The Registry | Q3 2014 by The Registry

3: 2014 A publication by

july | august | september | 2014

Commercial & Residential Real Estate

A new era of co-working just started | PG. 52 Next level of sustainability — profitability | PG. 56

The Commercial Issue 2014

these

golden days

volume 3, number 3

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letter from

the PUBLISher Over the last year, we have been hearing from industry veterans about how they’ve never seen a market like this. In many ways the Bay Area is leading the recovery in the U.S., and the problems that we’re experiencing in our region, from insufficient housing stock to congested highways, are not things you will hear in other geographies. We have the attention of the world, and investors from around the globe are trying to get in on the action. Chop Keenan, the famed Silicon Valley land owner and developer, compared the region to Florence of the mid 16thcentury, where the convergence of innovation and commerce transformed the Italian city forever. The technological innovation that makes our region hum is also moving markets across the globe, and it’s not just investors who are claiming their stake in the Bay Area. Large cap and blue chip companies are opening offices across the region in an effort to bottle the lightning produced among our rolling golden hills. Many are spending millions to get into the right building and be in the neighborhood that will appeal to their future employees. They figure that getting the right peoplein the office will be transformative for their business, so they don’t worry about the upfront cost of an office that may not be the most economical one. The office they build communicates the culture of their company, or at least the culture they aspire to have. These truly are the golden days for real estate and for the region as a whole. In a recent interview we conducted with Michael Covarrubias, the CEO of TMG Partners in San Francisco, he underscored just how fast the region’s market expanded over the last two years, in some cases even surpassing previous heights. The question is how much further it can go, and is there room for value appreciation. While Covarrubias doesn’t see the economy turning in the next two to three years, we are left with an obvious question for the real estate market in the Bay Area: Where will investments provide lucrative enough returns for their investors? San Francisco seems to be running out of space, and regulation limits expansion through Proposition M. This may prove a boon for East Bay and Silicon Valley. In the valley, people are used to seeing geeks with Google glass and other gizmos. In the East Bay, there is lots of opportunity for rejuvenation. Perhaps this recovery will spread there with similar vigor. Thank you for taking the time to pick up The Q and read through. Feedback is always welcome. Vladimir Bosanac

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Counselor at Law

“Character is much easier kept than recovered.” Thomas Paine

Jess Love has been involved with real estate on the peninsula for more than 25 years. His real estate expertise, leadership skills and ability to spot trends make him a successful legal advocate. He represents homeowners, investors and business entities, from contract negotiations through all stages of litigation. An example of his effective advocacy is a recent case involving a homeowner who purchased a high-end dream home and found the seller’s prior lender threatening to foreclose because of the seller’s unreleased equity line secured by our client’s property. The sellers were nowhere to be found and had drawn the equity line to its maximum after discovering the lender’s failure to release the loan after closing. The lender ﬁled suit with a demand for $560,000. Jess immediately obtained a temporary restraining order and preliminary injunction to forestall the trustee sale and protect the client’s home. Jess effectively resolved the matter through a summary judgment motion. Whether it’s assistance through a real estate acquisition, negotiating a contract, litigating a case or every day legal advice in terms of business or real estate, Jess is prepared to provide comprehensive advice and legal advocacy.

Over the past sixty years, Ropers Majeski Kohn & Bentley has conducted a multi-service practice offering litigation and transactional services to domestic and international businesses and individuals. Visit us at www.rmkb.com San Francisco 415.543.4800

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inside...

development OFFICE DEVELOPMENT 10

Office Space as Diverse as Its Tenants Bay Area’s technology firms are exploring ways to communicate their brand through space

INVESTMENT 14

Value-Add Drought Afflicts the Bay Area Many investors are refocusing value-add efforts to existing properties

NORTH SAN JOSE 19

Through the Orchards of Silicon Valley Repositioning Orchard Parkway in North San Jose was a big bet that is starting to pay off

MULTIFAMILY 23

Up, Up and Away Bay Area’s multifamily development boom is captivating all corners of the region

Map: Bay Area Multifamily Pipeline continueD

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events | daily breaking news | market trends | design Let The Registry tell your story. Send your news releases to news@theregistrysf.com.

