The Registry Q1 2012

A publication by

Q

th e Q1: 2012 www.theregistrysf.com

2012

outLOOK

What’s your Q? Total Market Value of Firm Q RATIO = Total Asset Value

CONTENTS Online www.theregistrysf.com Daily breaking news, market trends and design.

Webinars www.theregistrysf.com/speakerseries.html Monthly webinars are held on the third Wednesday of every month from noon - 1 p.m. PST

Events Quarterly events on design, markets, sustainability and materials trends are complemented by a year-end forecast. See www.theregistrysf.com for timely details.

EMPLOYMENT

RESIDENTIAL

08

Mark Buell

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Dan Mueller & Bill Gardner

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Gary Dillabough

20

Maria Sicola

14

Russ McMeekin

22

Kim Walesh

26

Steve Reilly

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Chris Foley

30

William Faidi left to right:

Spectators watching the America’s Cup Fleet Race in San Diego.

Russ McMeekin photographed in San Francisco.

Screen capture of Judo Baby’s video game.

continued on page 2

CONTENTS continued

COMMERCIAL 36

Dan HOFFMAN

40

KEN ROSEN

42

Jeremy Neuner

46

James Bennett

48

john kilroy

54

Mark Gilbreath

56

Michael Foust

60

Hessam Nadji

public policy 68

MATTHEW MAHOOD

70

Sarah Karlinsy & Leah Toeniskoetter

top to bottom: Dan Hoffman riding his mountain bike in Pescadero.

Digital Realty Trust data center.

John Kilroy in the lobby of 100 First Street, San Francisco.

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Anton Qiu Chuck Henderson

For a confidential evaluation of any note purchase opportunities please contact:

Adam Phillips, Principal adam.phillips@366development.com (510) 735­9567 www.366development.com

a letter from the

PUBLISHER Dear Reader, Welcome to The Q, The Registry’s newest quarterly publication. The magazine you hold in your hands continues the tradition that we started with our monthly magazine in 2007 to provide a best-in-class real estate print product that focused on quality coverage of the industry with an unmatched visual experience. We hope you will enjoy the new product and let us know your thoughts about the changes.

During the second half of last year, we spent considerable time thinking about the future. It became apparent that the world around us is changing rapidly. Most importantly, we realized that in order to prosper, we had to anticipate the new, post-print news and media world and be an actor in its creation, not a follower of others’ ideas. Of utmost importance was to remain loyal to our goal of producing world-class analysis of the real estate industry for the region but also to expand the methods by which that information is delivered. This expansion was carefully considered in light of what we have observed over the last five years—namely, that real estate professionals engage with us through different channels. Some readers prefer certain media, and some news items are suited best for specific channels. That was part of the learning, and now it’s time for action, which is where The Q comes in.

As I noted in my letter in the last issue of The Registry’s magazine, The Q’s name is a double entendre. One meaning pertains to the frequency of its publication, which is quarterly. The other is a reference to Tobin’s Q ratio, a mathematical formula for evaluating the relationship between the value of the firm and the size of its assets. As a business media company, this is close to our financial reporting hearts, and the name reflects that.

And the change does not stop there. During the first quarter of 2012, we will roll out various changes to our Web site to allow more comprehensive and elaborate coverage of the industry.

We will also be expanding our webinar offerings (the schedule should be up on the Web site shortly) and will be engaging more with our audience through events. All in all, we will deliver Bay Area real estate industry news and information that is deeper and more integrated, and that will encompass a broader and more diverse audience. We are excited about the changes and look forward to an exceptional 2012.

In this issue, we maintain our tradition of interviewing top industry executives about their outlook on the year ahead. We have nearly doubled the number of interviewees, and this issue provides readers with a very broad understanding of the Bay Area real estate market. I don’t think there is a more comprehensive overview of our region, and I hope you will find this overview informative.

As always, we would love to hear from you about all our efforts. Our changes are based on reactions from the market and our readers. We think that we got it right, but there is always room for improvement. Our team can easily be reached, and our information is on our Web site. I can be reached directly at my e-mail, vb@theregistrysf.com. Thank you again for your continued interest. We wish you and your business all the best in the New Year.

Best regards, Vladimir Bosanac

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Q Publisher Vladimir Bosanac (415) 738-6434 vb@theregistrysf.com President Heather Bosanac (415) 738-6434 heather@theregistrysf.com EDITOR-IN-CHIEF Sharon Simonson (408) 334-2512 ssimonson@theregistrysf.com EDITORIAL Brad Berton Robert Celaschi Sharon Simonson DESIGN Janet Raugust Photographers John Sebastian Russo Chad Ziemendorf Advertising Denise Franklin (408) 366-1984 denise@theregistrysf.com News news@theregistrysf.com Feedback letters@theregistrysf.com Subscriptions subscriptions@theregistrysf.com (415) 738-6434 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. ©2011 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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Employment

Where are the

Jobs?

13/11/2011 - San Diego, CA 34th America’s Cup San Diego America’s Cup World Series Port City Challenge Day 2 Onboard China Team

Q James Bennett Mark Buell Gary Dillabough William Faidi Chris Foley Michael Foust Bill Gardner Mark Gilbreath Dan Hoffman Sarah Karlinsky John Kilroy Matthew Mahood Russ McMeekin Dan Mueller Hessam Nadji Jeremy Neuner Steve Reilly Ken Rosen Maria Sicola Leah Toeniskoetter Kim Walesh

READ ON www.theregistrysf.com

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MAR K BUELL

Chair America’s Cup Organizing Committee

selling the high SEAS

BRAD BERTON

Racing events associated with the 34th America’s Cup will begin off of San Francisco’s north waterfront this summer with a pair of America’s Cup World Series events. They will be followed by the Louis Vuitton Cup, America’s Cup Challenger Series and, ultimately, the America’s Cup Finals over the summer of 2013. The San Francisco America’s Cup Organizing Committee was established to raise up to $40 million in donations to help defray costs to the City and County of San Francisco as the host while also assisting with the America’s Cup Event Authority efforts to secure $270 million in corporate sponsorships. Mark Buell, a retired Bay Area real estate developer, chairs the organizing committee.

What are the projections for the economic impact of the events?

I’ll share the conservative estimates that the Bay Area Council Economic Institute and Beacon Economics calculated for the City and County of San Francisco. They’re based on previous experiences, particularly the 33rd competition four years ago in Valencia, Spain. They are projecting that the events should generate direct expenditures approaching $800 million, which would add up to a total economic impact of over $1.37 billion, factoring in all the associated indirect expenditures. But, we should all keep in mind that at this point it is impossible to say just how many people will travel to San Francisco this time around.

In terms of real estate, is it safe to assume hospitality will be the chief beneficiary?

Based on previous cup experiences, it seems likely hotels in San Francisco alone won’t be able to accommodate all the visitors. We have a bit over 32,000 rooms in the city, and with occupancy typically at about 85 percent during the high season (when the cup events take place), that would tend to leave about 8,500 rooms to handle any additional visitors on any given night.

That is well short of the average they

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experienced in Valencia, so it’s logical to think the spillover will benefit a lot of hotel properties outside San Francisco, as well. The overall projections from BACEI and Beacon include accommodation expenditures of about $157 million. Just in the city, at the average daily rate of $180, we are likely looking at an additional $77.8 million in projected hospitality expenditures over the summer of 2013.

Will apartment landlords and homeowners have short-term rental opportunities?

We are obviously going to experience some temporary additional demand for residential rentals from people visiting for the cup events. And I can’t tell you how many calls we are already getting from Realtors with clients looking to rent homes with views of the bay. But my impression is visitors are going to want to watch in person, not through a window.

Will there be longer-term hospitality sector benefits?

There’s no question San Francisco and other Bay Area cities will feel some permanent tourism benefits. It is the world’s third-largest sporting event (behind the Olympics and FIFA World Cup). It is also in the right time zone to have people on the East Coast watch during the evening.

We will have eight or nine teams here racing against [defending champ] Larry Ellison’s team, and the odds are he will win again, which would bring it all back in another three or four years.

Will cup events generate demand for commercial space?

I am skeptical we will see a lot of impact outside the hospitality sector. We are unlikely to see much in the way of [commercial] construction or other improvements since so much lead time is required for permitting and financing.

But I would not be surprised if landlords and agents see some additional demand to temporarily occupy vacant shop space in districts popular with visitors.

What about facilities construction and infrastructure improvements?

BACEI and Beacon are projecting that nonresidential construction activities should have total direct and indirect economic impacts of nearly $235 million, which should generate 780 or so jobs in the construction trades. And we do know we will see improvements to Piers 27-29, which will be the main onshore public space, and to Piers 30-32, which is where the main bases of the competing race teams will be. With Piers 27-29, any improvements need to be consistent with the [permanent] cruise terminal planned for that property.

Which other industries are likely to see significant impacts?

BACEI and Beacon calculate that the total economic impact of spending on food and beverages will be about $113 million and the impact on retail should approach $85 million. Some of the other sectors expected to feel substantial boosts during the events are other leisure-related goods and services, maritime-related industries and the transit sector.

Any other temporary employment that the activities are likely to generate?

The projection for total San Francisco jobs created by the events is more than 8,800 [full-time, 12-month-equivalent] positions. The biggest category, at a bit over 2,000, is food preparation and service, followed by office and administrative support at about 1,200, around 1,000 sales positions, the nearly 800 construction-related jobs, and more than 500 in business and financial operations.

How is your committee’s fund-raising progressing?

As far as I’m concerned, we are on schedule. We are cooking along and getting ready for the end of year when the EIR is completed. I see us meeting our expected goals. But it’s been a timeconsuming effort—that is for sure. Q

www.theregist

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CHAD ZIEMENDORF

Mark Buell, chair of the America’s Cup Organizing Committee, expects the races to convey residual benefit to Bay Area tourism for years.

ABOVE: 20/11/2011 - San Diego, CA 34th America’s Cup San Diego America’s Cup World Series Racing Day 5 - Fleet Race

CHAD ZIEMENDORF

CHAD ZIEMENDORF

top left, top right, above, left: In November, San Diego was the third stop in the inaugural America’s Cup World Series, featuring both fleet and match sailing.

ACEA/Gilles Martin-Raget

ABOVE LEFT: Mark Buell walks along San Francisco Bay, a natural amphitheater for the America’s Cup races scheduled to begin there next year.

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Gary Dill ab ough Managing Partner The Westly Group

Q

RISE OF THE DIGITAL BUILDING

Sharon Simonson 14

Gary Dillabough runs the Smart Buildings and Energy Efficiency practice at The Westly Group, a Menlo Park cleantechnology venture-capital firm. The Westly Group is currently investing a $127 million fund and has begun raising its next fund, where it is targeting $175 million in equity investment.

Westly is one of several venture firms backing San Franciscobased SCIenergy Inc., which targets the $5 billion commercial building market with what it says is the first-ever softwareas-a-service platform to help reduce annual energy spending by comparing predicted energy and system efficiencies with real-time operation. Westly also was a backer of Tesla Motors.

How did you become interested in building management?

Before coming to The Westly Group, I was at eBay, working on our environmental strategy. Of course the first thing you do is look at where you are consuming power, so I got to see some cool models on energy consumption, and I became intrigued with energy efficiency. In this business, on the investment side, you look at supply and you look at demand. We are trying to find investments that are less capital-intensive, and energy efficiency is the first thing that jumps out at you. The real question is: ‘How do you digitize a building?’ How do you take a clear window with no controls and turn it into a digital window. Then you start to digitize the skin of a building, and tie it all together. This is where we think building energy management is going.

Why is there so much venture capital investment in building management systems now?

The existing building management systems are very large, difficult to employ and maintain and expensive. For SCIenergy, it is going wonderfully, but I think a lot of these companies are making great strides, and it is helping people manage facilities better. That said, the data is very complex and these are very complex systems, and more development needs to be done. In the next year or two we are going to see better systems, but there is a lot of hard engineering work to do. We are great at capturing the general data but getting at the most interesting tidbits—we are not there yet. There is data coming into these systems, but they don’t know how to process it very well yet. Right now we are not giving facilities teams the information they need to prioritize their days. They spend a lot of time trying to adjust the system to make one office cooler and another warmer. We allow them to rank the issues in front of them based on an ROI analysis versus who is yelling the loudest.

You say that commercial building management systems represent a $5 billon market. How do you get to that sum?

I actually think it is a lot larger than that. You can slice and dice the market, but generally it is the retro-commissioning market and then how do you keep the buildings continuously commissioned. Buildings consume a tremendous amount of energy. Ten percent greater efficiency would far outweigh the environmental benefits of lots of wind farms. It is much less capital-intensive than solar energy. We have always built buildings to the lowest bid, and you get what you pay for.

Developers have worried about the $50 million cost to build a building, but we have not been thinking about the longterm operational costs, and for the most part our buildings are

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poorly constructed. I hope in the future we make investments that cost a little more up front but in the long run pay for themselves. There are more buildings that need what we are offering than we know what to do.

Generally, it seems that San Francisco landlords and property owners have embraced LEED adoption and advanced building management systems more quickly than those down the Peninsula and into Silicon Valley. Would you agree?

If you look at a lot of Silicon Valley, there are many of these oneand two-story concrete tilt-up buildings, which are relatively unsophisticated structures. In San Francisco you have more sophisticated buildings and control systems and those owners view the world in a different way. That said, Google, eBay and others are doing great stuff, and they are going to be the early adopters of the technology. They want to be demonstration sites, and I think those owners and users are doing a great job. We are investing in more sophisticated markets like San Francisco and New York. I see what is happening in Europe and I say, ‘Those folks get it.’ They don’t tolerate wasteful activities as Americans do. They hate their high energy costs, and they realize that these resources are scarce and that with greater adoption of these technologies, they will benefit in the long run. Especially if we phase out of nuclear power globally, we will have to focus a lot on these efforts.

How will venture capital and energy change going forward?

I think that with electric vehicles that there is a lot of work that can be done there and progress made. I also think there will be more happening around [energy] storage. Everyone is still trying to figure out how to do a better battery, and I think distributed power and the fuel cell movement—local energy on site—I think there will be a lot more around them.

Why are you focused on clean tech as an area for investment?

Energy markets are trillions of dollars, so it is a huge opportunity for companies to grow and get large. So we think it is a great investment category, but we also think it is important to our kids, our community and our country. Steve [Westly] worked at the Department of Energy, and he is working with [DOE Secretary Steven] Chu as well. To me it is also a national security issue.

What opportunities do you see in the year ahead for the clean-tech sector?

I have seen some amazing technologies in the last six months and some amazing leadership. In the past, companies often had great technology but not great management or leadership.

Ten years ago, few people even knew or understood what green technology was.

What do you think will be the result of the Solyndra failure for clean tech?

We as a country have put billions to work [in clean tech], but we haven’t managed people’s expectations to understand that a lot of these companies will fail. We are going to have more failures, too, but we also have companies that have done extremely well. The key is to be betting in the right categories—electric vehicles, biofuels, the smart grid, energy efficiency. Q

JOHN SEBASTIAN RUSSSO

Gary Dillabough says The Westly Group is focused on energy markets because that is where the money is.

The real question is: ‘How do you digitize a building?’

Q

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rus s MCMeeki n

President and Chief Executive Officer SCIenergy Inc.

BUILDING ON A CLOUD Sharon Simonson In mid-2011, San Francisco’s Scientific Conservation Inc. completed its acquisition of Atlanta-based Servidyne Inc., becoming SCIenergy Inc. The sale foreshadows an anticipated consolidation wave in the building-automation business. The sector has seen an “explosion” of new companies seeking to address the shortcomings of traditional building management systems, said Dan Probst, chairman of Energy and Sustainability Services for Jones Lang LaSalle. With the rising emphasis on sustainability and energy efficiency plus the emerging technical capacity to gather data from a building itself and to process that data in a meaningful and timely way, building owners and users are gaining a new window on their world.

