the U.S. to thrive in and become the leading think tank and manufacturer for the world. Cleantech is already allowing companies to be more cost effective and efficient from a facilities standpoint. The idea of using recyclable materials on all levels in the construction process is saving precious time and space at our landfills. Another example where cleantech is having huge effects in my industry is within the energy category. We have so many products to choose from that can improve energy consumption such as HVAC control systems, server rooms and lighting controls to name a few. The future is looking bright.
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ACCOUNTING
F
or more than 20 years it has been widely accepted that the off-balance-sheet treatment of real property leases under Financial Accounting Standards Board statement 13 has failed to meet the needs of financial statement users because it doesn’t provide faithful representation of leasing transactions. When you boil it down, a lease is just another type of financing—100 percent financing, and today’s financial statements simply don’t reflect those underlying economics. That makes it difficult to compare companies that have made different financing decisions. There is little argument that the right to use property (including real estate) for a finite period of time is an asset and that the obligation to pay rent is a liability. Despite these fundamental agreements, forthcoming lease-accounting rules are causing controversy. The troubles stem from the methodology proposed to determine the value of the “right-to-use” asset, the manner in which occupancy expense is recognized and the position that in-place leases will not be granted “grandfathering” treatment. The new standards introduce an element of discretion for a company to proactively mitigate the impacts for their benefit, including ways to legitimately dampen the dramatic front-end expense differential under the new standards. For the most part chief finance officers and corporate real estate executives have adopted a wait-and-see attitude toward the proposed changes. Many companies believe that because some details of the new lease-accounting standards have not been finalized that they may not happen at all. Based on my research, this is a mistaken perception. There is unanimous consensus among the international accounting firms and experts that I have consulted that the implementation of the proposed lease-accounting rule changes is imminent and that final details, including the implementation date, are to be set by mid-year. Assuming the accuracy of those expectations, the impact to the financial statements of companies that lease their facilities will be dramatic, if not shocking. Be wary of overly broad conclusions about the new standard’s effects—leases are going to be shorter, more companies are going to own, or the sale-leaseback market is dead. These and similar statements oversimplify and don’t address the many nuances of individual companies. Changes in key financial-statement ratios and performance measures associated with the shift to what is being referred to as the “right-to-lease” method of accounting will be dramatic. The results will impact loan covenants, performance metrics that influence executive compensation, earnings and contract pricing. The shock to occupiers will manifest in multiple forms. As a rule of thumb, the costs associated with new five-year leases will increase 8 percent to 10 percent in the first year, and the first-year costs associated with new 10-year leases will rise 16 percent to 20 percent. Leases entered into prior to the implementation of the new standards will not be treated differently, so the first year profit-and-loss impact for in-place leases, or leases entered into before the implementation of the new standards, could reach 35 percent. A five-year lease with a five-year option under FASB 13 is treated as a five-year lease. But the same structure under
An Accurate Accounting New accounting rules for property leases promise unhappy surprises for the unprepared. By Scott Daugherty
the new standard could be treated as a 10-year lease, which would result in material impacts to both balance sheets and profit-and-loss statements. Balance sheets are expected to balloon. Financial services company Credit Suisse Group AG conservatively estimates that the S&P 500 companies have $550 billion of uncapitalized, off-balance-sheet real estate leases. There is also the mistaken notion that the new standards will uniformly impact all companies, so there is no need for any one company to act faster. But similar to the decision to purchase and finance a facility, leasing is a corporate finance decision that is influenced by a company’s unique circumstances and business objectives. When a decision to lease is made, the period a company chooses to control the facility through the combination of lease term and option periods is influenced by factors including growth assumptions, the level of investment made in a facility, a forecast of future real estate market conditions, the impact on earnings and risk mitigation considerations. Further, the timing of when in-place lease commitments were made will have significant financial-statement implications. Accordingly, the impact to two companies in the same industry more times than not will be materially different. Others believe they can rely upon their auditors to assist them to navigate the implications. But the support a company’s auditors can provide is limited by their business model and regulations. Auditors can and will advise clients on the complex new disclosure requirements and will bless the accounting for lease commitments. But the regulations associated with The Sarbanes-Oxley Act of 2002 prohibit CPAs from auditing work that they supply on a consulting basis. Further, any structuring support they could offer in a consulting role would be limited by whatever they lack of local real estate market knowledge and practices. In the end, hurry will pay the highest price, and there will be benefits to first movers. The opportunity to structure transactions to mitigate the impact of the changes is now, including their effect on in-place leases. n
There is unanimous consensus that the proposed leaseaccounting rule change is imminent and will be implemented by mid-year.