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spaces co-working 52

All Together Now Co-working space has moved from a start-up phenomenon to a maturing real estate niche

SMART BUILDINGS 56

Profitable Sustainability Firms take holistic approach in managing facilities and meeting stricter regulatory requirements

COMMUNITY SAN FRANCISCO 28

DATA CENTERS 62

The Cloud Center

San Franciscoâ&#x20AC;&#x2122;s Second Act

Businesses, IT firms refocus on data center expansion projects

South of Market metamorphosis is just starting to take shape

final offer 64

EAST BAY 34

A Bright Shining Light in Emeryville

Harry Freitas: Up From the Ranks

East Bay city civic and business leadership rallies behind effort to increase education opportunities for underprivileged

retail RETAIL DEVELOPMENT 38

Marking Up the Property Retailers fight for scarce locations around the Bay Area

Map: Bay Area Retail Development and Construction Projects Making First Impressions Count Jamestown tries to understand the local stories behind the spaces is buys

Transportation 47

Powering Up the Shopping Center

San Francisco-based start-up is poised to change the way cars are charged at retail locations

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development

photo courtesy of Jasper Sanidad

Office Development 10 | Investment 14 | North San Jose 19 | multifamily 23

The view from Autodeskâ&#x20AC;&#x2122;s offices in San Francisco shows one alternative to the typical tech campus. (See story on page 10.)

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Office Development

“It really isn’t about one size fits all. Different needs have different types of buildings.” Phil Mahoney, Cornish and Carey Commercial Newmark Knight Frank

At left: Autodesk in San Francisco

OPPOSITE PAGE: Facebook Campus in Menlo Park

Office Space as Diverse as Its Tenants

photos courtesy of Jasper Sanidad

Nancy Amdur

Bay Area’s technology firms are exploring ways to communicate their brand through space

A booming Bay Area technology

industry is demanding so much office space that companies are considering options beyond the traditional campus, including high-rises and converted warehouses. “When we look at the numbers in the Bay Area, it is 85 to 90 percent tech company growth, and it’s really about [those companies] looking for the kind of space that is attracting and retaining the best talent,” said Garrick Brown, director of research at Cassidy Turley Commercial Real Estate Services in San Francisco. Finding the best office location can be a challenge for Bay Area firms. Tech and startup companies—along with

many of their employees—often seek a San Francisco address, and office vacancy in the city stands at about 8 percent, Brown said. Further, there is 3.5 million square feet of office space under construction and 75 percent of it is already pre-leased, he added. Some businesses still are moving into traditional sprawling suburban office campuses, such as Apple’s 3-millionsquare-foot headquarters underway in Cupertino, but they also are going vertical like Salesforce.com’s plans to take more than half of the 61-story tower being constructed at 415 Mission St. in San Francisco, or creating “cool” space by renovating converted warehouses or outdated properties. “It really isn’t about one size fits all. Different needs have different types of buildings,” said Phil Mahoney, an executive vice president at real estate services firm Cornish and Carey Commercial Newmark Knight Frank in Santa Clara. To stand out in a sea of potential employers, companies are carefully choosing the location, amenities and design touches to set them apart from competitors. “All companies are trying to differentiate themselves, and space is a huge factor,” said Kelly Dubisar, a design director at the San Francisco office of global design firm Gensler. No matter where a company lands, access to transportation and amenities are essential pieces to office campuses, according to industry experts. “Being on or near transit or having a shuttle to transit is very important,” Mahoney said, adding that companies also want to provide “amenities around the building or in the building” to help them recruit and retain employees. Suburban office tenants might create an urban feel by offering a variety of restaurants along with services such as a dry cleaners. On-site amenities might include outdoor kitchens, walking trails and bocce or volleyball courts.