How long has there been an interest in creating automated systems to help companies manage their real property?

I have been watching the movie for 20 years. I came from Honeywell [International Inc.], and at one point I oversaw their Internet ventures for their industrial division, their commercialbuilding division and later their aircraft division. In the early 1990s, our big customers were companies like Chevron [Corp.], and it was all about the efficiency and reliability of their large-scale industrial operations. It is very similar to what we are doing today at SCI. So the supply side of the energy equation, the oil and gas industry, is where a lot of the innovations began that we use today.

How big is this market?

It is not a global product for everybody, but the good news is that it is still a massive market. There are 77 billion square feet of commercial buildings in the United States. We are focused on geographies that are dense and intense. It requires more energy to make a dense location comfortable and energy efficient, so places like Northern California and Southern California, New England where there are higher densities of people and buildings. At the same time, less than 20 percent of U.S. buildings have a building automation system in place that is ready [for his software]. So if you are in the business of supplying upgrades to building systems that are not current, your market is very big. I am looking at the 20 percent where they have been upgraded, but that is still a huge market. And if you look at every quarter when these big companies like Honeywell and Siemens [AG] that do building automation systems, the retrofit market is pretty robust. That creates the baseline for my business to grow, so from now until 2014, we will really be dialed into that 20 percent, but at the end of that time, the total available market will have grown, not because of new building but because of retrofits. In China, where there has been lots of new construction, 80 percent of the buildings are digitally aware, and that creates global opportunity.

We have customers in China, and we will soon be live in Japan.

We have several shopping centers in Australia, and we have many buildings in Ontario, Canada.

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Isn’t there a large proliferation of companies, often venturefunded, that are trying to penetrate the building-management space and to build on the legacy systems from companies like Johnson Controls Inc. and Siemens AG? There is, but there is also a lot of noise. There will be more casualties and consolidation. In the next year or so, you will see the beginning. In the late 1990s, wireless became a big thing.

There was so much going on, you couldn’t make heads or tails out of it. Then in the early 2000s, you began to see a dying off and a consolidation, and by the mid-2000s, you had BlackBerry and a handful of others, and it is nowhere near as confusing. In the energy-efficiency space, there are too many companies and not all of them are useful. It will start to be crystal clear by 2014 or 2015 [what the winning technologies are].

What is your unique selling proposition?

We are a lot more granular in where we are going and how we are doing it, so we don’t put ourselves in the larger category.

When you talk about energy efficiency, the problem is really at the subsystem level. HVAC is 60 percent of a building’s energy use. You have to understand what a building uses on a squarefoot basis to see if you can save enough energy to get a good return. That is what the Servidyne purchase did for us. They can figure out what buildings can be cured. The Servidyne guys are the equivalent of a financial auditor. You tie the auditors to the tools and technology, and you can become pretty precise.

It is surprising that you have your research and development people in Atlanta rather than the Bay Area. Why is that?

We have about 50 people in San Francisco (headquarters) and 120 in Atlanta. Atlanta has the development center and primary sales center and where we have the building doctors and energy-diagnostic people. The computer science part where we have those kind of brainiacs is in the Bay Area. The energyefficiency brainiacs that put the knowledge in the cloud, that expertise is more predominant in the Atlanta area, so it is based on where the domain expertise lies. In the energy efficiency space you need more than software knowledge. You need to understand the physics of a building.

Where will the building stock be in five years ?

The stock today is nothing compared to where it will be. There is a lot of soft dirt there. China will surpass the number of commercial buildings we have in about five years, but most of their buildings are being engineered to be energy efficient. In the United States, energy-efficiency awareness is going to grow, and we are going to see more retrofits, and also in Europe as they decommission their nuclear energy plants. Q

Top to BOTTOM: McMeekin says five years from now the commercial building stock will be transformed by modern building management systems.

McMeekin calls this Oakland Raiders’ helmet his “little Budda,” and asks passersby to rub its top for good luck.

CHAD ZIEMENDORF

Top to BOTTOM: SCIenergy Inc.’s cloud-based technology allows building managers to monitor energy use.

Russ McMeekin keeps copies of green guru David Gottfried’s book in his office.

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DAN MUELLER

Chief Executive Officer JudoBaby Inc.

BILL GARDNER Chief Strategy Officer JudoBaby Inc.

GAMING GETS DOWN TO BUSINESS Robert Celaschi The San Francisco Peninsula is emerging as a favored location for the interactive, online gaming and entertainment industry.

Coming into 2011, Redwood City calculated that 15 percent, or 2,600, of its high-tech jobs were gaming-company related. The growth continued throughout the year, anchored by its largest gaming employer, Electronic Arts Inc., which owns its 660,000 square-foot Redwood City headquarters.

EA has seen layoffs and losses in recent years as it adapts to the proliferation of devices on which people now play electronic games from the traditional console and PC to smart phones and the Internet. EA Chief Financial Officer Eric Brown told analysts in mid-November that five years ago gamers worldwide were an estimated 200 million; now they are an estimated one billion, according to SeekingAlpha.com.

In September, game company Perfect World Entertainment said it would expand to 100,000 square feet in Redwood City, from 33,000 square feet in Foster City next door. The move displaced Kabam Inc., another rapidly growing gaming company, pushing it immediately north to San Carlos. Trion Worlds Inc., already a Redwood City resident, late in the year doubled its footprint to 50,000 square feet. On the last day of September, Sony Computer Entertainment America LLC, famous for its PlayStation franchise, announced it would move its corporate headquarters in 2013 from Foster City to more than 450,000 square feet in neighboring San Mateo, where it expects to accommodate its long-term growth.

Redwood City’s JudoBaby Inc. creates interactive family games that can be played on consoles, mobile devices and social networks. The company’s “Jerry Rice & Nitus’ Dog Football” was released in 2011.

How has JudoBaby grown since you started in 2008?

Mueller: We started at Plug and Play Tech Center in Redwood City. We got up to about 12 guys in our tiny little room. When we needed to expand, we got a 4,700-square-foot space that was suitable to the needs of the time. A friend of a friend put us onto this real estate, and we were able to move over quickly. I was looking for room to grow, and they had that. In the last year or two we expanded into a suite adjacent, about 14,000 square feet total. We have about 25 employees now; we started with around 10. In terms of what we do, we are just at the beginning stage. We needed about 20 developers to get the product in the can. We did that. We are now in our second phase of growth as a company, as a publisher that serves mobile, social, gamification.

What is gamification?

Mueller: Say you are Nike, and you want to have a presence in the mobile and social space. The best thing is to turn to game developers to add that layer to your marketing.

Gardner: What do people in [Nike’s] demographics like to do? For one thing, they like to play games. So we are taking the game mechanics to help these guys promote their product, to have a brand experience that is a little more fun that looking at shoes.

What kind of space does a game developer need?

Gardner: The publishing side is a lot more sales and marketing.

You need a lot more phones. You can’t have a phone ringing off the hook next to a guy who is deep into his coding.

What’s good and bad about your space?

Gardner: It’s a converted warehouse, so the upside is it is very cheap. The downside is that the infrastructure is a little weak for high-speed Internet. Having been in a number of different environments, the No. 1 priority is having access to high-speed Internet, and having multiple [access] choices. I have done a couple of startups, and that has been the biggest hindrance to getting going, the entire infrastructure that is required for the IT department.

What’s the draw of Redwood City?

Mueller: Two things that were critical were having parking for employees and having access to transit. A lot of our guys are in the North Bay or the East Bay. They can take the train, and bike it the rest of the way. Redwood City makes a good central location.

If people have to fly in or we have to fly out, it’s just a hop and skip to the airport.

Gardner: When I had a company in San Francisco, and we moved ultimately to Redwood City, one of the things I found was that a lot of my San Francisco talent decided they would rather change companies than leave the city. For a lot of people it was the convenience of being in the city, working and then at 5, 6, 7 at night going out to dinner and having a social life.

Getting into the Redwood City area, it’s not quite the same. You don’t walk from the building to the BART station. The other thing we did find when we got down here is that the talent pool is richer. We had people coming from the city, and we had people coming from the San Jose area.

Will Redwood City remain a hub for software?

Mueller: I think they have the opportunity, if they take ahold of the infrastructure. If they focus on the infrastructure and make sure there is enough places available to hang out after work— which, for these guys, can be midnight—it would be great.

Redwood City is trying to do that, but for an older crowd. It’s not for the hipsters. If you work late like everyone does, you’ve got Applebee’s or Jack-in-the-Box. The way I look at it, you’ve got a city that wants to go to sleep, and that doesn’t help when you’ve got an employee base that wants to run hard and play hard. Q

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JUDOBABY INC.

RIGHT: Bill Gardner (left) and Dan Mueller play their company’s 2011 game, “Jerry Rice & Nitus’ Dog Football” on the Nintendo Wii video-game console.

Top: Gamers can play JudoBaby’s “Jerry Rice” on mobile devices too.

CHAD ZIEMENDORF

LEFT: Early in his career, Mueller wrote the “Official Strategy Guide” for the Blasto video game made by Sony Computer Entertainment America. Blasto is one of the first characters he created.

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The way I look at it, you’ve got a city that wants to go to sleep, and that doesn’t help when you’ve got an employee base that wants to run hard and play hard.

DAN MUELLER

ABOVE: Mueller stands next to a portrait of Bill, an alien character who appears in the final level of JudoBaby’s “Jerry Rice & Nitus’ Dog Football.”

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MAR IA SIC OL A

Executive Managing Director Head of Research for the Americas Cushman & Wakefield of California Inc.

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Great Expectations for...2013

BRAD BERTON 22

Maria Sicola joined Cushman & Wakefield in 1981 and today is a member of the company’s Global Advisory Board; the global real estate services organization has 235 offices in 60 countries and 14,000 employees.

Sicola is a graduate of Seton Hall University where she earned a Bachelor of Arts, she has a master’s in business administration from Manhattan College and master’s in information science from Rutgers University. From her offices in San Francisco she puts Bay Area office and industrial property markets in a global context.

There’s great concern about sovereign debt default among euro zone countries and how that might affect the U.S. economy. Looking the other direction, China, a big driver of the world economy in recent years, is projected to see slowing growth.

How do you see global factors affecting demand for business space in the Bay Area?

Business decision-makers and real estate investors are concerned about the volatile swings we’ve been seeing in the stock market, as well as debt issues in Europe and somewhat slower GDP growth in Asia. If this combination of issues persists, it could potentially reverberate throughout the entire U.S. economy, slowing employment growth generally and holding back the recovery in consumer spending.

If we don’t see resolution of European debt issues, it may well translate nearterm to weaker demand for office space in the San Francisco Financial Districts north of Market Street. And continued slower economic growth in Asia could also tend to reduce investor demand for commercial properties in the Bay Area and elsewhere along the West Coast.

Domestically, pull-backs in employment in the public sector and in financial services will be another factor limiting demand for office space in the Bay Area. Although those factors don’t exactly inspire a lot of confidence in the American economy, I’d say the Bay Area remains pretty well positioned to

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hold its own. The local economy will probably plod along next year, but we should then start to see strong growth again in 2013.

Can you describe how some of the key industry sectors that have helped keep local business space occupied will likely affect local employment and thus space absorption going forward?

From a national perspective much of the growth we have seen in employment is in technology-related fields, which creates demand for space here in the Bay Area as well as markets like Portland, Seattle and Boston. Unfortunately employment growth in most of the other sectors has been pretty much flat. I think it’s safe to say we’ll continue to see significant demand for office space in San Francisco, Silicon Valley and the Peninsula. While it’s still mostly driven by technology, much of today’s demand is related to companies in the socialmedia category rather than the (widely varying) Internet start-ups we saw in the late ’90s and early 2000s. Logically, locational decisions we’re seeing today reflect employee preferences. The new generation of workers (attracted to social media, gaming and related fields) prefers the brick-and-timber structures in the SoMa area over the traditional steel-and-glass high-rises north of Market.

Health care and education are other important components of the demand we’re seeing and bode well for the local economy going forward. It’s really encouraging to see Pfizer’s commitment to Mission Bay and its planned joint R&D efforts with UCSF. It also helps that San Francisco is trying to ease the high cost of doing business in California, like offering the kinds of tax incentives that helped keep Twitter in the city.

What does C&W’s latest market research project for how supply and demand fundamentals of local office markets will impact vacancies and rental rates in coming years?

We are really not expecting significant

growth in employment, and in turn space demand, until 2013. This doesn’t necessarily indicate that companies’ financial pictures are weakening. It is more the [prevailing] absence of the level of confidence they need to make more space commitments. However, generally we’re moving toward a landlord’s market, and we expect to see concessions dry up by 2013.

Our research is suggesting office vacancies in San Francisco will return to single-digits by 2013 if not by the end of 2012. And as those rents move back up toward $65 a foot over the following couple years, we’ll see stronger demand for space in Oakland especially, as well as along the Peninsula. Class A vacancies are already in single-digits South of Market, so effective rents for higher-quality space there could move up pretty quickly.

Although office and flex vacancies in Silicon Valley are still pretty high (at about 15 percent), we’re seeing extraordinarily strong leasing activity there, and we expect that to continue.

So we’re forecasting that the flex vacancy rate should decline to 11 percent by 2015. Rent growth hasn’t been quite as strong on the Peninsula, but we’re projecting that office vacancies there could fall from well over 15 percent at the beginning of 2011 to around 5 percent by 2015.

What is your outlook for the local industrial property sector?

Our forecast for industrial rent growth nationally over the coming five years has Silicon Valley as the top market, with Oakland and the Peninsula also in the top five. We’re projecting 40 percent rent growth over that period in Silicon Valley, and 20 percent along the Peninsula.

Looking further into the middle of the decade, rising manufacturing costs in Asia could generate some ‘on-shoring’ activity that would benefit industrial markets in Northern California and elsewhere. Q

The local economy will probably plod along next year, but we should then start to see strong growth again in 2013.

MARIA SIC OL A

Maria Sicola says Bay Area commercial real estate markets could be subdued by further unwinding in European debt.

CHAD ziEmendorf

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kim WALESH

Director of Economic Development, Chief Strategist, City of San Jose

RAINY DAYS FOR SOLAR Sharon Simonson The first goal of San Jose’s Green Vision is to create 25,000 cleantech jobs by 2022. The solar-power industry makes up the largest portion of the city’s clean-energy goals, and San Jose has become a magnet for solar companies including the publicly traded SunPower Corp. and thin-film solar-printer Nanosolar Inc. Heading into 2012, the solar power industry, which touches multiple Bay Area cities, is under acute pressure. Manufacturing has expanded beyond demand, prices are falling, and there are widespread expectations of industry consolidation. While the Solyndra failure has captured headlines, other solar companies also are strained: SunPower reported more than $520 million in losses, or $5.34 a share, in the first nine months of 2011. San Francisco- and China-based Suntech Power Holdings Co. LTD, the world’s largest producer of solar panels, lost $376 million in the second and third quarters combined. “Looking forward we expect excess capacity to fuel strong competition and consolidation in the next two or three quarters,” SunTech Chairman and Chief Executive Officer Zhengrong Shi told analysts in late 2011. “To re-calibrate the supply and the demand, we believe the industry needs to go though a process of capitalization, liquidation and then consolidation.”