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FINANCE
We’ll Eat Like Kings Technology is remaking banking, creating checks on rating agencies that undermine their unhealthy market dominance. By Peter Ingersoll
W
aiting for the logjam of distressed loans to break and flood the market with commercial buying opportunities reminds me of a Gary Larson cartoon where two spiders have woven a web at the bottom of a child’s playground slide. One says to the other: “If this works, we eat like kings!” While some loans and foreclosed properties have been brought to the market and snapped up at pennies on the dollar, on the whole, portfolios of loans and distressed properties sit intact and are ripening in the anemic sun of economic recovery. Because of the jiggering of FASB rule 157-e on accounting for fair value, banks have had no urgency to mark their loans to market and, for the moment, are content to wait for greater recovery in commercial real estate, which has seemed always around the proverbial corner. Still, now that the money supply is growing again, odds have improved that commercial property prices may climb despite the significant risk of rising interest rates. Yet, even if a broad price recovery happens in commercial real estate, the question remains: Will banks deliver their troubled assets to market in supertankers or hand-woven baskets? Probably neither! Advances in information technology and the way it is being used in the Internet age are overhauling the banking sector, including the way it disposes of distress. Coupled with the generous regulatory regime, the methods are in wild contrast to the federally sanctioned fire sale led by the Resolution Trust Corp. in the first half of the 1990s. But the same technology has the potential to remake banking more broadly, too, touching loan origination and participation
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practices and creating checks on rating agencies that undermine their unhealthy market dominance. The Internet as we know it did not exist in the early ’90s. Investors had to wade through reams of paper to perform due diligence on loans and properties offered by the RTC. Today there are Internet platforms that provide identical due-diligence information electronically and efficiently. Banks with adequate capital can engage in active portfolio management, taking performing and non-performing assets to a wider audience of qualified investors more completely than ever before. The FDIC has approved five firms to offer this secure, Web-based, market-clearing mechanism: DebtX, a Boston firm co-founded in 1999 by Chief Executive Kingsley Greenland; Eastdil Secured, with headquarters near Central Park in New York City; First Financial Network, an Oklahoma-based company formed in 1989 by Chief Executive Bliss Morris and her husband; Garnet Capital Advisors in Harrison, N.Y., formed in 2004 by Managing Director Lou DiPalma and partners; and Mission Capital, a New York City company formed in 2002 by Chief Executive David Tobin and partners. Banks have three primary motivations to sell a note through a third-party platform, said Garnet Capital’s DiPalma. They help banks position themselves with regulators as acquiring banks, or “aggregator banks,” in the words of Sheila Bair, head of the FDIC, by ridding their balance sheets of bad assets and improving metrics such as equity ratios. Overworked asset managers can leverage the resources and experience of these platforms to ease inventory management. Finally, they aid in investor management. If non-performing assets can be pared away, balance sheets look better and investors are pleased. Stock prices are bolstered, giving banks the ability to create “currency” through secondary stock offerings. Beefed-up capital allows banks to grow their assets and deposits through acquisition of other failed banks, which, in today’s turbulent market, is better than making a loan from scratch. With likely financing and a loss-sharing agreement available from the FDIC, the acquiring bank has a much safer route to make money than the grind of lending money on a loan-byloan basis. Mission Capital principal Tobin says its Web-based system “allows investors sitting at their desks to perform underwriting from beginning to end and provides a level and fair playing field for all bidders.” All due-diligence documents are tagged, labeled and organized and then supplemented with real-time updates—such as revised appraisals—as Mission Capital receives them. All bidders get simultaneous notice of any new documents, and the system keeps an audit trail of who has reviewed which documents. These platforms are evolving at a rapid pace and may begin to breed disruptive technology. Shortly, DebtX will be providing the equivalent of a FICO score for all loans sold through its platform.
“In effect, technology is creating liquidity.” David Tobin, Chief Executive, Mission Capital
While not an exact equivalent of what rating agencies are supposed to provide, it has the potential to grow into a powerful tool for note buyers that also has the effect of loosening the monopoly grip that rating agencies have on this important due-diligence function. DebtX’s Greenland emphasizes that its marketplace is “transparent.” That transparency, in turn, should spread to the banking system and help make it safer. He equates the ranking system for all of the loans listed on its site as a proxy for traditional credit-scoring methods, saying it “takes all of these heterogeneous assets, like commercial real estate loans, and makes them homogeneous.” If this loan-scoring capability becomes ubiquitous and gives the rating agencies a run for their money, maybe—just maybe, they will be more thorough, transparent and honest in their ratings. Then again maybe it won’t snow in Minnesota this year. There are other positive implications for these new Web platforms in loan origination and participation. Because a large number of banks are using these platforms—both as sellers of notes and, more particularly, buyers of notes—what is emerging is the potential to become a national platform for traditional loan participation among community and regional banks. Banks can now originate loans in their back yard, structure the participation agreement and find participants anywhere in the county; conversely, banks can choose to let other banks originate and simply become participants. This will allow banks of all sizes to scale their loan origination volume up or down without committing to the fixed overhead of staff; alternatively, a bank can choose to become an active originator and specialize in a niche and supply their larger cousins with assets for a much-needed fee. This Web-based marketplace opens the doors to new profit centers that are squarely within the traditional banking realm to any bank with a little creativity and foresight. Green shoots from the ashes! “So [banks] have the ability to distribute high-quality, performing loans to other healthy banks that are plugged into the marketplace,” Greenland said. “It is really a stunning [development].” Mission Capital’s Tobin agrees: “In effect, technology is creating more liquidity.” He cautions that the system still requires refinement: “Every commercial loan can be different, so there needs to be more standardization and regulation of the inter-creditor agreements to fully support a liquid market.” But a new day still appears on the rise. Technology disrupts, new markets form in clear light, and bidders listen. “At the end of the day the marketplace speaks for itself. It is extremely deep and extremely liquid. And it prices very, very efficiently,” Greenland says. For the Luddites in the modern world of commercial real estate— perhaps myself included—I guess this means we will have to suck it up and learn how to program our TV remotes. n Peter Ingersoll can be reached at peter@safeharbourequity.com.
retail
There’s No Place Like Home As good times roll back around, real estate investors should take stock of the foibles of our past and resolve not to repeat them. By John McNellis
Too late, we, the geniuses of real estate, learned that “VC” stands for Viet Cong and that we were “angel investors” because we were about to die.