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Office Development

Facebook Campus in Menlo Park

“All companies are trying to differentiate themselves, and space is a huge factor.” Kelly Dubisar, design director at the San Francisco office of global design firm Gensler

Companies in San Francisco scan the surrounding neighborhood for features such as a grocery stores, fitness centers and dining options before choosing a location, said Dominique Price, a design director at Gensler. “A lot of square footage is being gobbled up by ping pong table rooms [or] massage table rooms—all these different amenities being offered to the worker—it’s an entirely different type of workplace where you’re not sitting in a cube or office isolated from your co-workers. You’re interacting with people all day long,” Brown said. Amenities can be key in making a space stand out to potential tenants. “You’re trying to create a touch point that someone can relate to,” said Nathan Carlson, a project director at San Francisco-based Swift Real Estate Partners, a San Francisco-based real estate investment firm. “It may be a patio or a fire pit—so when someone tours five different buildings, [he or she] can say, ‘I remember that one.’” In 2011, when 3D design software firm Autodesk began updating its San Francisco office space at One Market, originally built in 1916 and incorporated into a larger development in 1976, the company worked

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with Gensler to help form a design that reflected its culture, Dubisar said. Among Gensler’s design elements was creating a base color palette of charcoal and white with energetic splashes of vibrant colors. The company also added a variety of collaborative spaces and introduced wood slats to indicate a dynamic, multidimensional environment. It is not only tech companies looking toward more innovative design features. “We’re seeing this with every [type of] company,” Dubisar said. “Trends start with tech companies because of their agile nature and the experimental nature of how they work.” But Dubisar adds that it is not always necessary to include entertaining amenities. “Not every company needs to have ping pong tables and air hockey and slides. It’s understanding what resonates with your particular culture,” she said. In fact, a building’s overall design is increasingly important. “The image of the building matters,” Mahoney said. “It doesn’t need to be the most pristine building, but a lot of [companies] want nice to very nice buildings because that’s the image they want to portray. They’re a first-rate company,

their employees are first rate, and they want to take care of them in a first-rate fashion.” “Everyone wants curb appeal to make [a building] inviting,” said John Marmesh, director of business development at San Jose-based TICO Construction, Inc., adding that Silicon Valley buildings from the 1970s and ’80s are either being razed or receiving significant interior and exterior renovations. Tenants also are saving money by creating more dense space. In 2000, it was typical to house four employees per 1,000 square feet. Now companies are squeezing in six or seven employees into that space, Brown said. Further, moving into a vertical office campus is becoming a popular choice due to high land costs, Mahoney said, while traditional office parks with several low- to mid-rise buildings also remain “very much in vogue,” he added. Demand for office space throughout the Bay Area is not likely to wane soon as tech companies continue to introduce new products, Brown said. “All these innovations are coming from the Bay Area,” he said, adding that at this point, he does not see any indication that they’re going to stop.

photos courtesy of Jasper Sanidad

At Autodesk in San Francisco all it takes is a great view to make a great break room, but tech workers still like to have a game or two handy.

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Investment

370 Townsend St. was one of the few value-add properties to hit the market last year.

Value-Add Drought Afflicts the Bay Area Steve Weir feels fortunate. His investment firm was able to grab a value-add property in the Bay Area last year—a vacant two-story industrial building near the Caltrain station in the molten-hot real estate SoMa submarket of San Francisco. The 23,500-square-foot structure, built in 1923, has been transformed into a creative technology office space and is now 100 percent occupied. “We were lucky to get 370 Townsend St.,” said Weir, a partner at Housman Weir Investments, which specializes in value-add commercial real estate, primarily in the Bay Area. “We missed out on one deal on Bryant Street, but other than that, we didn’t miss out on any, because there wasn’t any to be had.” Good value-add commercial properties have become few and far between in the Bay Area, especially in San Francisco. Those on the lookout today are finding that such properties—buildings that can be repositioned, leased up and sold—already have been

Many investors are refocusing valueadd efforts to existing properties

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snatched up in a frenzy during the region’s tech-fueled economic boom. Even when such a property does hit the market, the purchase price can prove to be too steep to justify the investment. Value-add properties in San Francisco “ran out about a year ago,” Weir said. “We bought our last San Francisco property the beginning of 2013. Even in mid-2012, there were very few on the market.” These days, Weir said, he is not seeing any property that can be bought where the added value will warrant the time, effort and cost to rehabilitate it. At the start of 2013, he said, commercial office space was going for $400 per square foot. “That blew me away,” he said. “But now you’re seeing $600 popping up. It seems the value added is baked into the selling price.” Markus Shayeb, senior vice president of tenant advisory in the San Francisco office of Houston-based real estate services firm Transwestern, had a similar take on the pricing. “The entry point in most rehab projects has reached such a high point that you are basically starting to give away some of the future potential profits to compete for the purchase,” Shayeb said. “I think when Class B stuff sells for $400-plus a square foot, people tend to build the future value into the equation.”