By mid-2012, demand should begin to grow again, and the upside of the downside is that the winners will take all, Shi noted. According to SunTech estimates, the process has already begun: The market share of the six top photovoltaic module suppliers increased from 26 percent in mid-2010 to 55 percent in mid-2011.

San Jose’s Green Vision has gained a lot of notoriety. Is that the city’s primary redevelopment and economic development thrust?

The city has its comprehensive economic-development strategy, which was adopted a year and a half ago. It includes a strong focus on regaining jobs and revenue as the economy rebounds, especially by being in close contact with our driving-industry companies. The Green Vision is a very aggressive and progressive framework for both economic development and environmental sustainability. It has a 15-year time horizon and was adopted in 2007. There are 10 goals, and goal No. 1 is to grow clean-tech jobs.

Where are you in creating the 25,000 jobs?

We are at 4,000 roughly confirmed core clean-tech jobs. I think it is becoming widely recognized that Silicon Valley is home to the most established solar cluster in North America if not the world.

That includes the range of solar technology companies in a fullrange of maturities from start-up, proof-of-concept phase to firmly established companies.

Why was solar a fit for Silicon Valley?

I think there were a number of assets that came together to support the growth of our solar cluster, but a foundational one is the existing high-tech industry and skills base that is here around semiconductors. It is important to solar companies in their manufacturing process and to their research. Other factors that are always important are the risk capital that is here and also the fact

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that we are an early-adopter marketplace. There are nearly 7,000 solar rooftops in San Jose, and that is more than any other city in the nation.

What are your expectations for the year ahead?

San Jose has to work very aggressively in this cycle of recovery as things have heated up on the Peninsula to accelerate companies taking San Jose space. We have a huge opportunity to play a critical part in spawning a global [clean-tech] industry that can employ a lot of people and also address our most pressing environmental problems. From the city’s point of view, Silicon Valley is clearly leading the Bay Area, California and national recoveries. So, there is no place I would rather be an optimist. I think there are some challenges in the tech-sector recovery, such as how soon is it going to ripple out and affect job growth and income growth for the rest of us in the remaining parts of the economy. Our economic development focus now is on relationships with building owners, the brokerage community, existing businesses. But clean tech is the right spot to be. Even with the downturn, clean-tech companies wanted to locate their headquarters here, their R&D functions and their pilot [manufacturing] lines, all in one place. I never would have guessed the return and strengthening of manufacturing jobs in Silicon Valley.

Does pilot manufacturing lead to large-scale manufacturing?

The pilot manufacturing is ongoing, so you produce products at low volume but high value. They are very important for solar manufacturing but after it is shown a product works, they will go elsewhere to scale up or to be close to the market. The other piece of it is the tremendous contract-manufacturing base in Silicon Valley, and those companies like Flextronics [International], Sanmina [-SCI], SMTC [Semtech Corp.]—they will do manufacturing on behalf of these emerging companies and all 10 of the largest contract-manufacturing companies have operations here.

What do you think will be the effects of the Solyndra bankruptcy for the solar sector and Silicon Valley?

Overall we really believe that the shift to green and clean energy is inevitable, a big transformation that will continue to march forward over the next several decades. A key factor is driving the price down to a point where it is competitive with traditional energy sources. There is definitely going to be consolidation in the market. Not all of the solar jobs are going to be created here. We want headquarters operations; we want the R&D and the initial pilot lines—the low volume and high-value production. Solyndra made a bet that unfortunately wasn’t successful, but from our point of view the clean energy economy remains a huge opportunity.

There will continue to be both business and public investment in it, and it is in all of our best interest to reduce the cost of solar and that is what will enable its broad-scale adoption. The size of the available marketplace is stunning, and that is what we have to keep our eye on. Q

Top:

CAPTIONS WOULD GO HERE

Kim Walesh at the Clean Energy Showcase demonstration site across from the San Jose City Hall. Clean energy technologies are at the center of the cityâ&#x20AC;&#x2122;s economic development plans.

JOHN SEBASTIAN RUSSO

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RESIDENTIAL

Home Economics

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Q James Bennett Mark Buell Gary Dillabough William Faidi Chris Foley Michael Foust Bill Gardner Mark Gilbreath Dan Hoffman Sarah Karlinsky John Kilroy Matthew Mahood Russ McMeekin Dan Mueller Hessam Nadji Jeremy Neuner STEVE Reilly Ken Rosen Maria Sicola Leah Toeniskoetter Kim Walesh

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S teve Reilly

Marketing Consultant Land Advisors Organization

Home Builders Still Seek Shelter Robert Celaschi

Steve Reilly is a licensed real estate agent and marketing consultant for land brokerage Land Advisors Organization. Working from offices in San Ramon, he specializes in Northern California land, much of it for residential use. The temporary federal tax credits for new home buyers that ended in April 2010 skewed the market, stimulating demand for new home construction and keeping land prices higher than they should have been. When the tax credit ended, buyer demand “fell off a cliff,” and land acquired based on the previous demand levels lost value rapidly, Reilly says. Now, the new home market is finally starting to clear, though development capacity remains too large, both in terms of financial capital and human capital dedicated to the task.

What did the short burst of construction do?

The inventory of land shrank from maybe a six-year supply to maybe a two-year supply. Then as soon as the tax credit went away, the market evaporated. Not only that, the buyers had been pulled forward. If you had any motivation to buy a house, you probably bought it to get the tax credit. Then all those land deals that had been put together (based on the effects from the tax credit) six months before were worthless. You went from a twoyear inventory to about an eight-year inventory.

Builders knew the tax credits would end, didn’t they?

Everybody thought this was going to be a repeat of the last recovery, a V-shaped recovery. Builders get nervous about running out of land. They wanted to get the distressed lots before the deals were gone. It was more pronounced in the Central Valley, but to some extent the same thing happened in the Bay Area.

So where does that leave us now?

There are a couple of bifurcations. There are the haves and have-nots, from a capital standpoint. You have some really large builders with hundreds of million dollars on their balance sheets.

They are willing to buy deals on razor-thin margins just to keep the doors open. Then you have the smaller builders. They are basically out of the mix. They can’t get loans, and they would be nuts to sign a personal guarantee. If the house price moves down 10 percent, they are totally hosed.

And the other one?

The second bifurcation is that the market got skewed with sub-prime lending. All these houses got put up in such places as Merced. But nobody really wanted to live there; it was just where the growth could happen. Now you are seeing more of a bifurcation between the good markets and the bad markets.

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In Palo Alto the market has come down, but people still want to live there. So there is a bottom to it. But in Merced, the bottom isn’t there. The secondary markets, it’s almost like there is no demand for houses. We have seen deals where you can have a halffinished house, and it may not make economic sense to finish.

What are the good Bay Area markets for new housing?

Sunnyvale, Los Gatos, Fremont—anywhere that is a commute to Silicon Valley is doing very well. Dublin fits that bill. If you look at the hot spots of single-family development, it pops up in Dublin, Morgan Hill. Gilroy is doing relatively well. You can kind of see the patterns of recovery. Silicon Valley is the new job driver of the Bay Area. It is no longer San Francisco.

In Dublin, they are getting a very traditional product, a singlefamily detached house on a 5,000-square-foot-plus lot, and it is now coming in at a price that is 25 percent below the peak. In the more core Silicon Valley locations like Mountain View, Palo Alto and Sunnyvale, those are working because the job base is there, and there is tremendous pent-up demand. But it is more delicate there because there is more tendency for the land prices to be driven up. A homebuilder who wants to put a house on it may be competing with Google, who wants to put an office on it.

How about 18 months from now?

I think they are still going to be building in those markets we just mentioned. That’s where, for the most part, the municipalities are more development friendly.

What will get built?

People realize the condominium tower doesn’t work in Silicon Valley. In downtown San Jose, all those condos, there was no demand for it. I think we will see projects limited to three-story town homes. In Palo Alto and Sunnyvale that is still considered a bread-and-butter product. Outside of the core area, people are tending to go with a single-family detached house. Maybe a smaller one.

The real big question is, over those 18 months, are we going to start to run out of developable lots that are ready to go, given how many large builders operate in the Bay Area? You start doing the math: They’ve got to cue up 30,000 lots a year just to stay in business. We are going to get to the point where places like Mountain View and Dublin, all the lots are eaten up. Do they go back to the Central Valley after getting burned? Or will they go to the core-area infill markets? Q

In Palo Alto the market has come down, but people still want to live there. So there is a bottom to it. But in Merced, the bottom isnâ&#x20AC;&#x2122;t there. STEVE REILLY

LEFT to RIGHT: Steve Reilly, who specializes in land sales, visited Positano, a master-planned single-family housing development in Dublin. john SEBASTIAN russo

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CHRIS FOLEY Founder, Principal The Polaris Group

Condos Correct Course

Robert Celaschi

Chris Foley is a co-founder and principal at the Polaris Group and group leader of Polaris Analytics. The San Francisco company helps to sell newly built condominiums from San Francisco to San Diego. Foley acts as a consultant to some of the state’s largest developers.

His expertise lies in the areas of land acquisition, site analysis, construction financing and risk management.

Median condo prices resumed falling in 2011 after tax incentives slowed price declines in 2010 in all three of the region’s major markets. As 2011 closed, however, re-sales and pending sales of existing condos were spiking in Silicon Valley and Oakland and gaining momentum in San Francisco.

Median condo prices fell a whopping 36 percent in San Jose-Santa Clara from 2007 through 2009. As of October, the Oakland-Emeryville condo market had seen a 32 percent median price drop from the 2007 peak. The Peninsula and the Mountain View-Sunnyvale pocket have fared better, though both still saw double-digit median price declines. The San Francisco median price has been largely flat since 2009 at about $638,000, after falling sharply through 2008.

All three major markets saw dramatic increases in their condo development in the middle years of the past decade.

Polaris predicts more subdued new condo deliveries across the region in coming years with no high-rises in Oakland or San Jose for a number of years. In San Francisco, the firm projects an annual average of 160 new units delivered in 2012 and 2013. As the year closed, in San Francisco the proportion of all-cash buyers and socalled “absentee buyers,” (investors and second-home buyers) in the resale market was surging, often an indication of instability.

Together, San Francisco, Oakland, the Peninsula and the South Bay had standing inventory of about 2,600 new condos for sale going into 2012, according to Polaris research.

Where are the Bay Area’s strongest condo markets?

San Francisco, the Peninsula. And

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Oakland is rapidly becoming that way.

In San Francisco it is so clear-cut it is not even funny. We are seeing renters come into our sales center: ‘Our rent just went up 20 percent. What do you have to sell?’

You can borrow at 4.25 percent, fixed, for 30 years. And the prices are down 30 percent from the peak. Why would you not buy?

What are people buying?

In San Francisco they are looking at one-bedrooms for $500,000; for two bedrooms they are looking between $600,000 and $750,000.

And they qualify for financing?

We sold three condos last week, and all three of the buyers put down 50 percent and financed at 4.3 percent interest. So the lenders are out there. The lenders are figuring out ways to work around all the different regulations and provide a good ending solution to the buyer.

Then how can a private mortgage insurer like PMI Mortgage Insurance Co. run into financial trouble?

PMI had been around a long time. They underwrote a lot of mortgages in ’05 and ’06. All those notices of default are peaking right now. It makes sense that if PMI were ever going to go down, they would go down now, at the peak of the foreclosures. The market they lent into is at a peak of its distress right now.

Which Bay Area markets are weak?

One is the southeastern quadrant of San Francisco: Hunters PointBayview. The prices went up a lot more significantly than they ever should have. The market has fallen further because it was over exuberant.

The second thing is you have such a high concentration of product. And those people were not making as much money as you would imagine.

A lot of those people were the first to get laid off. Then in Oakland and headed east and north, those markets felt a lot of pain.

What about Silicon Valley?

The technology sector is really helping us get out of the dismal economic situation. You are seeing the TwitterZynga-Facebook effect. You are seeing the high rises in San Jose getting velocity.

What’s happening with raw land?

What is getting built is multifamily apartments. The Urban Land Institute just did a study that said if you get your apartments built in the next two years, you are going to do great.

You are seeing small condo products being built. Those are being very well received because you can finance a 20or 30-unit condo product.

So you can’t succeed with just any condo project?

Let’s say you have a high-rise tower, single-phase, 500 units, and your average size is 1,200 square feet. Your ability to get that financed is slim to none. It’s the wrong size, the wrong product type and it’s too many units. But let’s say you have a phased project, each phase was 150 units, and the average size is 950 square feet. I can get that financed all day long.

How is the long-term outlook?

In the third quarter of 2011 we signed $300 million in new listings. In Q4 we will probably sign $150 million in listings. Those are all people getting started now with delivery in the next 12 to 24 months. You are going to see a lot of cranes. It is going to be four-storyover-podium. In eight to 12 months you are going to see probably one highrise go vertical.

You are also seeing a much higher quality of developer. You are seeing a lot of the same developers who used to be around, but you are also seeing a whole new breed of developers coming in. They are better capitalized. They have learned from what happened and they are much leaner, and they are much more focused on smaller unit size, higher-end design. This is their business, their passion. The B- and C-level players, a lot of those people went away.

You are probably not going to see a high-rise built for a few years in Oakland, and probably not in San Jose.

In Oakland a lot of product that was built condo and went rental is going to come back into the condo market.

After that you are going to see new construction. On the Peninsula, it’s all about town homes. Q

You are also seeing a much higher quality of developer.

CHRIS FOLEY

Top to bottom: A view from one of the penthouse suites at Blu, a 114-unit condo tower in San Franciscoâ&#x20AC;&#x2122;s South of Market.

Chris Foley at Blu, where all but two units are sold after three-plus years on the market. chad ziemendorf www.theregistrysf.com

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William Faidi specializes in buying distressed apartments and shopping centers with an eye on their potential for quick recovery. chad ziemendorf

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Ultimately, distress is good for us because it creates the very opportunities that we are seeking.

william Fai di Chief Executive Officer Tribeca Companies

Finding the Diamond in the Rough Sharon Simonson William Faidi founded San Francisco-based private equity real estate investment firm Tribeca Cos. in 2005. Tribeca specializes in opportunistic real estate investment in the multifamily and retail sectors and has been an active buyer in this cycle since 2009.

That year, the company acquired from lender UBS AG a 12-building portfolio of Bay Area apartments primarily located in San Francisco and previously owned by the Lembi family. Tribeca paid $31 million. The company sold the holdings in two transactions in 2010 and 2011 for more than $40 million. More recently, the company acquired a nearly 14,000 squarefoot San Mateo shopping center for $4.8 million where the owner was in financial default. Tribeca primarily co-invests with private, wealthy individuals and families.

The company focuses on multifamily and retail properties.

Why are multifamily and retail your favored asset classes?

Three reasons: We believe they are very central to the lives of Americans. Our view is also that historically NOI recovery in retail, especially grocery-anchored retail, and multifamily has been the quickest when economic circumstances improve. We also believe these assets—notwithstanding rent control in some areas—are much more responsive to improvement. Leases are usually a one-year term, and in retail things like overage provisions, which are opportunities to participate in a retailer’s performance above a certain threshold level, would add value that would be reflective of improvement in the economy.

We are looking now in Denver, Los Angeles, the Phoenix area, Portland and Seattle. Our investment philosophy is a matrix that seeks a disproportionate level of distress to the larger market and a faster NOI recovery.

How do you deal with the risk and stress of opportunistic buying?

There is a tremendous amount of anticipation that goes into each deal, and the details have to be very well considered on what can go wrong. But that is the

nature of our investment strategy, and our returns are the key ingredient for our investors. It is something we embrace and so long as we are patient in finding the right opportunity and diligent in our execution, we mitigate as much of the risk as possible.