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I
f the Great Recession isn’t already in Northern California’s rearview mirror, we will pass it shortly, and good times—or at least dramatically better times—will be upon us. Maybe this recovery will be different. Maybe, amidst the celebrating by one and all, we will acknowledge what we have ignored in past booms—namely, that prosperity brings its own pitfalls. Principal among them is the well-fed’s desire to travel afield. Jesus once lamented, “No man is a prophet in his own country.” Gospel, perhaps, if one is in the messianic line, but less useful for those of us with secular pursuits. A more germane proverb might be, “No man can make a profit outside his own country.” All too true and all too ignored by the lords of real estate. At least in the good old days developers who strayed from what they knew—their flocks, so to speak—lost money with panache and style; they went down having fun. In the bottleof-wine-for-lunch era, a successful developer would grow bored building tract houses and open his own restaurant. Opening night, the place would be wall-to-wall with the pretty people, the prawns would be jumbo and the champagne French. Young lovelies would mob the enchanted developer; he would be the toast of the town. Soon enough the restaurant would empty like a played-out gold mine, and its owner would discover how quickly the toast of the town can become just toast. More successful old-school developers—add a zero to the net worth—were apt to invest in a professional team in some new, emerging league. These developers would throw even better parties—wild affairs replete with chiseled athletes, long-limbed beauties and regional celebrities. Even prettier people would swarm these soirees, the thrilled developer could walk across his swimming pool on the shoulders of his admirers. But, since nary a one would ever attend a single game, the league would inevitably fold and these greater men would quietly lose their jerseys. The true behemoths of that bygone era—developers with nine figures to the left of the decimal point—would buy a movie studio when they wearied of bricks and mortar. Their parties were the grandest: exclusive, starlet-strewn bashes peppered with the near-great from the fun walks of life. The studio might last a bit longer than the restaurant or the team, but in the end the titan would fare no better, selling to Hollywood insiders for pennies on the dollar, then learning the hard way just how appealing he truly was.
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At least those developers, from the mere rich to the staggeringly wealthy, had a great time when traveling abroad. We, the serfs, could only gasp at their swashbuckling daring, and hope—forlornly—to be invited to their swanky parties. And possibly, to learn from their mistakes. But what we learned—never invest in anything fun— was the wrong lesson. Or just half of the right lesson. When our turn came 20 years later—starting near the end of the 1990s—we were half-prepared; we knew we should run away from any investment advisor wearing a ponytail or more gold than a wedding ring; we knew the most one could hope for in opening a restaurant was a great table on Friday night. But the lesson too few modern developers or landlords learned—stick with real estate—was their undoing. They— no, we—had learned to avoid the flashy, the glamorous and the outrageous. But we all were helpless before the bland, the boring and the goofy—the quants, the techies and the Internet savants. Being far more clever and practical than our economic forbears, we equated boring with reliability and mistook complexity for profits. If a presentation on a new company both went over our heads and put us to sleep, we were sure to invest. That old saying—experience is something you acquire just after you need it—should be Silicon Valley’s official motto. Too late, we, the geniuses of real estate, learned each new company has dozens of critical elements that must be questioned from the outset, elements the innocent (in this admittedly rare case) developers would never dream of. Too late, we learned that “VC” stands for Viet Cong and that we were “angel investors” because we were about to die. We learned start-ups never die a clean, brave death. Unlike failed real estate that is guillotined on the courthouse steps, dying start-ups can linger for years. Investors may have utterly worthless shares, but management somehow ekes out a dreary, dividend-less existence seemingly forever, doing little more than paying its own salaries. This time around, we should stay in our own country, we should stick with what we know, we should realize we are to Silicon Valley what doctors are to real estate. And, perhaps like that cowboy generation of developers from yesteryear, we ought to have fun, maybe even take Tug McGraw’s investment strategy to heart. When asked about how he would spend a sizable signing bonus, he reportedly said, “Ninety percent I’ll spend on good times, women and Irish whiskey. The other 10 percent I’ll probably waste.” n
by the
Numbers
And They’re Off Evidence is mounting that the Bay Area economy is improving; employment and net absorption are two indicators. By Sharon Simonson
From late 2008, when the outline of future events was as hazy as anyone could remember, and expectations as doleful, the mosaic of the new world order in commerce is filling in. Clarity is breeding optimism; nowhere is the U.S. picture more clear than in the Bay Area. Once again, the latest iterations of information technology are at the vanguard of economic revival led by social networking and mobile devices. The science and applications being created, the companies developing both, and workers are driving change, profoundly and fast. The effects are evident everywhere in Northern California. “We have a lot to be thankful for,” said Mike Kamm, chief executive of brokerage Cassidy Turley BT Commercial, Jan. 12 at the San Francisco Four Seasons. Kamm spoke for the company’s annual state of the market and forecast event. Social media are a big deal, he said, and they are a primary cause for optimism about the Bay Area. “The number of social media users is staggering and growing fast,” he said. Facebook, which now has more than 500 million users, is projected to have a billion in the next 18 months. Of the 10 largest social networking sites, six companies are headquartered in the Bay Area, including Facebook Inc., LinkedIn Corp., Twitter Inc., Tagged Inc. and Ning Inc. Of the five largest search engine sites, three are in the Bay Area and account for 88 percent of searches, Google Inc., Yahoo! Inc. and Ask.com., according to Cassidy Turley research. In San Jose, high-tech jobs represent a whopping 26 percent of all employment, far more than in other well-known technology clusters in Boston, Seattle and Austin, according to Moody’s Analytics and Cassidy Turley. High-tech represents 10 percent of all workers in San Francisco.