photo by Eustacio Humphrey

Neil Gonzales

Investment

“We bought our last San Francisco property the beginning of 2013. Even in mid-2012, there were very few on the market.” Steve Weir, a partner at Housman Weir Investments

Also ratcheting up the price is the presence of multiple bidders competing over a tight inventory. “I think the market has been thoroughly picked over,” Shayeb said, “and any building that comes to market gets too many offers that drive the entry point up.” The underlying factor in all this is the ongoing surge in the tech industry, which has gobbled up San Francisco office space block by block and lease by lease. Many successful firms such as Twitter and Square concentrate on the city to recruit young talent who enjoy the urban life. According to a report by financial and professional services firm JLL, the first quarter of 2014 saw leasing activity in San Francisco shoot up 25 percent year-over-year, including six leases already for property larger than 100,000 square feet—nearly the same number signed for that amount of space in all of 2013. “Five out of the six deals have represented expansions by prominent tech tenants, who on average grew their footprint in the city by more than 60 percent,” the report said. Even as more than 3.5 million square feet of new supply is under way, “close to one-third of it has already been preleased by growing tech tenants such as Salesforce, Dropbox and Trulia.” Non-tech businesses face being shut out of the office market in the city as demand is only expected to grow while supply is predicted to further diminish over the next two years. “Those industries outside the tech sector will continue to be the most adversely affected due to their inability to compete and lack of options left by voracious tech leasing,” the report said. The market outlook also calls for “reduced tenant leverage, heightened rents and diminished concessions,” the report said. In San Francisco, the average asking office rent overall at the

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start of the year was $58.66 per square foot per year, a 6.8 percent increase from a year earlier, according to JLL. Sellers are factoring future rent increases into their value-add price, said Stephen Duffy, managing director at the investment banking firm Moss Adams Capital, based in Seattle, Washington. “Sellers believe buyers will enjoy rent increases for an extended time.” The pressure in the value-add arena is not just being felt with commercial property—which includes apartments—but also with single-family homes and condominiums, Duffy said. “Everything is on fire in San Francisco. Just look at the for-sale prices of homes and condos, and that’s all you need to know.” According to the San Diego-based real-estate information service DataQuick, San Francisco’s median home sales price in April jumped 13 percent from the same period last year to $922,500. Shayeb is more optimistic and still sees good value-add deals being available—only that they “happen off-market,” he said. But off-market deals can require additional detective work to track down because sellers seek privacy or have other reasons for wanting to avoid making a transaction on the public market. Weir’s firm has looked for value-add properties just outside the fringes of SoMa and even out to the East Bay, he said, but the prices in these areas are also high or creeping up, in the least. So the firm has decided on “waiting it out until prices come to a realistic view” to buy additional value-add properties, he said. In the meantime, it will build on and add value to existing property. The firm’s Townsend property, for instance, is entitled for highrise mixed-use development. For now, “it’s better to put time into existing sites than finding additional sites to acquire,” Weir said.

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North San Jose

Through the orchards of Silicon Valley Joe Gose Growing technology companies,

a recovering real estate market and high development costs have sparked a renovation renaissance in North San Jose’s industrial corridor. Developers have been buying tired warehouses and flex properties over the last couple of years and recasting them as modern office and

them leased, and a number of leases are in the works for other renovated assets.” Santa Clara-based ProteinSimple, a developer of protein analysis technologies, inked a nine-year lease to occupy the 98,000 square feet at 3001 Orchard Parkway beginning in September. The company disclosed the deal in early May when it registered with the Securities and Exchange Commission for an initial public offering. It will move 200 employees into the building from two locations in Santa Clara. Building owners Ridge Capital Investors and Contrarian Capital Management acquired the structure in 2013 for $13.5 million. In April, Sunnyvale-based VanderBend Manufacturing agreed to occupy a 209,000 square foot retrofit at 2701 Orchard Parkway. Irvine-based LBA Realty bought the building for $14 million in July 2013. Shannon characterizes the intersection of Trimble Road and First Street as the “Main and Main” corner of North

photo courtesy of Vantage Photography (left), and by Eustacio Humphrey (right)