Like all investors, one gets apprehensive, particularly when there is volatility. But volatility doesn’t always translate to risk.

Do you feel like there is still opportunity out there?

Opportunities do exist, but not in the manner that we all expected. Banks are not releasing huge portfolios. But you still have economic pressure on owners who can’t refinance, so the same issues of 2008 remain today, but they are manifesting themselves in a different way. It makes looking for the deals that much more important and difficult.

Was there a time when you didn’t buy at all because you believed the prices were too high?

Toward the end of the boom, the end of 2008, we stopped buying and started selling.

When did you stop selling and start buying again?

We were making offers on properties in the second half of 2009 and attempting to acquire.

When will you stop buying now?

In the next 24 months we will continue to look in an opportunistic way. It really depends on the specific asset or portfolio sale, looking at the broader economic sentiment and where the economy goes.

Are you a gut buyer or statistical buyer?

Data-driven with a little bit of instinct.

I look at historical values and market comparables, going back for a long period of time—the last 10 or 15 years, or as far back as I can get, with a keener interest in more recent data. Sometimes the data is very helpful. It can show a local area’s responsiveness to economic cycles. You can see how an economy reacted a certain way in a recession and then rebounded in

a certain way. So it is historical information and a leading indicator. We would factor in the desirability of the particular location.

It is a bunch of questions we ask ourselves and the seller with the view that prior performance informs future outcomes.

It is highly relevant and in some cases controlling. We also ask the basics. What third party liens are there? Are there issues with the asset? Are tenants happy and paying? Sometimes it is looking at what the buyer paid and discounting it while looking at historic and current comps. All of this combined gets you to a price and a riskadjusted return. Sometimes the data, the analysis and the number-crunching get you to a figure, but the seller won’t sell it there, so there is a gap in expectations even in a distressed context. So the instinct comes in.

You have to be able to say, ‘The numbers tell me one thing but the seller’s expectations are higher, so I will push price and risk.’ We don’t view it as a prize to get. Sometimes it is looking at the asset and walking in and having an emotional response, or asking ‘What would a downstream buyer say?’ What condition is in? How are the aesthetics? For multifamily, the desirability affects whether people want to live there.

For retail you look at circulation, cotenancy and signage. It goes beyond data and traffic counts. It is standing on the corner and looking around.

How do you feel about where the economy is right now?

I think that everyone is cautiously optimistic that there will be a period where things improve, but there is a certain uncertainty. In 2012, I don’t expect any dramatic moves or shifts. I think cap rates will stay around the same levels and remain steady, certainly for the first two quarters, especially given the global context with global banks impacted by events in Europe.

Investment will be around key geographies and key industries, and that is where we will be looking. Ultimately, distress is good for us because it creates the very opportunities that we are seeking. Q www.theregistrysf.com

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WILLIAM FAIDI

THIS PAGE: William Faidi bought the note on San Franciscoâ&#x20AC;&#x2122;s 1845 Franklin St. apartments and 11 other Bay Area multifamily properties in 2009, then sold the property and the other buildings in 2010 and 2011 for a more than 35 percent gain.

CHAD ZIEMENDORF

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City of Hope and the Real Estate & Construction Council:

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Real Estate & Construction Council Board Members: Todd Adair, BKF | Mark Berger, Berger Bros. | Nick Brereton, Brereton Architects | Felicia Brown, San Francisco Business Times | Alan Burr, Murphy Burr Curry Ed Cherry, Cox Castle & Nicholson LLP | Alan Collenette, Colliers International | Cloey Del Santo, Toss | Steve Dominiak, BRE Properties Inc. Shelley Doran, Webcor Builders | Diane Fischer, WSP Flack + Kurtz | Greg Fogg, Jones Lang LaSalle | Drew Gordon, Hudson Pacific Properties Mark Hansen, Prologis | Ron Heckmann, Heckmann Communications | Gregory Johnson, McCarthy Building Companies | Dan Kingsley, SKS Investments Chris Lang, Arthur J. Gallagher & Co. Insurance Brokers | Jeffrey Leon, RBL Real Estate | John Moe, Equity Office | Greg Moss, Cassidy Turley Wally Naylor, Charles Pankow Builders, Ltd. | Allen Nudel, Forell/Elsesser Engineers Inc. | Joe Olla, Nibbi Brothers General Contractors Marc Press, KPFF Consulting Engineers | Brian Sena, Willis Insurance Services | Lori Simpson, Treadwell & Rollo | A Langan Company David Stolecki, Sasco Electric | Bill Stotler, FME Architects | Tom Sullivan, Wilson Meany Sullivan | Richard Watkins, TMG Partners Bruce Wright, SB Architects | Rudy Yu, Ronin Project Consulting LLC

Please contact Heather Olinto, regional director of development, at (415) 369-0371 or holinto@coh.org.

COMMERCIAL

World of Work

Q James Bennett Mark Buell Gary Dillabough William Faidi Chris Foley Michael Foust Bill Gardner Mark Gilbreath Dan Hoffman Sarah Karlinsky John Kilroy Matthew Mahood Russ McMeekin Dan Mueller Hessam Nadji Jeremy Neuner Steve Reilly Ken Rosen Maria Sicola Leah Toeniskoetter Kim Walesh

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DAN HOFFMAN

Former Director of Real Estate and Workplace Services Google Inc.

Corporations Draw the Veil BRAD BERTON

Dan Hoffman is perhaps best-known as the former director of real estate and workplace services for Google Inc. Now, after four years with the Silicon Valley search-engine giant, Hoffman has moved to a new position at another Silicon Valley company. Here Hoffman discusses corporate real estate trends and what they mean for commercial property.

greener environments. Many of the campuses will be developed to LEED certification standards—but more as a reflection of individual corporate values than the [quest] for points to boost LEED evaluation scores. We’ll see more bike parking facilities and showers, but the motivation is to encourage healthier lifestyles not to earn LEED points.

What kinds of occupancy strategies will we see as tech companies large and small compete for preferred facilities?

One trend that is abundantly clear is that the big companies are looking to consolidate onto large campuses they are developing or redeveloping. They desire the benefits they get with that kind of critical mass, so they are tending to get away from telecommuting and maintaining smaller satellite offices. This is generating what you could legitimately refer to as land grabs among these companies in preferred parts of Silicon Valley.

But I’ll also say the big companies have taken down much of the larger available near-in sites in 2011, so the big space users won’t be quite as active in that regard in the coming year simply because fewer such opportunities remain.

I’ll also say the general trend in demand is toward quality buildings, Class A properties, rather than older industrial structures or lab-type space. While there’s still some need for labs, most of the growing companies really employ knowledge workforces, and high-quality facilities are what they prefer.

The second trend pertains more to all those newer, fast-growing social-networking and gaming applications we see popping up.

These are smaller companies with 20 to 250 employees who need to be nimble and act quickly. They are especially interested in flexibility in their space commitments as they continue growing.

So they prefer short-term arrangements with expansion options until they hit the point that they need much larger facilities.

And they are often motivated more by simple transactions and affordable rents than preferred locations—although a few are more sensitive to image considerations.

What key trends are you anticipating with respect to tech campus configurations, features, amenities, sustainability and the like?

I think we’ll see more and more corporate campuses that are closed. Companies like Facebook and Google are concerned about privacy and security for intellectual property and physical property. Both are demonstrating the trend toward the closed campus. It’s got a cultural feel that’s both green and urban—but it only feels open if you’re on the inside.

Another trend is that tech companies, driven in part by the desires of their younger employees, will aim to create cleaner and

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chad ziemendorf

www.theregistrysf.com

Silicon Valley remains the hotbed of technological innovation— notwithstanding the tech employment growth South of Market in San Francisco. What dynamics do you anticipate in terms of the industry’s locational preferences, particularly with the BART extension in the South Bay? The tech community still thinks of Palo Alto as ground-zero, and as companies continue to grow many of them will try to meet their space needs in the nearby cities to the east and south such as Mountain View and Sunnyvale, or maybe just to the northwest in Menlo Park in some cases, as Facebook is doing at the former Sun Micro campus. We haven’t seen many of the large tech companies move north other than Oracle and others who have selected the Redwood Shores area.

As tech companies continue growing and vacant space gets absorbed, we’ll definitely see them and developers take advantage of opportunities to redevelop sites along transit corridors into denser campuses. We’re already seeing this in Mountain View and Sunnyvale, and those and other cities are clearly pushing for more transit-oriented development.

Obviously SoMa is red-hot with tenants. But questions are rising about whether the district can continue accommodating space needs at reasonable costs. How do you see this dynamic playing out near-term?

Clearly we’ve seen some of the growing tech companies scramble for any square footage they can get their hands on in SoMa. Twitter got so big they ended up grabbing space on the outskirts of the district. And Salesforce.com is developing its campus in Mission Bay, which is a different neighborhood but one that will likely see more [tech] development attracted by Salesforce.

DAN HOFFMAN

While at Google Inc., Dan Hoffman rented goats for a week to mow the grass at their campus in Mountain View.

The venture, part of an experiment in sustainability, earned him the title Chief Goatherder from peers.

Hoffman was photographed at Harley Farms in Pescadero, CA.

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DAN HOFFMAN

I think we’ll see more and more corporate campuses that are closed.

Companies like Facebook and Google are concerned about privacy and security for intellectual property and physical property.

So it’s pretty clear we’ll be seeing more redevelopment in SoMa given the level of demand and that the area north of Market [Street] still seems off limits [for the tech sector].

We’re also seeing some companies take a bipolar location strategy with offices in Silicon Valley and the SoMa vicinity; Adobe, Google, Zynga and others have done this. The [underlying thinking] seems to be that young people love to work from San Francisco, but once they get married and have kids, many prefer the more suburban setting of Silicon Valley, so they can have a house with a yard.

You haven’t mentioned anything about companies squeezed by high costs and scant space availabilities heading to Oakland, Emeryville, Fremont or other near-in East Bay locations. Why? The social-networking companies generally haven’t shown any interest yet in locating knowledge workers in the East Bay—or even on the Peninsula to much extent, for that matter. But we do see the more manufacturing-intensive, clean-tech operations locating in larger facilities in the near-in East Bay where real estate costs are lower. Q

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Real estate economist Ken Rosen told a San Francisco audience that the global economy is at â&#x20AC;&#x2DC;much more risk than any of us would like to admit.â&#x20AC;&#x2122; CHAD ZIEMENDORF

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KEN ROSEN

Chairman Fisher Center for Real Estate and Urban Economics Haas School of Business University of California, Berkeley

BITTERSWEET Sharon Simonson Ken Rosen was professor of business administration at the Haas School of Business at the University of California, Berkeley from 1978 through 2004. He is also chairman of Rosen Consulting Group, a real estate market research firm, and chairman of Rosen Real Estate Securities, a real estate money manager with nearly $400 million in assets under management. This interview was adapted from a speech given on Nov. 21, 2011, at the Westin St. Francis Hotel in San Francisco at the Fisher Centerâ&#x20AC;&#x2122;s 34th Annual Real Estate and Economics Symposium.

What are your observations about the world and domestic political events and their implications for the economy?

It is a difficult time to forecast because we have unprecedented events. We have a crisis in confidence happening in the U.S. and around the world, a crisis in our political leadership. Our own Congress and president [have shown a] complete lack of leadership. We are going to have continual uncertainty here and abroad [until 2013].

I think that causes financial market volatility, and that is the worry I have. Financial market volatility undermines consumer and business confidence. It already has in Europe. We have a lot of longer-term issues we need to address. We have the government suing the banks for things that the government actually caused by its own lack of regulation and very low interest rates. We have a high unemployment rate, and we

have de-leveraging still going on.

There are good things out there. We have had very good job growth around the country, and the Bay Area has had the strongest job growth in the entire country. There will be a new person [replacing Federal Reserve Chairman Ben Bernanke] at the Fed [in 2013], and that person may have a very different set of policies. The weak dollar has actually helped the U.S. Many companies outside the financial world have had record profits and have good cash balances, and they are feeling pretty good, especially those that have a global footprint. We have had pretty good emerging-country growth, but both Brazil and China are now showing signs of weakening. So there is a lot of risk out there, much more risk than any of us like to admit.

So what are your expectations for the national economy?

Our base scenario is what we call a broken W, that this is going to be a choppy recovery. There are going to be some good quarters, some good days, good months and good years. [But] underlying weaknesses are preventing a strong recovery. We give a strong recovery possibility only a 5 percent chance.

There is some chance that this could spin out of control. The European Central Bank seems to be holding strong and not wanting to do quantitative easing in the way we have done here. Germany and France are at odds, and there is a $1 trillion dollar check that has to

be written by somebody, and if they donâ&#x20AC;&#x2122;t want to write it, it has contagion effects on the banking sector [in Europe] and here. There is some chance we could get a double dip, and I say 30 percent. But it scares me because we have no leadership anywhere.

Our best guess is that because of the drag in Europe and the continual weakness in state and local governments and the housing market, we are going to have trouble getting much more than 1.5 [percent] to 2.5 percent growth [in GDP].

What are your projections for employment?

The news is much better. The labor market is improving. We lost huge numbers of jobs, 8.8 million, during this recession, and we have gotten back 2.7 million. These are privatesector jobs, and this has been a very steady recovery this year.

We are adding jobs, especially in the tech sector and the energy sector. However, if financial volatility makes people and firms worry, we could see substantial layoffs again.

It is [also] true that about 20 percent of the population is in dire straits. But it has a lot to do with global competition.

People who are highly educated who can compete globally are doing very very well. People who are not are left behind, and that really is the problem. It is not whether tax rates should be higher or lower. They want to tax the 1 percent, which has nothing to do with the economy getting better at all.

The unemployment rate is coming down and will be in the mid-8s when we have the election in 2012. We expect to have net, private 1.4 million [new] jobs this year and 1.6 million jobs next year net.

Ranked by percentage growth in 2011 year-to-date, Silicon Valley is number one in the country in job growth. It added 22,000 jobs, a 2.7 percent growth rate, and since the bottom of the recession it has added 40,000 jobs. California finally is growing faster than the rest of the country, but we still have a big hole to fill.

Where are we in the real estate cycle today?

We are in the sweet spot of the real estate investment cycle. Every product type, as demographics and economics improve, is going to see increasing demand. So we fill space, but we are not building anythingâ&#x20AC;&#x201D;and that is really critical. So vacancy rates come down, and rents start stabilizing and rising.

Multifamily rental is one of the few product types that is actually building, and it is still in a good phase of the cycle, the growth phase. We still like it a lot, but it is further along.

Office buildings are lagging, and single-family is lagging.

The Bay Area is leading the way back because of the job creation and the wealth creation. But we are early on in the recovery here. We are nowhere near a full recovery in real estate. We have three to five years of running room. continued on page 45 www.theregistrysf.com

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jeremy neuner

Chief Executive Officer NextSpace Coworking + Innovation Inc.

workpLace revolution

ROBERT CELASCHI

Jeremy Neuner is chief executive of NextSpace Coworking + Innovation Inc. In 2008, as the economic development manager for the City of Santa Cruz, he was frustrated by the mismatch of commercial office spaces and employers. “If you wanted 10,000 or 15,000 or 100,000 square feet, no problem,” Neuner said. “However, our biggest company in Santa Cruz is 600 people, and we have only one of those.”

Along with Mayor Ryan Coonerty and local attorney Caleb Baskin, Neuner founded NextSpace. Across four locations—Santa Cruz, San Francisco, San Jose and Los Angeles County—the company has a little more than 30,000 square feet, with its largest location in Santa Cruz at 11,000 square feet and its smallest in San Jose with 3,500 square feet. Its current membership is 525.