Office Net Absorption Thematic
Net Abs Thematic As % of Building Base Positive Absorption Negative Absorption Source: Cassidy Turley/BT Commercial
Technology leading U.S. jobs recovery and driving multi-speed CRE recovery Tech Software+Services
Millions
3.2
Tech Maunfacturing
Total Non-Farm
Millions
140
Bay Area Tech Software+Services
138 3.0
136 134
2.7
132 130
2.5
128 126
2.2
124 122
2.0 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: BLS, Moody’s Analytics & Jones Lang LaSalle
Rebirth in this cycle comes after a far less severe downturn, at least in the Bay Area, compared to that of the early 2000s. From the beginning of 2001 to the end of 2003, the Bay Area lost 65 million square feet of occupancy across all products, according to Cassidy Turley. In this downturn, from 2008 through 2010, the region lost 27 million square feet of occupancy, and recovery is building across property sectors. Technology’s resurgence is affecting real estate in three ways, says Ben Breslau, director of Americas research at Jones Lang LaSalle. Technology is driving demand for office space inexorably down. As their workforce of “digital nomads” does more from laptops and other mobile devices and cost pressures continue, companies will demand less real estate. Space per worker could decline to 50 feet before decade’s end, Breslau said, speaking Jan. 12 at San Francisco’s Ritz Carlton, as part of JLL’s 2011 “Forecast 2.0: Market Evolution in the Digital Age.” Technology also is leading demand for space in markets other than the San Francisco Bay Area, Breslau said. He cited Google’s huge purchase of 111 8th St. in Manhattan for $1.9 billion. Tech companies are opening offices in Washington, D.C., because they want to sell to the federal government, a potentially huge client, but also because they want to influence federal policy. “Microsoft, Google and even Facebook are in Washington,” he said. Also at work are the improvement of technology itself and a generational shift in the population, as the children of the Baby Boomers—also known as Generation Y and the millennials—mature. “By mid-decade, the millennials will be half of the U.S. workforce,” Breslau said. They are a group that technology companies and corporate America seek to attract. “Commodity office space is a thing of the past,” Breslau said. Instead, companies are asking: “What does my workplace of the future look like?” n
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Not Yet Plugged In By Rob La Eace
R s ’ ob
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“Back to the Future,” 1985 Marty McFly: This is uh... This is heavy duty, Doc. This is great. Uh, does it run, like, on regular unleaded gasoline? Dr. Emmett Brown: Unfortunately no, it requires something with a little more kick — plutonium. Marty McFly: Uh, plutonium? Wait a minute. Are ... Are you telling me that this sucker is nuclear? Dr. Emmett Brown: No, no, no, no, no. This sucker’s electrical. But I need a nuclear reaction to generate the 1.21 gigawatts of electricity I need.
D
In the condominium complex where I live, a committee was formed several months ago and charged with exploring ways our homeowners’ association can offer residents the ability to charge an electric car. 28 theregistrysf.com
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r. Brown from “Back to the Future” was on to something. It appears, though, that it was more a case of right idea-wrong execution. Fast forward to 2011, and car makers Chevy and Nissan have rolled out the first mass-produced electric vehicles: the Volt and the LEAF, respectively. Though these models do not require plutonium, they do need electricity—and therefore a place to plug in and charge while they rest their weary tires. This reality has federal, state and local governments, as well as corporations, small businesses and residential communities of all sizes focused on the task. Some industry experts expect as many as 10 percent of car sales will be electric by 2020. Though electric cars will not dominate the highways, they will be popular with green-minded Bay Area residents. Planning for the installation of the massive infrastructure to charge the electric vehicles of the future has been underway for several years, but with these vehicles now on the streets, there is a heightened sense of urgency. In the condominium complex where I live, a committee was formed several months ago, headed by an environmentally-conscious owner who is a retired architect. The group is charged with exploring ways our homeowners’ association can offer residents the ability to charge an electric car. Having polled my colleagues from the real estate industry regarding their personal knowledge of other buildings that are tackling this subject, it’s evident that this is relatively uncharted ground. It is estimated that 80 percent of all electric car charging will take place at home, so like it or not, this topic will need to be broached by residential buildings sooner or later. There are many points building residents and management will have to consider. Topping the list is who will pay for the installation of the charging units ($2,000-$4,000 per unit). Condominiums will need to debate whether the building as a whole should pay for the installation or if individual owners should bear
the cost. A decision must be made, as well, on which charging models will be allowed. Different systems run on different voltages. There are 110V, 220V and 440V chargers readily available at this time. The higher the voltage, the faster the cars charge. Charging times currently vary from 26 minutes to eight hours depending on the car and voltage of the charger. Keep in mind, not all home wiring systems are set up for even 220V applications, let alone 440V. So, some buildings will need to upgrade wiring and circuit panels, as well. As you can see, these projects can become a bag of worms quickly. Add some hypothetical scenarios, and the fun continues: Do you add a charger for a common area or guest-parking space? What does a building with only valet-parking do? How will the building charge for this service? Will it be a flat fee per month or do you install meters? You can imagine that there will be members of a building’s community that will not believe it fair that they carry the cost to charge their neighbor’s vehicle, right? It will be interesting to see if sales in buildings that do establish charging systems will be more brisk. Will the public care in the first few years? And will it help with resale values at all? The answers are unknown. What my crystal ball does tell me, however, is that there are some very lucky real estate attorneys out there who will be running up billable hours amending association covenants, conditions and restrictions to address these new policies. Beyond individual buildings, municipalities will play key supporting roles. Progress, on a small scale, has been made. In San Francisco, charging stations have been added to city streets (e.g. in front of City Hall), parking structures and places of business to offer alternative charging locations for those who are not tooled up to charge at home or simply are low on juice. Palo Alto company Better Place, along with the U.S. Department of Transportation and the cities of San Francisco and San Jose, is working to create a network of 61 electric continued on the next page
02Calendar
january february march april may june july august september october november december
1
CREW Silicon Valley will host a monthly program and luncheon at SV Capital Club, 50 W. San Fernando, Ste. 1700, San Jose. Visit wwww.crewsv.org for more information. CoreNet Northern California Chapter will host a Young Leaders Speed Networking event from 5:30 p.m. – 8:30 p.m. Visit http://nocal.corenetglobal.org/CORENETGLOBAL/NorthernCalifornia/Home for more information.
2
USGBC Northern California Chapter will host a LEED Green Associate Exam Prep workshop from 8:30 a.m. – 5 p.m. at XL Construction, 851 Buckeye Ct., Training Room A, Milpitas. For more information, contact info@usgbc-ncc.org.
3
BOMA Silicon Valley will host a Commercial Leasing Class from 9 a.m. – 11:30 a.m. at Crowne Plaza San Jose – Downtown, 282 Almaden Blvd., San Jose. Members $40 and non-members $60. Visit www.boma-sv.org for more information. BOMA Silicon Valley will host a membership luncheon starting at 11:30 a.m. at Crowne Plaza San Jose – Downtown, 282 Almaden Blvd., San Jose. Members $50 and non-members $75. Visit www.boma-sv.org for more information.