Repositioning Orchard Parkway in North San Jose was a big bet that is starting to pay off research and development space in the northern portion of Silicon Valley’s Golden Triangle. The submarket, flanked by Highways 101, 237 and 880, incorporates parts of Santa Clara, North San Jose, Sunnyvale and Milpitas. The bets are beginning to pay off. “With the pressure from surrounding submarkets to the north and attractive acquisition prices, a number of parties have gotten in and repositioned these buildings for re-use,” said Rob Shannon, a senior vice president in the San Jose office of brokerage CBRE. “We’ve already seen the first of

San Jose. Some 1.3 million square feet of space in the corridor has been renovated over the last couple of years, and he considers millions of more square feet eligible for similar treatment. Investors have been able to buy properties below replacement cost, finance renovations and earn a profit given the market’s rental rate increase and capitalization rate compression, he said. How much rent the structures can fetch depends on the building and extent of the rehab, but some asking lease rates range from $1.95 a square foot a month to $2.45 a square foot a month, Shannon said. Two years ago, asking rents were around $1.65 a square foot a month, he added, and the increase has generally mirrored rent growth in Sunnyvale and Santa Clara. More broadly, Cassidy Turley reported that vacancy in Silicon Valley research and development space crept up 20 basis points to an average of 13.7 percent in the first quarter. But the brokerage noted that about half of the 472,000 square foot added to the market reflected new space coming online from building conversions. “With land for new development increasingly scarce, we have continued

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top photo: 3055 Orchard Drive, TMG Partners, courtesy of Vantage Photography | All others by Eustacio Humphrey

North San Jose

More than 1 million square feet of old offices have been successfully renovated in North San Jose, and millions more are eligible for similar treatment.

“We’ve already seen the first of them leased, and a number of leases are in the works for other renovated assets.” Rob Shannon, a senior vice president in the San Jose office of brokerage CBRE

to see the trend of developers purchasing older buildings and rehabbing them to compete with newer Class A properties,” the report said. The brokerage added that “skyrocketing” land prices also contribute to the strategy, which also has been playing out in Sunnyvale and Santa Clara. But Cassidy Turley suggested that the market for Class A space would only get more competitive because some older buildings had been razed in the first quarter. Additionally, the city of San Jose is attracting attention to the area through its planning and marketing efforts aimed at fostering dense residential and commercial development on the north side. Companies moving to North San Jose

include Samsung, which is building a 680,000-square-foot campus. Renovations with available space include the 76,600-square-foot 2711 North First Street and the 111,300-square-foot Orchard Drive properties, both of which are being marketed by CBRE. The renovations generally feature new exteriors, expanded window lines, pronounced entryways, fresh landscaping and warm interiors. Some include mechanical upgrades and new roofs. Developers in some cases are making dramatic statements to differentiate themselves. Irvine-based Bixby Land Co., for example, earlier this year finished a $23 million rehab of the 227,000-square-foot Trimble Technology Park, now known as

The Campus. In a release announcing the renovation’s completion, the developer said that it wanted to set a “new benchmark for companies seeking a vibrant, amenity-rich work place in Silicon Valley.” Beyond the conventional upgrades, Bixby Land added outdoor seating areas with couches, fire pits, outdoor kitchens, games and exercise areas. Bixby Land CEO Bill Halford said in the release that the concept “turns a deaf ear to conventional office development.” Bixby Land and Hartford, Conn.-based Cornerstone Real Estate Advisors bought the four-building complex from Rockpoint Group in 2012 for nearly $30 million. In June, Bixby announced the leasing of 136,000 square feet in two buildings to Verizon Corporate Services.