The company has raised less than $1 million in equity capital starting with a small seed round in 2008 and a larger round in 2011 to fund the current expansion. All of the investment so far has come from private individuals.

Neuner, who is 38 years old, is a former helicopter pilot for the U.S. Navy and management and strategy consultant in Washington, D.C. The company offers three levels of membership: firstcome “cafe” workspace, a reserved spot or a separate office.

How is the workplace changing?

The workplace is now, for a lot of people, a portfolio of places. It might include the office, the home, the coffee shop, a kid’s soccer game with an iPhone. The knowledge-based economy does not need to be tied to place anymore.

What is the effect of these changes on commercial real estate?

Companies need less space. If the owners of commercial real estate aren’t freaked out, they should be. We talked with one of the heads of workplace services for Accenture. They are looking to create a workplace footprint to accommodate, at most, 30 percent of their head count. Whatever that square footage is, it is a lot less than the owners of commercial real estate

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might want it to be. There are still plenty of times when you are going to want that headquarters footprint.

But over the next couple of decades, commercial real estate is really going to have to rethink the product it provides.

What is NextSpace’s role in that shift?

We create innovative, flexible, almost on-demand workspace. We couple that with a layer on top of strong collaborative community. We’re not renting space; we are selling you a membership in a community that happens to come with a place to work that is vibrant and flexible.

Who are your members?

One of the myths of coworkers it that it is just a bunch of twenty-somethings that want that dorm-room, frat-house feeling. Our youngest member is fresh out of college. We have one member who is in his 80s. Most people who are NextSpace members are in their 30s and 40s, in the middle of their professional lives and trying to do something different than the usual W-2, nine-to-five type of employment.

Having three of our four locations in the Bay Area, we certainly skew to techheavy. We have a lot of programmers and web developers and platform app developers—the more traditional Silicon Valley startup kind of people.

But we also have quite a few graphic designers, attorneys, accountants, PR and marketing people who are not in and of themselves high tech, but keep in touch with the high-tech industry.

And some interesting outliers. We have a standup comic. It inspires him to write material. We have a sex therapist in our San Francisco location. She is a relationship and family therapist. I don’t think she actually does therapy in that space, but it is her back office.

The real magic of NextSpace happens when that front-end graphic design person meets the back-end programmer meets the PR person: trading ideas, trading bits of expertise, maybe buying and selling services from each other, and in a couple of instances founding a company together.

As the number of members grows, the number of connections and collaborations increases. We’re starting to see connections and collaborations happen between members in different locations. The media and entertainment people at NextSpace L.A. are starting to connect with the technology and design people at our locations in the Bay Area.

How do you acquire space?

We go through commercial brokers and find a space we can lease relatively long term. We like to be in locations where, No. 1, the space feels open and vibrant and collaborative. Florescent lighting, drop-ceiling cubicle hell is not what we are going for.

Will you buy or develop your own space some day?

We would love to. Order No. 1 is to develop your product. But now that we are up and established and feel like we know what we are doing, buying our own space would be a significant game-changer for us.

How has NextSpace grown?

We started in Santa Cruz. The initial intention was to only ever be here.

We signed the lease the day after Lehman Bros. collapsed. NextSpace was quite viable in Santa Cruz. It was our success in Santa Cruz that made us think that we could replicate in other markets. We realized that the ‘future of work’ was a growing industry, and that we could not only be a part of that emerging industry, we could help lead it. In 2010 we opened in San Francisco.

Then, based on that ability to replicate, we got the second round of angel capital and doubled the size of our San Francisco location and opened in San Jose. And then we tried to prove we could replicate our space at a distance, and opened in Culver City (in Los Angeles County).

What’s the future for NextSpace?

We are going to be national, even international. We definitely have our eye set on a big expansion. Q

chad ziemendorf

Jeremy Neuner starts his day taking a call and sipping coffee in his San Jose location, which opened in 2011.

RIGHT, TOP LEFT: Jeremy Neuner at his NextSpace location at 97 S. 2nd St. in downtown San Jose.

The atmosphere is relaxed but signs also emphasize enterprise and diligence.

ABOVE: In the break area, every member gets a nook for a coffee mug.

CHAD ZIEMENDORF

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â&#x20AC;&#x153;Bittersweet,â&#x20AC;? Ken Rosen, continued from page 41 What are your thoughts on the office sector?

We are at a 50-year low in office building nationwide, and vacancy rates are coming down, but slowly. Financial-service firms are cutting back, and government is cutting back, two big demanders of office space. Rents are stabilized. The Bay Area is different. We have very strong job creation in San Francisco. Our estimate is this year we will have 19,000 jobs. That is the best year we have had since the mid part of the decade. It is not quite like the dot-com boom yet.

The dot-com boom was bigger. This is feeling a little bit more stable even though valuations may be bubble-like. There has been no new construction and very little in the last cycle. Returns have already been great for office space for the last two years, but it is because of cap-rate compression. Net operating income is just now starting to move up. So office is lagging with the exceptions of Silicon Valley, South of Market, Palo Alto.

What about for-sale housing?

If you are in the mass housing market, credit is very tight.

Affordability is the best in 30 years in California. The foreclosure hangover continues, not in San Francisco, but in some submarkets in the Bay Area. We think prices have bottomed, and some pockets are showing substantial increases.

We are down to about 66 percent home ownership [nationally].

We were 64 percent before the boom, and I would not be surprised to see it keep falling. There is a change in attitude. To get the strong demand we would like to get, there is going to have to be some structural shift. I think the shift is going the other direction.

Fannie and Freddie will be phased out over the next five years, more dramatically under one election scenario than another. Mortgage rates relative to Treasuries will rise. They have already lowered the lending limit for Fannie and Freddie, and I think it is going lower, and the mortgage-interest tax deduction is at risk.

What do you think about the apartment sector?

San Francisco and Silicon Valley have had huge rent increases, 12.9 percent effective rent increases. There is substantial improvement going on across the country in rental apartments. It is the best property sector and will be for the next three years in a row. Returns in multifamily have been great. They have been the best of any sector. Cap rates have fallen, but now roughly three-quarters of the gains are because of rent increases, and we think that is going to be true going forward as well. The demographics are truly astounding.

The number of people turning age 18 this decade will average roughly 4.4 million per year.

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In retail, we have the lowest level of building in 50 years. That is a good thing if you want improved rents and better occupancy. What is especially doing well is luxury retail. Vacancy rates are coming down slightly. We donâ&#x20AC;&#x2122;t have the slew of store closings we thought we would see through this great recession, and returns have been pretty good, the second best of any sector.

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And finally, what about the hospitality sector?

We built too many hotels. It was a bubble just like single family.

We are building a lot less. Occupancy has improved dramatically.

Revenue per available room is surging.

So both apartments and hotels, which are very much leading indicators of the economy, are doing very well. San Francisco in particular is booming in the hotel business, the biggest boom since the dot-com era. So, despite all of the economic headwinds, the two sectors of real estate most sensitive to current conditions donâ&#x20AC;&#x2122;t show any weakening yet. Q

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Partner, Senior Vice President, Life Sciences Kidder Mathews

Tech Crowds Life Sciences BRAD BERTON Though the life-sciences industry typically tracks the beat of its own drummer, the economic climate of the last three years has not spared its players. “The biopharma industry has undergone really thorough, transformational change,” Joel Marcus, chief executive of Alexandria Real Estate Equities Inc., told analysts as 2011 came to a close. But that change, he argued, should benefit players like Alexandria, which is focused on buying and owning tight-in real estate adjacent to the industry’s “innovation centers” such as UCSF’s Mission Bay campus in San Francisco. In 2011, Alexandria invested heavily on both coasts. In April, it bought 409 and 499 Illinois St. in Mission Bay, paying $293 million for 453,000 square feet; roughly half is occupied. In late October, it broke ground on a $500 million, 1.7 million square-foot campus in Cambridge.

The Boston and Cambridge markets are the “best positioned” in the country, followed by San Francisco, Matt McDevitt, executive vice president of real estate for BioMed Realty Trust, told analysts as 2011 came to a close. BioMed owns nearly 3 million square feet of primarily life-science space in the Bay Area. Alexandria owns over 2 million square feet and has capacity to develop an additional 400,000 square feet.

But a trend that has become evident in the Bay Area with Salesforce.com and VMware Inc. is surfacing in other markets: Tech users are edging out life-science users for the best properties in pursuit of the strongest talent. Alexandria says that 211,000 square feet it has available on Illinois Street is being considered by “a very strong technology company,” in addition to two lifescience entities.

How do near-term growth prospects for life-sciences companies stack up against other technology categories?

It’s pretty clear that more general technology [companies] are generating the bulk of the [tech-related] employment growth and space absorption locally today. We’ve seen several examples of tech companies taking down spaces or sites that had initially been planned or built out for biotech uses. One is Salesforce.com’s purchase of 14 acres for its headquarters in Mission Bay, a major biosciences hub. And we also recently saw VMware [Inc.] take over the former Roche campus in Palo Alto. And in Mountain View’s Shoreline district, Google took over the former FoxHollow [Technologies Inc.] facilities, and LinkedIn [Corp.] took over the former Boston Scientific building.

Can you identify some of the economic and other issues that are inhibiting local growth in the biosciences fields?

Once startups reach their next rounds of growth, it’s harder to get additional financing to expand when their space needs go from maybe 15,000 [square] feet up to 30,000 [square feet] or 50,000 [square feet]. There’s just no such thing as an IPO market

[in biotech] these days. So that leaves these companies with few options; either sell to or partner with big bio or big pharma. And those aren’t necessarily the most favorable alternatives.

With the biggest of the biotech companies, we’ve seen something of a slowdown in growth locally after a couple of major mergers in the industry—with Roche [Holding Ltd.] taking over Genentech [Inc.] and Novartis [AG] buying Chiron [Corp]. Both of the acquired companies were growing locally at pretty good clips before the mergers, and this really hasn’t continued other than the 30,000 feet that Novartis took in Emeryville.

We also saw Bristol-Myers Squibb [Co.] buy a couple local companies, Kosan Biosciences [Inc.] in Hayward and Medarex [Inc.] in South San Francisco. And what can happen with these mergers is that the acquired company’s R&D gets relocated or their local facilities get consolidated. So the growth of these giants locally going forward remains a question mark.

How do you see this combination of factors translating to leasing activity near-term?

I expect modest leasing activity for 2012. Not only is there still plenty of concern about the economy generally, but there’s also a hesitation to make any big and bold commitments during an election year. But I wouldn’t be surprised if activity trends upward as we get deeper into the year if the economy improves and then picks up after the election. This will depend to some degree on when some of the mid-sized companies hit commercialization of their products in development, as well as having the financial markets loosen up.

Are you generally encouraged or discouraged about ongoing growth prospects for the life sciences in the Bay Area?

Fortunately, we are seeing some companies that are developing intriguing technologies grow quietly behind the scenes, particularly in South San Francisco. Onyx Pharmaceuticals [Inc.] is one, and both Novartis and Biogen Idec [Inc.] have invested in Portola Pharmaceuticals [Inc.] In fact there’s a whole series of companies here that are moving into phase-two and phase-three [clinical] trials, and some of them are bound to experience strong growth ahead as these technologies emerge into commercial applications. It’s also encouraging that a lot of the startups that don’t make headlines are developing promising technologies and securing venture capital and angel funding. Some of the local biotech incubators are at capacity and expanding, so it’s pretty clear that activity on the smaller spaces is brisk.

The Bay Area boasts a handful of biotech hubs. Describe the interplay among them.

We don’t really see a lot of companies relocating among the local submarkets that attract biotech hubs. The real magnetic continued on page 65

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You are also seeing a much higher quality of developer. james bennett

South San Francisco may consider itself the birthplace of biotechnology, but the market has lagged San Franciscoâ&#x20AC;&#x2122;s Mission Bay and the Stanford University area in demand from the sector. James Bennett says 2012 will be a test year for the city. chad ziemendorf

www.theregistrysf.com

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JOHN KILROY

We have commissioned a piece for the plaza (of 303 Second St.) from one of the world’s foremost sculptors Jon Krawczyk, who did the 9/11 cross that is now installed at St. Peter’s Church in New York City. john kilroy

John Kilroy (right), Eli Khouri and Eileen Kong walk the lobby of Kilroy Realty’s newly remodeled office at 100 First St. in San Francisco.

CHAD ZIEMENDORF

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john KILROY

President and Chief Executive Officer Kilroy Realty Corporation

TRACKING THE KNOWLEDGE WORKER Sharon Simonson Since mid-2010, Los Angeles-based Kilroy Realty Corp. has amassed a portfolio of 2.5 million square feet of San Francisco offices located in the rapidly gentrifying South of Market district. In the third quarter, the company completed its fourth SoMa acquisition with 201 Third St., a 312,000 square-foot, 12-story office building for which it paid $103 million. On Nov. 2, John Kilroy, the company’s president and chief executive officer, announced that Kilroy had just gone into escrow on SoMa’s 370 Third St., a seven-story, 402,000 square-foot building for which it paid $92 million. The property is subject to a ground lease, and Kilroy plans to acquire the land late in 2012. Today, San Francisco is the company’s “standout performer,” Kilroy said.

With nine months of 2011 behind it, the company reported funds from operations of $95.6 million on revenue of $276.4 million. “In the last 18 months, together with what we have in escrow, we have acquired the better part of $1.5 billion in assets,” Kilroy told The Registry. “We have added 38 people this year across all of our target markets at a time when not many real estate companies are expanding.” Heading into 2012, the market is “challenging and uncertain,” Kilroy told analysts, but also laden with opportunity.

Before you began investing in SoMa, had you owned property in the Bay Area?

Before 2010 we had been in Silicon Valley, but we had not owned assets there since about 2001. We had been in Seattle for years, too, but had sold the one big campus we had there at the peak of the market in 2007. We had been studying the Bay Area for a long time but didn’t feel comfortable with the pricing. With the downturn, we have been able to turn on the jets and acquire.

You have said that leading into your first SoMa purchase, the company had been studying the market for some time looking at growth drivers. Talk about that process. Are you involved?

I am very much involved. As a real estate guy, I am involved in trying to understand what geographic areas and specific assets we should target, but I am backed up by a tremendous operating and finance team. I am involved in the repositioning because most of the assets we buy have some value-add component.

The investment thesis for expanding into the Bay Area and Pacific Northwest was that certain West Coast markets would lead the recovery, especially where there are concentrations of industries where intellectual capital is abundant with worldclass universities churning out technology and life-science companies that are globally competitive and dominant.

Chris Corpuz is our executive vice president of strategy and a brilliant guy, and I said to Chris, ‘I want you to focus on the following things,’ and one of them was ‘What drives San Francisco?’ He had worked in San Francisco and Silicon Valley, in real estate and high tech. He graduated from Harvard [University] and worked in Boston. He understood the connection between Harvard and MIT (Massachusetts Institute of Technology) as economic drivers of the Route 128 high-tech market and the similar pattern of how Stanford [University] and Cal (University of California, Berkeley) drive the Bay Area. He made a deep dive into the market, and it was clear that SoMa was going to attract the knowledge companies. He also dove into the Transbay terminal and how it would affect individual streets and properties.

When 303 Second St. came up [in 2010], we jumped at it. When can you buy an entire city block with a large south-facing plaza? It hadn’t had a lot of love. The day it went on the market, we walked every street there. A few days later, when we made our offer, we had done our due diligence. We went hard day one with $50 million and said we would close within three business days from getting the tenant estoppels and doing the tenant interviews.