8
SPUR and ULI San Francisco will host an event called New Urban Development: Looking Back to See Forward from 6 p.m. – 8 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Visit www.ulisf.org for more information. USGBC Northern California Chapter will host Retrofitting Existing Buildings for Energy Efficiency and Demand Response from 8:30 a.m. – 5 p.m. at Cypress Envirosystems, 198 Champion Ct., San Jose. Members $15 and non-members $30. For more information, contact Judith Sayler at jsayler@gordonprill.com.
9 10-11
IFMA Silicon Valley will host a Develop Your Path luncheon from 11:30 a.m. – 1 p.m. Members $20 and non-members $30. Visit www.ifmasv.org for more information. IFMA Silicon Valley will host a Leadership and Strategy Essential FMP class from 8 a.m. – 5 p.m. Members $400 and non-members $500. Visit www.ifmasv.org for more information.
10
BOMA Oakland/East Bay will host an Employer/Employee Practices luncheon starting at 11:30 a.m. at Scott’s Seafood Grill and Bar, 1333 N. California Blvd., Walnut Creek. Members $45 and non-members $75. Visit www.bomaoeb.org for more information.
USGBC Northern California Chapter will host a course called The Competitive Edge, Part Two: Financial Considerations for Energy Efficiency Retrofits from 9 a.m. – 4:30 p.m. at Hanson Bridgett, LLP, 425 Market St., 26th Floor, San Francisco. Members $395 and non-members $445. Visit www.usgbc-ncc.org for more information.
15
USGBC Northern California Chapter will host a LEED AP Building Design and Construction Exam Prep workshop from 8:30 a.m. – 5 p.m. at Rudolph and Sletten, 1600 Seaport Blvd., Ste. 350, Redwood City. For more information, contact info@usgbc-ncc.org. Appraisal Institute Northern California Chapter will host an event in which the Fresno area appraisers will gather at Fort Washington Country Club in Fresno. For more information call 559.433.9257.
22
SPUR’s Young Urbanists will host an event called Hub Bay Area: Innovation in Energy starting at 6 p.m. at 654 Mission St., San Francisco. Members $10 and non-members $20. Visit www.spur.org for more information.
28
SPUR will host an evening forum called Urban Green: Innovative Parks for Resurgent Cities starting at 6 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Visit www.spur.org for more information.
Not Yet Plugged In
Opportunity Cost
continued from the previous page
continued from page 15
taxi cabs that use four battery-swap stations along the Peninsula. These will allow cabs that couldn’t spare even 30 minutes for a fast charge-up a means to stay on the road where they can generate revenue. Many other public and private ventures are in the works. They come in the forms of electric car-share programs and the installation of charging stations at retail locations like Costco and Best Buy stores and places of employment (see Google and Adobe Systems). San Francisco based ECOtality Inc. is even working on the placement of charging stations at traditional petrol stations (Big Oil wants your money one way or another). And San Francisco has even adopted new building codes to require the installation of charging units in new homes and offices. While this sounds like a great step forward, it must be taken cautiously. One electric-car charger can draw the current of three homes. Too many cars charging at the same time, during peak hours, could be disastrous. Thus, Pacific Gas & Electric Co. is working fervently to study the impact these chargers will have and to create work-arounds (off peak charging or smart chargers) to ensure power grids will not be overloaded. Clearly, there is a buzz in the air. Electric cars are an exciting concept. How they will make their way into our hearts and homes, time will tell. Government tax credits and auto-maker rebates will continue to fuel the growth of this niche industry. But, ultimately, the sales and popularity of these vehicles will depend on the existence of a welldesigned and affordable infrastructure in place to charge them. n
As for World Heritage Site status for San Francisco’s Civic Center, the designation process is complex, but Veerkamp says that given the connection with the signing of the U.N. charter, the Civic Center seems to meet UNESCO’s criteria. Beyond that, it is considered one of the finest if not the finest examples of the American City Beautiful movement, a drive for municipal reform that sprang up in the 1890s and continued after the turn of the century. That said, Veerkamp believes that the transfer to private hands of an integral building to the Civic Center cluster would almost certainly torpedo the effort. Stephen Morris, chief of the National Park Service office that oversees the U.S. nomination process to UNESCO, says that legally all private property owners of nominated sites must give their written consent. Private property owners also must be willing to establish legally binding protection for a nominated site to ensure that it is preserved in perpetuity. He discussed the Civic Center nomination with Hough before his demise, Morris said. John Rizzo, a board member at the Burton Center, said without Bill Hough’s leadership it is unclear if they could carry the torch forward in any case, a pity, he notes, given the global stature the designation would give San Francisco, not to mention the potential boost to the troubled Tenderloin district nearby. “It would seem like the founding of the U.N. would be enough for World Heritage Site,” Rizzo says. n
Rob La Eace can be reached at 415.290.7228 or rob@roblaeace.com.
F E B R uary 2 0 1 1
theregistrysf.com 29
activity
Reports
commercial leaseS
City
Lease Size Sq. Ft.