As a result of underwriting that asset I sat down with our group in San Francisco and said, ‘What is every building that will be positioned positively by the new Transbay terminal, and what will ultimately be built there?’ So we walked all of the properties, and we approached Beacon [Capital Partners LLC] on 100 First St., another property bordering the Transbay district. Fast forward 18 months, and we own six buildings in the city and are approaching 2.5 million square feet. I have been told by a couple of brokers that we are now the largest or the second-largest landlord in SoMa. We are now repositioning 303 Second St. We have commissioned a piece for the plaza from one of the world’s foremost sculptors Jon Krawczyk, who did the 9/11 cross that is now installed at St. Peter’s Church in New York City. Our sculpture will be as high as 40 feet in places and 70 feet long.

How does that bring value to the real estate and shareholders?

303 Second St. was an underinvested building, but it is ideally located and had the bones for building the collaborative work space and large floor plates that high-tech companies and knowledge workers love. As soon as we bought it, we powerwashed the building and began a multi-million dollar update of its plaza. It will revolutionize the building, provide accessible green space, a water feature and neighborhood- and tenantserving retail. We will then be able to drive rents.

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john kilroy

TOP to BOTTOM: Kilroy has acquired 2.5 million square feet of offices in San Francisco’s South of Market since the middle of 2010. Here he pauses at 100 First Plaza.

Kilroy wears his “Kilroy was here” cuff links only on big deal days. He calls them his lucky charm.

CHAD ziemendorf

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How do you chose your tenants?

With a lot of the startups, they may have cash on their balance sheets, but if they are not profitable, they can burn through that pretty quickly. We interview the CEO and CFO. We have also invested in a battery of analysts that dig very deeply into how companies are positioned and what their business model is. We talk with folks in the venture-capital industry. Our senior management has been through a lot of cycles, and we have made mistakes, too. Nobody bats a thousand, but I tell our people, ‘Let’s not make the same mistake twice.’

Has competition in SoMa with companies like Hudson Pacific Properties Inc. driven up prices?

We don’t feel we have competed with Hudson Pacific. They bought 1455 Market St. from Bank of America. That was not an asset that Kilroy was interested in. We draw a circle around what we consider Main and Main, and then our mantra is ‘focus.’ That circle can expand over time as a market gentrifies.

When there is competition for an asset, you have to be in the ZIP code on the pricing, but about half the deals we have done in the last 18 months have been off market or limited to select buyers. We have also been told that we were not the highest bidder. Where we think we compete favorably is we are not known to re-trade, and we do what we say we will do. We send in a SWAT team of senior people, so we can underwrite and close very quickly. We don’t have partners and we don’t require financing. All of the assets we have bought in San Francisco, we paid cash. We go in with pre-approval from our board, and we put up very significant deposits.

We love infrastructure-rich assets with public transportation and good vehicular access. Obviously the Transbay terminal, I-80, Caltrain and BART all fit into that. We love to be in the path of growth and where knowledge-based companies want to be. They are the entities that compete favorably around the world, and there are a disproportionately high percentage of them in Silicon Valley and SoMa. They aren’t really making more banks or law firms or accounting firms. Who knew about Google 10 years ago or Facebook five years ago? We have a history of dealing with technology and media tenants that goes back decades. When they tore down that old bus ramp [in SoMa], they transformed that area and got rid of an eyesore.

They also opened up retail and restaurant opportunities, and all of that goes to the amenities that we look for.

Is your love affair with good transportation new to this cycle?

No. We have a number of developments near airports, and airports typically have good vehicular access. Transportation is imperative to work. You have to get there, right? And transportation-rich areas tend to be areas where there is a lot of commerce. The knowledge companies we favor are very focused on transportation options for their employees, whether it is freeways or major arterials or by BART or Caltrain.

The rule of thumb used to be that you had three people per 1,000 square feet. We are now seeing densities of 85-feet per person or 12 people per 1,000 square feet. You can’t provide enough parking for that kind of density, so being near transportation is massively important. Collaborative

john kilroy

If I see a cigarette butt on our property, I pick it up, and everyone in our company must do the same.

If they don’t, I warn them once, and if it continues, they are gone. john kilroy workspace is all about reducing the square feet per person and improving productivity, so you have to have buildings with the physicality to handle that—the HVAC systems, the elevators, natural light and the right floor space. You can add some of that, but most of it needs to be there.

Will you develop in the Bay Area?

We are looking at a couple of sizable development deals right now that are close to the infrastructure and amenities that we want. We are confident that in the next three or four years, Kilroy will be doing development and redevelopment in Seattle and San Francisco. We have about $2 billion in the development pipeline, and we expect over time to develop in scale, in both the Bay Area and the Pacific Northwest.

How do you hire people?

I love people who work hard and want to move up. We have a really strong culture at Kilroy. We are a very entrepreneurial company, and we like people of strong character and expertise.

We don’t have a lot of hierarchy. We are not an investment vehicle that just buys assets and tries to make a cyclical play. We are long-term owners focused on markets and the physicality of our assets. We are willing to put in significant capital to reposition properties and give them legs for the future.

The service industry is not that complicated. It is about high quality and not straying from the things that you know work.

If you go to a Four Seasons [Hotel], and an upper manager is walking down the hallway and sees a piece of trash, the manager picks it up. I am the same way. If I see a cigarette butt on our property, I pick it up, and everyone in our company must do the same. If they don’t, I warn them once, and if it continues, they are gone.

What are the benefits and limits of the public real estate investment trust structure?

One strong benefit for a public REIT, if it is well-managed, is you have access to all forms of capital. We have an investmentgrade rating and can do overnight bond deals. We can sell equity. We have a sizable line of credit; we can do securitized financing or perpetual preferreds or convertibles. You never know in a volatile market what will be the most attractive.

Public companies also are transparent. Tenants underwrite their landlords, too, and there is a lot written about Kilroy. The discipline of being a public company has benefits. You have to run a clean ship; you have to have consistent reporting; and you want to make sure that your operations go as planned.

This discipline has sharpened Kilroy and made us more competitive. The negative is the propensity of government to endlessly pass legislation that affects all public companies, so that is burdensome. Q

MAR K GILBREATH Chief Executive Officer LiquidSpace Inc.

Just-In-Time Real Estate

ROBERT Celaschi

Mark Gilbreath is chief executive of Palo Alto’s LiquidSpace Inc. The company’s mobile application connects people seeking workspace with venues that have space to rent for intervals as short as 15 minutes and as long as a day. That can include business centers, co-working locations, hotels and private offices. Though Gilbreath won’t name large clients, executives from Cisco Systems Inc. have mentioned working with LiquidSpace. Gilbreath himself notes that 75 percent of U.S. workers spend at least one day each week away from their officially designated workspaces.

As of today the company reports bookable space in two dozen U.S. metropolitan areas coast to coast. That includes the Bay Area from Fairfield to Santa Cruz, Sacramento, Los Angeles, San Diego and Seattle. The company launched in the first half of 2011 with four spaces in San Mateo and San Francisco. Right now the app can’t be used to book anything outside the United States, but properties in Europe, Asia, Africa, South America and Australia are available.

How is the workplace changing the way it uses space?

One of the trends now clearly documented is the move to less square footage per employee. Where the norm would have been 250 square feet or more per employee, you are now seeing companies driving that number below 100 square feet. The simple calculus is that there is enough capacity already built to service us for the remainder of our lives. The massive disruption that is going to occur is that we are not going to need more capacity. That is not to say not any more will be built. But broadly speaking, the technology we need to develop, the processes we need to develop from architecture to interior design, from planning and zoning, will be to reorganize those activities around how we reharvest the existing landscape.

How are companies adapting?

Fortune magazine recently referenced that 82 percent of the best places to work that they track are offering workplace flexibility. There is very much an economic objective. The flexible work programs are really addressing the objective of helping the employees be happier and more productive.

How has LiquidSpace grown in its first year?

A couple of months back we began engagements with large corporations. We wanted to see if there would be a natural customer in the person whose job it is to administer the workplace portfolio. We have had success. What these individuals are doing is making a decision to deploy LiquidSpace to their internal employees, with the objective of helping their employees be more productive.

Who uses LiquidSpace, the employer or the employee?

The prominent approach is the companies are encouraging the use of the LiquidSpace platform. You are pushing the workplace decision literally into the palm of the employee.

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How far has LiquidSpace spread?

Over the last eight weeks or so at an accelerating clip, spaces have been going live in Boston and New York, Houston, Austin, Dallas, Los Angeles. Anyone in about five minutes’ time can go to LiquidSpace and list their space. There are now over 10,000 people active in LiquidSpace, and there have been over 12,000 transactions since we launched.

The venues that share their space have complete control to set the terms of use including the price. Venues can also elect whether to share their space with the general public or among a private community of users, for example a law firm sharing space with clients. In many cases the sharing of space among private communities is at no cost. In the public-sharing examples, typical costs range from $20 a day for a desk in an open area at a co-working space to $100 or more per hour for meeting space in a business center.

Are you running into much competition?

We are familiar with a handful of other very young companies that have presented themselves as workspace finders. All of them that we have been able to identify are providing the same simple sort of functionality, which is a website with a listing of spaces. It is a glorified real estate listing. There is no other provider that is providing the realtime capability of mobile and web that we perceive to be so important. We are able to do so because, behind the front end—the user interface that shows you images of spaces—is a complete platform that those venues are using to manage the booking of that space. We are the system of record to keep track of that availability.

What will commercial real estate look like in the future?

What is happening right now is the flocking of all these spaces into this platform that allows them to be shortterm transactional. I think the next wave will be spaces that are developed and redeveloped based on providers like LiquidSpace. This transaction activity will allow us to point real estate developers in the right direction in terms of what they should be building or redeveloping.

What will LiquidSpace look like in the future?

LiquidSpace in a few years time will be a global leader. In that time we will have seen a transformation in corporate real estate that is no less dramatic than with the emergence of companies like eBay and Amazon. Few will be the companies that have not embraced this as a key aspect of how they deploy their employees. Our long view on this is that, just as with eBay and Amazon, there tend not to be multiple instances of systems like this. The market forces will favor one large company. We hope to be that company.

There is no doubt in my mind that that company will exist in five years. Q

BELOW:

Photo courtesy of Rien van Rijthoven

Photo courtesy of Mercedes McAndrew Photography.

WorkBar Boston is comparative veteran in the young world of coworking. The idea began from a group of tech entrepreneurs lost the office space they had been working in. They set out to create their own workspace for “startups, small companies and mobile enterprise employee’s who also crave a vibrant, professional workplace filled with the energy of others to work around.” WorkBar was born and has been quickly expanding its footprint.

Photo credit to Melissa Blackall Photography

TOP TO BOTTOM:

CAPTIONS WOULD GO HERE

Mark Gilbreath, LiquidSpace chief executive, says corporate real estate is at the beginning of a massive transformation.

This private meeting room at the Hotel Diva in San Francisco is available to visitors via LiquidSpace.

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In the last 30 years, with the advent of the microprocessor, we have used in our professional and personal lives all of the computer and data-processing power that science will give us.

www.digitalreality.com

michael foust

LEFT to RIGHT: Demand for data center space is tied less to job creation than other classes of real estate and more to the growth of the Internet.

San Franciscoâ&#x20AC;&#x2122;s Digital Realty has a global portfolio with nearly 100 data centers in North America, Europe and Asia, including 150 S. First St. in San Jose.

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MICHAEL FOUS T

Chief Executive Officer and Director Digital Realty Trust Inc.

BIG DATA, BIG BUILDINGS Sharon Simonson San Francisco-based Digital Realty Trust Inc. began in 2001 as GI Partners, a private-equity venture with the California Public Employees’ Retirement System. Founded by Michael Foust and Rick Magnuson, the data center landlord and development company has built a global footprint with not quite 100 buildings and nearly 18 million square feet.

Digital estimates it completed $650 million in new construction in 2011 and had more than a million square feet under development as it entered the fourth quarter. In 2011, the company expected to close on more than $200 million of income properties as well.

Digital predicts it will complete $650 million or more in new development in 2012, and at the end of 2011 announced it had secured a $1.5 billion credit facility (that could be expanded to approximately $2.25 billion) to finance global expansion through acquisitions, development, redevelopment and debt repayment.

The new credit facility doubled the existing $750 million facility.

Digital is traded on the New York Stock Exchange under the symbol DLR. While Digital is a real estate investment trust, a data center’s capacity is limited by electricity supply as much as the real estate.

Space is measured in megawatts of electricity. A megawatt is a million watts, and a data center costs $10 million a megawatt to build. The Silicon Valley data center market is in equilibrium, the company said late in the year, with available supply and the pipeline of tenant demand nearly synced at about 26 megawatts.

So far in 2011, Silicon Valley has absorbed 29 megawatts of supply, compared to 16 megawatts so far this year in New Jersey, for instance.

The company is working to expand its build-to-suit program, an area where it has seen new competition, including from Jim Trout, the founder of Santa Clara’s Vantage Data Centers and a former Digital Realty honcho. Trout is being backed by private equity firm Silver Lake Partners and is focused on build-to-suit product for the enterprise class.

Why are you headquartered in San Francisco?

Arguably the Bay Area, Menlo Park and Palo Alto are ground zero for technology investing, and knowing the customers, some of the trends and requirements has been very helpful for us. So many of the innovations around cloud computing, applications and content distribution come out of the Bay Area, it is a natural for us to be in the middle of that.

That said, while we were founded here and have a headquarters here, we are a global company. We have regional offices and large staff in New York City, New Jersey, Boston, Chicago, Dallas, Los Angeles. From our private-equity days, we have always

had a European presence, and about a year ago we did our first investment in Asia Pacific. Now we are doing ground-up development in Sydney and Melbourne. In Europe we have large projects in London, Paris, Amsterdam and Dublin—major markets with the most demand from corporate enterprise customers.

Put Silicon Valley and Santa Clara, the epicenter of the Bay Area data center market, into an international context.

The Bay Area and Silicon Valley are really focused on companies based here. It is a vibrant market from the point of view of tech companies, IT (information technology) and cloud providers, but it is a local market.

Is the Bay Area emerging as a hub of data-center expertise?

There is a lot of good expertise in the Bay Area around datacenter design and implementation, but there is good mindshare in the New York-New Jersey area. In London, Paris, Singapore, Hong Kong, you have a lot of expertise around large-scale and very mission-critical deployments, especially around the financial services in New York, London and Hong Kong. That is why we have so many of our design, project management and technical folks here in San Francisco, in New York and in London.

The company is putting greater emphasis on its build-to-suit capabilities. Why? We have been active in the past especially with financial services firms in London, Texas and New Jersey, and we have done data centers inside existing buildings. It is a business that we wanted to bring to the forefront that we have this customized approach. We want people in corporate enterprises to know. It dovetails with our skill set and our supply chain, and we can leverage that for customized users and those who want to be in smaller markets.

What do you hear from executives across the country and around the world about their expectations for growth?

We are certainly seeing broad expansion in Asia Pacific.

The growth is slowing in some markets but demand for IT, especially from financial-services companies, continues to grow at a good pace. We see demand from them in London and the New York-New Jersey metro area. IT for most companies is productivity-enhancing, and we see especially in financial services, a tremendous amount of continued growth as they take advantage of virtualization and internal cloud deployments.

We see tremendous growth in the outsourcing of the cloud deployments, in managed hosting—all of the different flavors of the cloud. We see that especially in the United States and internationally. In the United States, the adoption and growth of third-party cloud services has taken off, and it will take off in international markets too.

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MICHAEL FOUST

Could technological improvement cause the demand for data center space to slow because storage capacity can grow without the need for more bricks and mortar?

In the last 30 years, with the advent of the microprocessor, we have used in our professional and personal lives all of the computer and data-processing power that science will give us. I marvel at the demand we create for data storage whether it is content, video or music or to comply with regulatory requirements, even private stuff and things as commonplace as email. There is so much demand for IT services, we have a hard time seeing a slowdown.

Technical capabilities do march on, but we donâ&#x20AC;&#x2122;t see any gamechanging technology. It is more an evolutionary process than a revolutionary process.

It seems as though there are more data-center developers competing than ever before. Is that true?

It is very regionalized like any real estate. So there are a few developers with private capital that have been building one or two projects, but few that have done stuff on a broader or regional basis.

DuPont Fabros [Technology Inc.] is in multiple U.S. markets and CoreSite [Realty Corp.] is in several markets. But like all real estate, it is very fragmented. Not many people are doing it on a broader basis, and no one like us. It is challenging from a capital perspective.

These buildings are expensive to build, and there is little financing available. And you have to have a lot of technical expertise. We have well over 200 people in our company who donâ&#x20AC;&#x2122;t come from a traditional real estate background. Many of our customers need solutions in multiple markets and to be truly successful on a broader platform you need a big investment.

What do you see going forward?

We see demand being pretty sustained for data-center solutions and the growth in IT. The rate of growth slows from time to time, but we see the demand from new applications, for expanding existing applications, from continuing regulatory requirements especially in the financial services world and the impact of the media. We think the media, content distribution and the use of the cloud, those are fundamental changes, and we see those driving growth for more data centers. We like the large U.S. market, but we think having a diversified portfolio works well for us because you get ebbs and flows in local markets, but you can move capital around to meet demand in different locations.

We see Asia-Pacific as a very exciting area for growth, and we are making our first significant investments in Sydney and Melbourne, and we are looking hard at Hong Kong. We are sticking to major markets but with the build-to-suits we also can have flexibility around geographic locations. We canâ&#x20AC;&#x2122;t ignore the macro environment, but the good news about information technology is that it is productivity-enhancing and cost reducing, so even in challenging times there is a place for growing IT. Q

LEFT: Michael Foust (left) is joined by Texas Gov. Rick Perry and the mayor of Richardson, Texas, for the ceremonial opening of Datacenter Park in Dallas, one of the largest data center complexes in the United States.

HESSAM NADJI

Managing Director Marcus & Millichap Real Estate Investment Services

Bay Area Recovers, Slowly Sharon Simonson Marcus & Millichap Real Estate Investment Services specializes in commercial real estate investment sales nationwide.

Hessam Nadji joined Marcus in 1996 as vice president of research and became managing director in April 2000. He has a Bachelor of Science degree in information management and computer science from City University of Seattle. Here he discusses his expectations for U.S. and Bay Area retail and apartment properties.

How do local job-growth prospects compare to other big population centers?

The Bay Area economy is generally in pretty good shape relative to most metro areas, but it is not setting any records. We lost 241,000 jobs locally from the employment peak in 2007 to the bottom of the cycle in 2009. And despite the revival in the tech fields, we are obviously still feeling the lingering impacts of the recession, as we’ve only recovered about 50,000 of those jobs so far—a pretty anemic pace. Our expectation is that we’ll see another 25,000 or so new local jobs in 2012 and again in 2013.

What do you see in retail sales activity nationally that you expect to affect demand for local store space?

What a lot of people don’t seem to realize is that at the macro level, core retail sales activity today is actually 7 percent above the prerecession peak, after growing 6.5 percent during the past

year. So even though economic conditions generally are still pretty tough in much of the country, the recovery in retail sales has actually been pretty quick and robust over the past couple years. But, the recovery is uneven. The strength we’re seeing is at the top-tier, among luxury-type retailers, as well as at the very bottom, and the weakness is in between with much of that softness tied to the decline of the housing sector. So we’re still seeing struggles in categories such as home-improvement and furnishings.

And of course the ongoing trend is that online sales represent the fastest-growing retail segment, currently about 10 percent of total sales. And that’s putting tremendous competitive pressure on brickand-mortar retailing in many merchandise categories such as books and electronics. It’s a force to be reckoned with and will [motivate] more chain retailers to reconfigure their stores and portfolios.

How do the Bay Area’s retail property markets stack up nationally?

San Francisco in particular is the absolute darling of the retail and shopping-center industries. The good news is that it’s fundamentally a healthy regional retail market.

But the not-so-great news is that the rate of recovery is what we’d call measured rather than exciting. We’re just not seeing the level of absorption that would make you feel like this

is a robust recovery. The retail vacancy rate in and around San Francisco is hovering around just 3.5 percent. But part of that is because it’s such a supplyconstrained, infill market where it’s so difficult to build anything.

The San Jose area’s vacancy had been down to just 3 [percent] or 4 percent before the recession. It is now 6.5 [percent]. Although that’s still well below the national average of about 10 percent, it is primarily because we had seen quite a bit of retail construction there just before the recession hit. The overall retail vacancy rate in the Oakland vicinity and the East Bay is about 7 percent—again, not great historically but well below the national rate.

What should we expect in terms of retail rental-rate dynamics locally going forward?

Retail rents will probably rise an average of 4 [percent] to 5 percent next year in San Francisco, which is one of the tightest metros. And the rate will probably be more in the 2 [percent] to 4 percent range for the rest of the region due in part to the higher vacancies. We see pretty good prospects in the most upscale shopping areas, and in the best-per-forming regional malls. Some of these might see gains of 6 [percent] or even 8 percent next year.

It’s difficult to predict how quickly some of the available retail spaces will get absorbed— or by whom. We’ve been calling

retail the ‘dark-horse’ sector, since it seems to reinvent itself so quickly. What we can say is that well-located space near jobs and population density should be in good shape one way or another before too long.

The further you get out and the more affected you are by the housing bust, the tougher it will be to re-lease vacant spaces.

Like other metros, the Bay Area has seen little in the way of retail development over the past three years or so. What kind of a pipeline are you anticipating going forward?

We’re probably not going to see the level of economic recovery we need to support more retail development until 2014. But what we will see over the next year or two is more retail redevelopment, more upgrading of tired centers and maybe some conversions of obsolete properties. And we’ll probably see more re-use type projects in 2014, assuming the economy improves.

The difficulty of adding new supply [in the Bay Area] has become something of a safety net for property owners, so the area is perceived as among the least risky and most attractive markets to invest in. But as has been the case these last couple years, retail investments won’t be as active as apartments even here in the Bay Area.

If anything we’ll probably see a fairly steady pickup in activity, continuing what we are already seeing, and some further momentum in 2013— but nothing off the charts. continued on page 65

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The Bay Area economy is generally in pretty good shape relative to most metro areas, but it is not setting any records. hEssam nadji

Marcus & Millichap Real Estate Investment Services

ABOVE: The upside of the brutal entitlement process in many Bay Area cities is that it caps new supply, which makes investors like the region more, said Hessam Nadji.

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Q&A

BNBuilders SEAN TRUESDALE /// PRINCIPAL BNBuilders is a mid-size general contractor that specializes in highly technical commercial construction projects. BNBuilders has the experience and strength of a large contractor, but provides the personal service and economy of a local builder. !"#/)$5/0#)*#$,+)'7+&/+$/2(&95#*$&/7#$*(/#2(#:$"#%&'"(%)#:$+73(#:$ education, data center and public sectors. Over the past few years BNBuilders has experienced measured growth, resulting in annual volume over $300 million and a presence along the West Coast. Sean Truesdale is a founder and principal, and +0#)*##*$'"#$K+)'"#)2$L%&/7+)2/%$+73(#6

Q: There are a number of corporate campuses planned in the Bay Area for Facebook Inc., Google Inc., Apple and others. Is the industry ready to supply enough workers?

Truesdale: Yes. If all these mega-projects move forward in 2012, the Bay Area labor forces will be stretched but capable of servicing the work. The one constant since the recession began a few years ago is that most projects are very slow to receive approval and many disappear before they start. Most corporations that have the funds to spend or lend are still being very conservative with their cash. !"#$%&#'()*#+,*-.+/*,#0%&12*34#(2#(#5%67(-0#8+.'#91%(,#5(7(9+3+ties across a number of sectors in our region. Which of those sectors do you believe will have the most activity in 2012?

Truesdale: The biggest growth appears to be in the corporate TI market with a number of corporate campus relocation projects in design. The life science industry has experienced consolidation as Big Pharma seeks to add smaller biotech companies to their portfolio in the hopes of the next blockbuster molecule. There are no signs that the BioPharma construction market is set for tremendous growth after the past year’s slump. !"#$"#%&'"$(%)#$*#('+)$%,,#%)*$'+$-#$*'%-&#$./'"$*#0#)%&$*/12/3(%2'$2#.$ hospitals being designed and built to accommodate SB1953. The data center sector shows promise as both owner and collocation companies "%0#$*/12/3(%2'$,)+4#('*$%2'/(/,%'#56$ Q: The economy has forced every business on the globe to re-evaluate its business model and in some cases utilize a new technology to do things better. How has your company and your industry adapted?

Truesdale: New technology usually means investing capital, something most businesses have not been able to tolerate in recent years. We

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%)#$+2#$+7$'"#$7#.$3)8*$'"%'$"%*$,9'$%$"/1"$0%&9#$+2$2#.$'#("2+&+1/#*:$ whether it be hand held-tablets with management software that can be used on our construction projects, or 3D, 4D, 5D, and 6D building information modeling. I think our industry as a whole has a long way to go to fully embrace and utilize technology to the fullest extent possible.

Q: What excites you the most about 2012?

Truesdale: I’m excited to see the market turn in 2012. We have invested in people and technology in the past few years, and that has resulted in our largest-ever backlog entering a new year. We are poised to serve the growing demands of our clients as the market turns the corner in 2012. It is also exciting to see clients returning to seeking the best value and best personnel over the recent months and moving away from the low-bid mentality that has been forced upon them by the tough economic conditions over the past few years.

Q: Will the next year bring consolidation in your industry and how will that manifest itself?

Truesdale: I don’t see consolidation occurring. The economy has forced +9)$/259*');$/2$)#(#2'$;#%)*$'+$-#$89("$8+)#$&#%2$%25$#73(/#2'6$$<+*'$ 5#*/12$%25$(+2*')9('/+2$3)8*$5+.2*/=#5$/2$>??@$%25$>?A?6$$!+5%;$*+8#$ 3)8*$%)#$-%(B$'+$"/)/216$$!"+*#$'"%'$"%0#$*9)0/0#5$'"/*$7%)$"%0#$%&8+*'$ certainly made it through the worst part of the recession.!"!!

BNBuilders www.bnbuilders.com 201 Redwood Shores Parkway, Suite 125 Redwood City, CA 94065 C73(#D$EFG?H$>>IJA@GI

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American Asphalt ALLAN HENDERSON /// PRESIDENT & CHIEF EXECUTIVE OFFICER

For over 25 years American Asphalt has been providing asphalt and concrete repair, maintenance, and new construction services throughout California. American Asphalt works with you to ensure that the right application is provided and the smallest details are attended to. This commitment to quality it what keeps customers coming back to American Asphalt year after year.

/////////////// Q: The recession has left many property managers struggling.

What effect has this had on roadwork repair and infrastructure development?

Henderson: Maintenance budgets have certainly been impacted, forcing managers to shift funding to other critical programs. But you can only defer maintenance for so long before you incur much greater expense.

M&9));$*9)7%(/21$/*$+2#$*+&9'/+2D$!"#$&/7#*,%2$+7$%$)#*/5#2'/%&$)+%5$/*$>?$ years to 25 years but slurry surfacing combined with proper maintenance can extend that 8 years to 12 years. It’s also more cost-effective than new asphalt – pennies versus $1.50 per square foot. A $200,000 budget 8/1"'$)#,%0#$30#$)#*/5#2'/%&$-&+(B*$./'"$%*,"%&':$-9'$*&9));$*#%&$(+0#)*$ 20+ blocks. This is true for residential properties, industrial parks, shopping centers and other commercial properties. We look for creative ways to stretch limited dollars. !"#:'*#71+5*#%4#0%&1#1(8#6(.*1+(3;#%+3;#<&5.&(.*2#=&+.*#(#9+.#(-,#+2# rising currently. How does this impact your business?

Henderson: >??I$%25$>??N$.#)#$#O')#8#&;$0+&%'/&#$8%)B#'*$./'"$'"#$ price of crude oil reaching $140 a barrel. We’ve had a bit of a break, but now we’re seeing $90-$100 a barrel. We just now are seeing asphalt prices start to spike again and will look at using recycled materials whenever we can. We always look for savings, but not at the risk of undermining quality or customer experience.

Q: Where in the state are you seeing the most activity, and to what would you attribute it?

Henderson:$M/&/(+2$P%&&#;$.%*$'"#$3)*'$'+$(+8#$+9'$+7$'"#$)#(#**/+26$ Businesses like Facebook, Tesla and Apple take great pride in maintaining their campuses. Google is in a property acquisition phase, with a long-term view for the company’s portfolio. Providing safe, acces sible, well-maintained parking and landscape surfaces is part of their Google brand experience for employees and customers alike.

At Tesla, we’re improving their parking infrastructure and also upgrading '"#/)$%((#**$'+$'"#$Q2/+2$R%(/3($S%/&)+%5$'+$*9,,+)'$5/*')/-9'/+26 Due to new regulations there’s also a lot of ADA work going on, which /*$0#);$*/'#J*,#(/3(6$T2;$'/8#$'"#)#U*$%$'#2%2'$/8,)+0#8#2':$'"#$(+5#$ needs to be reassessed to ensure compliance. So we consult with asset managers across the state to help meet compliance requirements.

Q: This recession has forced businesses to look closely at what they’re doing. How have the last few years transformed your business?

Henderson: We’re being invited to the table much earlier in the process '+$5#0#&+,$'")##J;#%)$'+$30#J;#%)$*')%'#1/($,&%2*$7+)$"%)5J*9)7%(#$8%2agement. This requires a deeper understanding of how each property is 9*#5$%25$."%'$/'*$1)+.'"$,&%2*$%)#6$V#$&++B$%'$')%73($%25$9*#$,%''#)2*:$ water erosion and other environmental factors that impact the life of all the hard surfaces. With the right maintenance plan, you can protect the ,)+,#)';$%25$*/12/3(%2'&;$/8,)+0#$'"#$SCW$+7$'"#$#2'/)#$,+)'7+&/+6 Q: What are you looking forward to in 2012?

Henderson: Basically, the end of the uncertainty. We’re seeing an uptick /2$-9*/2#**X$/'U*$*&+.:$-9'$5#32/'#&;$-9/&5/216$!"#)#U*$*/12/3(%2'$8+0#ment in the commercial and industrial space. Asset managers are investing more in their properties to attract tenants. Improving curb appeal is key to driving more interest and increased occupancy. It’s an exciting time. " American Asphalt www.americanasphalt.com 24200 Clawiter Road Hayward, CA 94545 EN??H$GYAJGGG@ www.theregistrysf.com

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Q&A //////////////////////////////////////////////////////////////////// Q: Just how tough a market will we see in 2012?

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Babitsky: The recession hasn’t changed the fact that health care providers are making efforts to be able to provide for the growing population of seniors. Additionally, while public school budgets are under scrutiny, there’s still a major need for more space to ease school crowding and give the next generation the best possible education. Hospitals and schools are the kinds of facilities that we expect to see growth before some other sectors.

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concerned with the price tags on new buildings, and I think they should balance that with a long-term view on operational costs.

Q: Do you think we’ll see other commercial sectors on the upswing in 2012?