Name of Tenant/Rep (Brokerage)
Name of Landlord/Rep (Brokerage)
Notes (ie. Lease type and/or lease longevity)
41707 Christy St
Fremont
120,960
Quanta/Thomas Taylor (CB Richard Ellis)
Unknown/David Buchholz & John Kovaleski (Colliers International)
Warehouse/ Distribution, New Lease
30336 Whipple Rd
Union City
53,000
LKQ/Cushman & Wakefield
RREEF/Mark Maguire (Colliers International Oakland) & Cassidy Turley BT Commercial
New Lease, 120M
1610 5th St
Berkeley
33,551
Annies, Inc./Benjamin Harrison & Aileen Dolby (Colliers International Oakland); Steve Crocker & Bill Kampton (Colliers International Fairfield)
Cedar 4th Partners/Benjamin Harrison & Aileen Dolby (Colliers International Oakland)
New Lease, 60M
30336 Whipple Rd
Union City
26,000
Lagasse
RREEF/Mark Maguire (Colliers International Oakland) & Cassidy Turley BT Commercial
N/A
2101 Webster St
Oakland
24,451
Pandora Media
CIM Group/Ken Meyersieck, Trent Holsman & Scott Greenwood (Colliers International Oakland)
36M
1968 Williams St
San Leandro
21,890
Customer First Warehouse Services, Inc./ Lee & Associates
Lowenberg Corporation/Greig Lagomarsino, SIOR, Mark Maguire & Kevin Hatcher (Colliers International Oakland)
New Lease, 26M
1333 Broadway
Oakland
18,137
USDA/Carpenter/ Robbins Commercial Real Estate
CIM Group/Ken Meyersieck, Trent Holsman & Scott Greenwood (Colliers International Oakland)
New Lease, 120M
20902 Cabot Blvd
Hayward
13,100
Talas Engineering, Inc/ Martin Church (Grubb & Ellis Company)
Hayward Corporate Center, LLC/Bob Ferraro, Mike Barry and Dan Dowd (CB Richard Ellis)
Manufacturing, New Lease
1 Kaiser Plaza
Oakland
12,550
Aiken & Welch/Al Musante (Colliers International Oakland)
CIM Group/Ken Meyersieck,Trent Holsman & Scott Greenwood (Colliers International Oakland)
Renewal, 36M
5401 San Leandro St
Oakland
11,200
Growop Enterprises/ Joe Yamin (Colliers International Oakland)
Longdo Trucking/Lee & Associates
Sublease, 16M
1 Kaiser Plaza
Oakland
9,838
Michael Baker, Jr, Inc./UGL Equis
CIM Group/Ken Meyersieck, Trent Holsman & Scott Greenwood (Colliers International Oakland)
84M
32940 Alvarado Niles Rd
Union City
9,450
Gexpro/Cushman & Wakefield
Harsch Investment Group/Joe Yamin, Sean Sabarese & Greig Lagomarsino, SIOR (Colliers International Oakland)
New Lease, 63M
6475 Christie Ave
Emeryville
9,138
Tavistock/Cornish & Carey Commercial Newmark Knight Frank Emeryville
Bay Center Investors C/O Harvest/Aileen Dolby & Ken Meyersieck (Colliers International Oakland)
New Lease, 36M
8000 Edgewater Dr
Oakland
7,678
Northrop Grumman Technical Services
Edgewater Holdings, LLC/ Al Musante (Colliers International Oakland)
New Lease, 60M
401 Roland Wy
Oakland
7,090
Alternative Family Services/ Cassidy Turley BT Commercial
Roland Way Associates, LLC/ Al Musante (Colliers International Oakland) & Gabe Burke (Colliers International Redwood City)
New Lease, 60M
2036 Livingston St
Oakland
6,300
Mitchell Newberger/Mike Barry & Robert Ferraro (CB Richard Ellis)
Two-O-Four-O Livingston/Mike Barry & Robert Ferraro (CB Richard Ellis)
Class B R&D/ Flex, New Lease
1999 Harrison St
Oakland
5,563
Brightsource Energy/Ken Meyersieck & Trent Holsman (Colliers International Oakland)
Beacon Capital Partners/Ken Meyersieck & Trent Holsman (Colliers International Oakland)
Expansion, 42M
1999 Harrison St
Oakland
5,294
Wells Fargo Advisors/Travers Realty
Beacon Capital Partners/Ken Meyersieck & Trent Holsman (Colliers International Oakland)
Renewal, 60M
2101 Webster St
Oakland
5,242
Pandora Media
CIM Group/Ken Meyersieck, Trent Holsman & Scott Greenwood (Colliers International Oakland)
45M
1855 Gateway Blvd
Concord
31,803
Kyocera Technology
Sierra Pacific Properties/Andy Schmitt & Chris Adams (CB Richard Ellis
Class A Office, New Lease
2175 California Blvd
Walnut Creek
11,499
RPM Mortgage, Inc.
RREEF America REIT II Corp./ Jeff Birnbaum & Andy Schmitt (CB Richard Ellis)
Class A Office, Expansion
San Rafael
10,316
Autistry Studios/ Michael Golden (Cassidy Turley BT Commercial)
Duffy & Myers/Nathan Ballard & Kevin Doran (Keegan & Coppin Co., Inc.)
Office Gross Lease
301 Brannan St
San Francisco
23,582
StumbleUpon/Cornish Carey Commercial Newmark Knight Frank
Slide, Inc./Phil Tippett (CB Richard Ellis)
Class B Office, Sublease
900 Kearny St, Suite 228
San Francisco
1,234
Hansell & Associates, Buchanan Law Group/ Peggy Burke (TRI Commercial)
The Leung Trust/David Wientjes & Mike Gschwend (GVA Kidder Matthews)
Office
301 E Grand Ave
South San Francisco
43,446
NA Sales Company, Inc/ Mark Melbye (GVA Kidder Matthews)
Bedford Property Investors, Inc
Industrial
2000 Sierra Point Pky
Brisbane
14,087
Ricoh Corporation/John Held (CB Richard Ellis)
Diamond Investment Properties/ David Wilson (CB Richard Ellis)
Class A Office, Renewal
220 S Linden
South San Francisco
7,000
US Governement of the United States GSA
Lai, David & Lydia/Mark Melbye & Joe Cammarata (GVA Kidder Matthews)
Industrial
Address Alameda County
Contra Costa County
Marin County 37 Duffy Plc
San Francisco County
San Mateo County
30 theregistrysf.com
F E B R uary 2 0 1 1
commercial Leases Continued
Address
City
Lease Size Sq. Ft.