Babitsky: I think so. Even at its worst, the market had a strong amount +7$'#2%2'$/8,)+0#8#2'$.+)B6$W$'"/2B$.#U)#$*'%)'/21$'+$*##$*+8#$3)8*$'%B#$ advantage of the overall lower costs to build right now. The competitive construction market and the costs of some materials make this a good '/8#$'+$-9/&56$T*$'"#$)#(+0#);$(+2'/29#*:$W$'"/2B$.#U&&$*##$8+)#$3)8*$'%B#$ advantage.

Q: How do we avoid another downturn for the construction market?

Q: You mentioned that public funding for schools is under scrutiny.

Can construction companies help on that front?

Babitsky:$Z/*'+);$*"+.*$'"#$8%)B#'$#--*$%25$[+.*6$W$'"/2B$'"%'U*$ unavoidable. A good step would be for every builder to commit itself to involving as many local partners on projects as possible. When we do that, we keep money spent on projects right here in the community. That helps fuel more local overall spending and a more sustainable regional economy. If we can do that, even if we’re helping build our future competitors, we’re taking steps to ensure long-term health. "

Babitsky: I think so, through the right kind of collaboration. On a case-by-case basis, contractors and design-builders can come up with -9/&5/21$8#'"+5*$%25$7#%'9)#*$'"%'$(%2$*/12/3(%2'&;$&+.#)$'"#$'+'%&$ cost of ownership of a new facility for a school district. The bottom-line -#2#3'*$'+$1)##2$-9/&5/21$2##5$'+$-#$#O,&+)#56$!%O,%;#)*$%)#$)/1"'79&&;$

Skanska www.skanska.com 1999 Harrison St., Ste 1950 Oakland, California CA 94612 EGA?H$>NGJAN??

Q

www.theregistrysf.com

/

“Bay Area Recovers,” Hessam Nadji, continued from page 60 Switching to the multifamily sector, highlight some macro trends that you believe are behind apartment demand across the country and in the Bay Area?

In addition to the age demographic trends generally, one key reason for the recovery is that of the jobs being created today, 70 percent are being filled by people between the ages of 20 and 34. So it’s young adults who are capturing the lion’s share of the new jobs, and they’re moving into apartments. Secondly, we saw three million young adults move back in with their families between 2005 and 2010, and now they’re moving back out. And we also can see that the doubling up of roommates into single apartments is now giving way to ‘decoupling.’ Thirdly, the nation’s overall homeownership rate has continued to fall, meaning more and more former owners are renting.

What’s in store for Bay Area apartment markets in the coming year or two?

Apartment vacancies here will remain well below the national average, which is now 5.6 percent compared to 3.4 [percent] in San Francisco, 3 [percent] in San Jose and 4 [percent] in the East Bay. So rents seem pretty certain to continue rising in 2012.

We’re projecting a strong 7 [percent] to 8 percent increase for San Francisco and the San Jose area, and 4 [percent] to 5 percent for the East Bay. The pace of growth will probably cool a bit in 2013, but it will still be pretty decent at a regional average of about 5 percent.

There’s no sign that we’ll see any slowing in apartment investment activity locally and pretty much across the country in 2012. Q

www.crewsv.org

With great appreciation, CREW Silicon Valley would like to thank our 2011 sponsors: Signature Sponsors

Partnership Sponsors

“Tech Crowds Life Sciences,” James Bennett, continued from page 46 pulls that drive location decisions are the research universities: Stanford [University], of course, in and around Palo Alto; CalBerkeley and the Lawrence-Berkeley lab in the East Bay; and now UCSF with Mission Bay. South San Francisco benefits from being between Stanford and UCSF.

Who are some of the key life-science players on the real estate side and what do you think are the prospects for additional development projects going forward?

The three big life sciences developers operating locally are the public REITs Alexandria Real Estate, which is the big player in Mission Bay; BioMed Realty, which is mostly in South San Francisco and Fremont; and HCT (Healthcare Realty Trust Inc.), which is also big in and around South San Francisco as well as Redwood City and Mountain View. Locally based Wareham Development continues to develop mostly in Emeryville and Berkeley. The Shorenstein Co. has also been active in Mission Bay and has secured entitlements for two million square feet of development along the waterfront in South San Francisco.

It recently sold its Mission Bay holdings to Alexandria and currently has its South San Francisco property on the market.

Other than Wareham’s latest Emeryville project, we’re not seeing much in the way of speculative biotech-type development, although these companies have been actively buying and entitling new sites that could potentially accommodate several million more square feet of space.

South San Francisco has some [space] overhang at the moment, so we’re not likely to see any spec development there nearterm. And since we’re seeing something of a lull in demand for large biotech spaces, there’s a chance we could see some of the planned space end up with traditional tech tenants rather than life sciences. Q

Media Sponsor

With great excitement CREW Silicon Valley introduces its 2012 Board: Penny Lewis, President (Gensler) Jill Collins, President-Elect (CBRE) Ginger Sotelo, Immediate Past President (Pahl&McCay) Nancy Brandt, Treasurer (Berliner Cohen) Tina Moore, Secretary (Cresa Partners) Sarah Edwards, Director of Programs (SRS R.E. Partners) Kimberly Taylor, Director of Sponsorship (Arborwell) Anna Rose, Director of Membership (Borelli Invest. Co.) Jonel Porta , Co-Director of Communications (Cassidy Turley) Brian Franklin, Co-Director of Communications (Morgan Stanley Smith Barney)

PUBLIC POLICY Who is in CHARGE?

Q James Bennett Mark Buell Gary Dillabough William Faidi Chris Foley Michael Foust Bill Gardner Mark Gilbreath Dan Hoffman Sarah Karlinsky John Kilroy Matthew Mahood Russ McMeekin Dan Mueller Hessam Nadji Jeremy Neuner Steve Reilly Ken Rosen Maria Sicola Leah Toeniskoetter Kim Walesh

RE AD ON www.theregistrysf.com

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MAT TH E W MAHO OD

President and Chief Executive Office San Jose Silicon Valley Chamber of Commerce

it takes a RegioN

Sharon Simonson

San Francisco gives the Bay Area its international glitz, Oakland its ragged edge of greater potential. But Silicon Valley is the sturdy co-star without which the show could not go on.

Of Santa Clara County’s 1.8 million residents (according to the 2010 U.S. census), not quite 950,000 live in San Jose. Half of the county’s 6 percent population growth in the last 10 years occurred in the self-designated Capital of Silicon Valley. As in the recovery from the dot-com bust a decade ago, San Jose has not yet felt the same boom as Palo Alto, Mountain View, Sunnyvale and Cupertino. And, no claim that the region is thriving has true strength if its largest city (Oakland has 391,000 residents, San Francisco 805,000) is still struggling so much. As we’ve all relearned painfully, political and public leadership matter, especially during a crisis. The private sector can go it alone but only so far.

In 2011, the San Jose Silicon Valley Chamber of Commerce brought Matthew Mahood back to the region.

The Bay Area native previously led the Sacramento chamber. Here Mahood offers a perspective on the region’s path forward and how the chamber intends to play a role. First off, with 1,500 paying member businesses, the chamber is too small, he says. His goal is to boost that number to 2,500 or more. “More is always better,” he said.

What is going to be new at the chamber because you are there?

Initially you will see a different level of communication from the chamber to our members. You will start seeing different formats trying to provide additional value, meaning and relevance, to tell them more actively the things we are doing to improve the economy and help our members.

You will see us implement a business plan for 2012 that is directly related to the interests of our members. The challenge is the needs of the chamber membership are very diverse. They range from the single proprietor insurance broker to Cisco Systems [Inc.].

So we have to figure out through that continuum how to serve the members.

It’s not enough to say they all want a positive business environment.

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We need to think about ourselves more regionally. Cisco Systems, Intel, Apple, Google, Applied—only one has its operations based in the city of San Jose; yet their employees probably live in San Jose. Also with these big global companies, they are focused on global affairs, not local affairs. How are we as a chamber relevant to them? How do we affect the business climate when they are looking at the globe? We can probably engage on the state and federal levels, but we are not going to be the lead on that.

You are always trying to be more effective and efficient as an organization, but externally, there is an increased desire by our members and board to engage in economic development. That requires significant advocacy at the local government level, talking about streamlining permitting and government getting out of the way to allow more private investment. So advocacy ties into economic development.

On the member-services side, the networking and educational aspect, we need to do a better job in those areas, too.

Define ‘regional?’

I am talking about Santa Clara County and pushing up the Peninsula. The focus of the chamber will look like concentric circles on a target but we have to be engaging broadly on important relevant issues.

How does the chamber’s mission jibe with San Jose’s economic goals?

The city does have an economic development plan but with the elimination of the redevelopment agencies and the reduced ability of the public sector to drive some of these brickand-mortar investments, there is an opportunity for the private sector.

How do you get around provincialism?

It is a big challenge. I think we have to figure out where our priorities are aligned. We can’t steal from the South Bay to benefit the Peninsula. The California tax system rewards war, particularly for retail, but we as a region, namely as the South Bay, need to figure out how we grow the pie. There has never been a need for an economic development plan for Silicon Valley, a regional plan, because it seemed to take care of itself.

But the rest of the world had caught on to some of our competitive advantages.

The region needs to figure out that we need to market and brand and promote ourselves and fight back. Silicon Valley is the driver of world technology markets and to me it is one of the hearts of economic development for this country. We should not lose sight of that. We need to come together as a unit and develop a plan that will help us to compete. We are going to need help from the state of California. That is a 30,000-foot discussion. We need to get that discussion down to the 10,000-foot level and to start taking tangible action.

Give some examples of the action you are talking about.

I hear it almost daily from people that getting your business open is hard in the city of San Jose. I had to find a new barber, and I went to this guy on San Pedro Square (downtown San Jose), and he has 190 square feet and his permits and fees to get that space built out were $4,400, all to the city of San Jose. I hear from people that the costs of some of their projects, 20 percent are fees and licenses for the city. That is too high. We need to change the mindset within every jurisdiction. They need to get the customer to success. If cities want to grow revenue, they need to grow business. The challenge for the cities is that they have reduced staffing and budgets.

Why does a city’s insolvency affect business?

It affects their ability to provide essential services. Police, fire, after-school programs, graffiti abatement—all of those things affect the business climate.

If people don’t feel safe and secure, they won’t leave home, so you have to have well-funded essential services. So even as the city is cutting, they need to focus on economic development, or you end up in a death spiral. The only way to get out of it is to grow the business community and that will generate the revenue for the general fund. The No. 1 issue on our membership survey was job loss, by a wide margin. How do we get people back to work and get the economy growing again? They recognize that for every one that gets back to work, it is a positive economic effect. Q

There has been never been a need for an economic development plan for Silicon Valley, a regional plan, because it seemed to take care of itself. But the rest of the world had caught on to some of our competitive advantages. mattHEW mahood

this page: Matthew Mahood wants Silicon Valley cities to overcome provincial attitudes for the betterment of the entire region. chad ziemendorf

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SAR AH K ARLINSKY Deputy Director San Francisco Planning + Urban Research Association

LEAH Toeniskoet ter Director SPUR San Jose

SPUR Travels South Sharon Simonson A long-held goal for the San Francisco Planning + Urban Research Association, or SPUR, comes to fruition with the opening of a San Jose office. In May 2009, SPUR opened a 14,500 square-foot Urban Center in San Francisco’s South of Market, a crucial improvement to its organizational infrastructure and a foundation from which to grow. Now it is fulfilling a second ambition to be a forum for regional thinking and local action in the largest city in Northern California. The new SPUR San Jose office will be manned by Leah Toeniskoetter. The 34-year-old San Jose native spent eight years away from the region for education, the Peace Corps in Bolivia and job opportunities in Sao Paulo, New York, Baltimore, Detroit and Washington, D.C. She then spent seven years as development manager at Toeniskoetter Development Inc., a commercial real estate development firm in San Jose. SPUR’s initiative is supported by 1stACT Silicon Valley and Connie Martinez, managing director and chief executive. 1stACT shares an interest in promoting place in the South Bay and is providing half the seed money and office space for the next three years to the SPUR San Jose office.

Who is SPUR and what does SPUR do?

Sarah: SPUR is a public-policy think tank that promotes good planning and good government. We are member-sponsored by individuals, foundations and business[es], and we have a very robust board of directors with 70 people representing a wide swath of the San Francisco and Bay Area. We focus on a variety of topics: urban-planning work and promoting regionalism. We work on sustainable development and have published reports on climate change and adaptation. Our philosophy is that cities are the laboratories for urbanism and lots of things can be done to promote urbanism. We have learned a lot and now is the time to think about some of the other cites in the region and apply what we have learned.

What is urbanism?

Sarah: Urbanism is about a strong and happy marriage between land use and transportation planning. In a city with a strong urban fabric you have a wide variety of transportation options.

You are able to get around on your own feet, via transit, a bike or a car. You have many compact walkable neighborhoods that can vary in scale from the downtown core of San Francisco to a strong residential neighborhood constructed around a commercial corridor where you can walk or bike to meet a friend for coffee.

The goal is to create strong urban environments in the Bay Area’s central cities: San Francisco, San Jose and Oakland.

If SPUR could achieve all that it wanted, what would it be?

Sarah: We would make the three central cities of the Bay Area— San Jose, San Francisco and Oakland—the greatest cities on the face of the planet.

Why San Jose and why now?

Leah: If you look at growth and where it is projected in the region, San Jose is slated to add more jobs and more housing than any

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other jurisdiction between now and 2040, based on predictions from ABAG (the Association of Bay Area Governments). San Jose has taken an even more aggressive stance toward bringing in more jobs than ABAG projects, and they are focused on bringing growth to the city.

How do you get past parochial self interest among cities?

Sarah: That is an excellent question and one that we will be grappling with. We took our board of directors to a study session in San Jose in 2010. It opened people’s eyes as to what San Jose is doing well and what we have to offer. There is a lot to learn but also there is political change that can be made if the [three] center cities are thinking about themselves in alliance. For instance, transportation dollars and making sure that money and other infrastructure money are going to places that currently have the greatest population and are planning for growth. A lot of times, money goes to communities whether they are planning for growth or not. It is important that resources be concentrated in places where they can do the most good for the most people.

On your Web site, you say that SPUR has been involved in “virtually every major planning decision” in San Francisco for 50 years. Will you apply that level of engagement in San Jose?

Leah: Eventually, yes. We realize that the preponderance of critical land-use decisions are made at the local level.

When will SPUR be in Oakland?

Sarah: We want to focus on the San Jose lab right now, and we have no set timeline for Oakland. We have a three-year period to pilot our work in San Jose, and if the excitement is there and the funding is there, we’ll stay.

Define success in San Jose?

Leah: To have a positive impact on the city. That will depend on the projects we take on. Right now we are speaking to everyone we can and creating a long list. We are also forming our advisory board to help us determine which projects to take on. We are not short on ideas.

Sarah: One example [project] would be making San Jose’s downtown work. San Jose through its redevelopment agency has put an enormous investment in downtown, but it is not a main draw for people. We want to talk to people using the space and do an analysis of why that is and make recommendations. The way we measure success is coming up with a policy report that people are excited about and that the city can implement and we can look back and evaluate.

So how is SPUR different from the many other civic, land-use and real estate organizations out there?

Leah: SPUR is built to serve our cities [and region], to ask, ‘On the whole, what is best?’ and that is a different question from what is good for our members. Q

We would make the three central cities of the Bay Area—San Jose, San Francisco and Oakland—the greatest cities on the face of the planet.

SARAH KARLINSKY

Sarah Karlinsky (left) and Leah Toeniskoetter at the SPUR Urban Center on Mission Street in San Francisco. john SEBASTIAN RUSSO

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