Name of Tenant/Rep (Brokerage)
Name of Landlord/Rep (Brokerage)
Notes (ie. Lease type and/or lease longevity)
1111 Bayhill Dr
San Bruno
6,673
Influentials.net/Cassidy Turley BT Commerical
Equity Office/Brian Beswick (CB Richard Ellis)
Class A Office, New Lease
2000 Sierra Point Pkwy
Brisbane
5,602
Keystone Strategy/ Alex Wilson (CB Richard Ellis)
Diamond Investment Properties/ David Wilson (CB Richard Ellis)
Class A Office, New Lease
950 Tower Ln
Foster City
5,105
Gemini Mobile Technologies/ Brian Beswick (CB Richard Ellis)
Equity Office/Mike Moran (Cassidy Turley BT Commercial)
Class A Office, New Lease
7000 Shoreline Ct
South San Francisco
4.627
Brains Online
Alexandria Real Estate Equities/Mary Hines & Jennifer Berrueta (GVA Kidder Matthews)
Office
4555 Great America Pkwy
Santa Clara
74,453
Tellabs Operations, Inc./Unknown
Unknown/Mike Charters, Mark Christierson & Christian Marent (CB Richard Ellis)
Class A Office, Expansion
329 Bernardo St
Mountain View
37,232
Argon St/Nancy Morse (Grubb & Ellis Company)
Vanni Business Park/Vanni Properties
NNN Lease
379 Lytton Ave
Palo Alto
29,705
Sheppard Mullin/ Derek Johnson (Jones Lang LaSalle)
Lytton-Campbell Associates LLP/ Michael Frost (CB Richard Ellis)
Class A Office, New Lease
3000 El Camino Real
Palo Alto
13,291
Kaye Scholer/Matt Von der Ahe & Doug Beck (CB Richard Ellis)
Equity Office/Randy Gabrielson (Cornish & Carey Commercial Newmark Knight Frank)
Class A Office, New Lease
275 Saratoga Ave
Santa Clara
7,329
JPD Financial/ Nancy Morse (Grubb & Ellis Company)
Saratoga Office Center/ Nancy Morse (Grubb & Ellis Company)
Full Service Lease
2450 El Camino Real
Palo Alto
6,259
Next Issue Media/ Nancy Morse (Grubb & Ellis Company)
Foster Enterprises/ Doug Marks (Colliers International)
Full Service Lease
1475 S. Bascom Ave
Campbell
5,807
Akeena Solar/ Bob Shepard (Colliers International)
Creekside Business Mall LLC/ Nancy Morse (Grubb & Ellis Company)
Full Service Lease
5201 Great America Pkwy
Santa Clara
2,879
Packet Bits, Inc/Carlos Lorente & Justin Hedberg (GVA Kidder Matthews)
Carr America/Garrett Hooker (Equity Office)
Office
2227 Capricorn Way
Santa Rosa
46,278
County of Sonoma/ Dave Peterson (Keegan & Coppin Co., Inc.)
CA-The Lakes Limited Partnership/ Rob Elias (Equity Office)
Office Modified Full Service Lease
33 Healdsburg Ave
Healdsburg
35,000
Sonoma County Vintners Co-op/ Shawn Johnson (Keegan & Coppin Co., Inc.)
Max Machinery/ Shawn Johnson (Keegan & Coppin Co., Inc.)
Industrial Gross Lease Extension
3562 Round Barn Cir
Santa Rosa
23,546
Morgan Stanley Smith Barney Financing LLC/ Jak Churton (CB Richard Ellis)
Fountaingrove Executive Center, LLC/Shawn Johnson & Danny Jones (Keegan & Coppin Co., Inc.)
Office Full Service Lease
3750 Westwind Blvd
Santa Rosa
18,810
Dry Creek Rancheria Band of Pomo Indians/ Phil Wright (Wright Realty)
Symmetricom, Inc./ Mike Flitner (Keegan & Coppin Co., Inc.)
Office Full Service Lease
1221 Petaluma Blvd N
Petaluma
18,384
Marine Unlimited/ Mike Thomason (Keegan & Coppin Co., Inc.)
Hansel Properties/ Chris Castellucci (Keegan & Coppin Co., Inc.)
Retail Gross Lease
Santa Clara County
Sonoma County
commercial SALES
City
Property Size Sq. Ft.
Buyer
Seller
Sale Price
Price/ Sq. Ft.
Project Type
Brokers
33200-33220 Lewis Ave
Union City
98,500
KTR Captial Partners
Encinal Real Estate
$6,200,000
N/A
Warehouse/ Distribution
Kevin Hatcher & Mark Maguire (Colliers International Oakland)/ Townsend Commercial Real Estate
3532 Arden Rd
Hayward
57,522
Grand Foods
Jim P. Ludba Golden Apple
$5,500,000
N/A
Warehouse/ Distribution
Mark Maguire & Kevin Hatcher (Colliers International Oakland)/ Lee & Associates
144 14th St
Oakland
21,991
Zeliang Zou
Madison 124 LLC
$1,850,000
$84.13
Multi-Family
Joe Owens, Rich Martini
2262 Camino Ramon
San Ramon
9,792
Dr William W & Flora H Ting
Michael H & Cherly D Vawter
$1,680,150
$171.58
Office
Jeff Weil, Bruce Witt, Eric Erickson
Pleasant Hill
16,500
Guzman Family Trust
United Labor Bank
$1,400,000
$84.85
Light Industrial
Joe Owens
Address Alameda County
Contra Costa County 5036 Blum Rd
F E B R uary 2 0 1 1
theregistrysf.com 31
FINAL OFFER Holding Down the Fort Adam Engelskirchen, director of real estate, The Presidio Trust The Presidio, one of the region’s most spectacular examples of public real estate, has evolved continuously since its 1776 beginning. This year, the 1,500-acre national park and historic landmark district is set to take another decisive step along its evolutionary continuum. The move promises even more consequential happenings in the years to follow. The Presidio Trust, which manages the interior 80 percent of Presidio lands, is slated to adopt a land-use template for the 120-acre Main Post this year. The Main Post is one of the Presidio’s most recognized features with its signature row of historic red-brick Army barracks. But at present, the trust concedes, most days it “feels empty and uninviting.” Presidio visitation is consequential. The park’s federal funding stops in 2013. If unsuccessful at financial self-sufficiency, the property could be sold. In the 2009-10 fiscal year, the trust generated about $60 million in gross operating income from residential and commercial leases, enough to fund the Presidio’s daily needs—but not enough to fund capital expenditures. So, the anticipated 2011 land-use re-think arrives at an especially crucial time. It also arrives at a propitious one: The reconstruction of the antiquated Doyle Drive into the Presidio Parkway. The re-build literally opens a vast new landscape for The Presidio, in particular the Main Post. The grubby, obtrusive Doyle Drive is giving way to a modern, slowermoving, more landscaped Presidio Parkway, which will be partially submerged. By 2014, the Presidio’s Main Parade ground—the heart of the Main Post and today an ugly parking lot—is to become a grassy, central plaza. That plaza will stretch seamlessly over the sunken Presidio Parkway, connecting to Crissy Field and the shores of the Pacific Ocean. More than ever, the trust will rely on its real property for survival and on the stewardship of 42-year-old Adam Engelskirchen, director of trust real estate since 2005 and general counsel for real estate for six years before that. Engelskirchen has able guidance. The trust’s sevenmember board includes William Wilson, managing partner of San Francisco’s Wilson Meany Sullivan Inc., and David H. Grubb, former president and chairman of contractor Swinerton Inc. Engelskirchen has helped prepare the trust for the transition to independence, negotiating deals with national real estate company Forest City Inc. to execute the remake of a 300,000 square-foot historic hospital into apartments and working to persuade Lucasfilm Inc. to build a 750,000 square-foot office and entertainmenttechnology center under a ground lease. The new Main Post land plan is expected to include a new 120-room lodge a la The Ahwahnee in Yosemite National Park, new restaurant and theater space and greater emphasis on ground-floor public uses, all designed to increase foot traffic and inject life. Why did you leave a career at a big Los Angeles law firm to come to the Presidio? AE ❯ The trust is utterly unique. It is a federal agency that has to pay for itself by using some of the world’s most amazing real estate in support of a public mission. There are constraints. We have a square footage cap, many of the buildings are historic, and we can’t sell property, so we have done a lot of complex historic rehabilitation on long-term leases. Since 2004, our operating revenue has covered our operating expenses, but we have a huge amount of capital expenditures to upgrade the infrastructure, replace the forest, keep the roads up and maintain police and fire service. It is very much like a small city. 32 theregistrysf.com
F E B R uary 2 0 1 1
❯
ADAM Egelskirchen By Sharon Simonson What are the current redevelopment initiatives at the Presidio? AE ❯ We have just under six million square feet total, about 1,100 residential units and roughly three million square feet of commercial space, not all of which has been rehabilitated. We have 200-plus office and nonresidential tenants including a climbing gym, nine restaurants, a bowling alley. We are rehabilitating two barracks buildings on the Main Post, which will be finished this summer, and we are looking for tenants. It will be spectacular space, with the Golden Gate Bridge visible out your back door and the sprawling Main Parade grounds out the front. We don’t now have a listing broker, but we will pay procuring brokers. Interest from tenants has been pretty strong. The reconstruction for each 44,000 square-foot barracks cost about $10 million. The ground floors will be visitor-serving and public uses and the upper stories will be offices with a total of about 20,000 square feet in each building. There are six Army barracks on the Main Post. Only one is now renovated, the Walt Disney Family Foundation Museum & Cafe. Another is being redeveloped by the Family Violence Prevention Fund and that will be done this spring. We are also looking to entitle a small boutique lodge with 120 rooms, and we are under construction now on a 22-room lodging rehab that we are calling the “Presidio Guest House.” We have hired Herrero Contractors for the construction and Waterford Hospitality, Bruce Hraba, as the operator. It is a way for us to rehabilitate an historic building and provide the park’s first overnight lodging. You recently attended an Urban Land Institute session on large-scale master-planned developments including San Mateo’s Bay Meadows and Oakland army base. Why? AE ❯ Public agencies face enormous challenges, including implementing large-scale public-private partnerships. Most agencies have budget problems, can’t raise taxes and have continued demand for basic services. Agencies are asking where they can leverage resources to deliver benefits. Success is more than financial. It is measured against how well the community’s priorities are served—and there’s obviously subjectivity in that. Many public agencies will need to do complex projects that require a skill set that the public sector hasn’t traditionally had. What is most difficult about dealing with The Presidio’s real estate assets? AE ❯ We do complicated projects in a very visible setting. I tell my team that if you can do real estate deals on financeable ground leases, in historic buildings, with tax credits, in San Francisco, you can do it anywhere. The trust is prohibited from selling land. So what kind of real estate transactions does the trust typically do? AE ❯ We can do a standard lease for space in a transaction that is akin to what is done in downtown San Francisco. The other is a development deal on a ground lease. The Walt Disney [Museum] lease and the lease with George Lucas [film studios] are examples. The Forest City lease is another example. Talk about the particulars of the Forest City lease. AE ❯ We issued the RFP in 2003, and in 2010 we went to the grand opening. The rehab involved historic tax credits and is the largest historic preservation effort in terms of square footage that the trust has done so far. It was a ground lease to them for 70 years, which was financed by Wachovia in one of the last loans before it was absorbed by Wells Fargo. The Trust Act, which created the trust, provides that if the trust isn’t financially self-sufficient, the property reverts to the federal General Services Administration for sale. The trust itself can’t sell property because it is forbidden by its legislation. n