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Multifamily

Up, Up and Away Robert Celaschi The Bay Area is in the middle of a multifamily building boom. “The amount of units going up is unbelievable,” said Stephen Jackson, vice president of Colliers International in San Francisco. His firm has mapped out 24,627 units in the pipeline at 108 sites around the Bay Area. That counts only projects larger than 25 units and scheduled for delivery by 2016.

based The Pauls Corp. The city has plans for the construction of 2,500 residential units, including condominiums and apartments. Palo Alto-based Essex Property Trust is planning a 420-unit apartment/ retail project in Santa Clara to be called Gateway Village, and Cupertino-based KT Properties is moving ahead with plans at the St. James Towers, a 643-unit apartment project in downtown San Jose.

Bay Area’s multifamily development boom is captivating all corners of the region “The good news is that the Bay Area will absorb them, and we could continue building if this market continues,” Jackson said. Had Colliers included all projects in the pipeline, the map would have been much more crowded. It shows about 500 units going up in Emeryville, for example, but more than 1,200 units are in the pipeline, Jackson said. Other projects that did not make the cutoff for the map include 470 apartment units slated for Redwood City on Middlefield Road, to be built by Denver-

As might be expected, more than three-quarters of the new units shown on the regional map are going up in either San Francisco, Oakland or San Jose, with the rest scattered among a dozen cities from San Mateo to Dublin. San Francisco leads the way with 51 projects totaling 9,083 units. But while San Francisco may have the largest total, Oakland has the largest single project. Developer Zarsion-OHP I, LLC started moving dirt this past March at Brooklyn

Basin, which ultimately will add 3,100 units to a 64-acre tract between the Nimitz Freeway and the Oakland Inner Harbor. This boom has a different flavor than the peak of the market in 2008, Jackson said. In that year, San Francisco added about 2,000 condo units and less than 500 apartment units. In 2013, the city gained about 1,850 apartment units and only about 200 new condo units. Drivers for apartment construction include high rents and low interest rates. New projects also tend to skew to the high end. Developers are building smaller units, Jackson said. Instead of 1,000 square feet for a two-bedroom apartment, they’re going closer to 750 square feet. That gives the project a higher rent per square foot. But developers also are loading their projects with community amenities such as roof decks with Jacuzzis, large gyms, bike repair shops and pet grooming facilities. On a project that has shaved 250 square feet off of 400 units—or 100,000 square feet—adding back 7,000 square feet of amenities still leaves the developer well ahead, Jackson said.

“The amount of units going up is unbelievable.” Stephen Jackson, vice president of Colliers International in San Francisco

read more online: Pauls Corporation Plans $187MM Apartment Development in Redwood City | http://tinyurl.com/theregistry-pauls Lampwork Lofts Project Illuminating West Oakland | http://tinyurl.com/theregistry-lofts Resurgent Redwood City | http://tinyurl.com/theregistry-red Developer Plans 27 Acre Mixed-use Project in Dublin | http://tinyurl.com/theregistry-dublin

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Multifamily

Bay area Multifamily Pipeline

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Multifamily map content and production by:

SOURCE: Colliers International

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community

photo by Eustacio Humphrey

San francisco 28 | east bay 34

San Franciscoâ&#x20AC;&#x2122;s South of Market area is moving toward a make-over. (See story on page 28.)

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SOMA

San Francisco

SOMA

San Francisco’s

Second Act Neil Gonzales

San Francisco’s South of Market District has gone through a dramatic transformation in recent years as the booming technology sector has swept into the area well-known for its funky mix of industrial, commercial, residential, entertainment and arts environments. Tech firms such as Twitter, Square and Airbnb have opened up offices in SoMa, helping to revitalize stretches of city blocks. Punctuating tech’s omnipresence in the district will be the 61-story Salesforce Tower at Mission and Fremont streets. Formerly named the Transbay Tower, it is slated to be the city’s tallest building upon completion in 2017 with cloud-computing giant Salesforce.com as the anchor tenant. SoMa’s landscape is also changing because of the city’s desire to extend transit-oriented development across San Francisco to foster walkable, vibrant live-work communities and reduce greenhouse-gas emissions from passenger vehicles. The Transbay area epitomizes that effort with revamped transit center, more than 4,400 units of new housing, nearly 1,000 hotel rooms, 100,000 square feet of retail space, several million square feet of offices and 11 acres of public parks are also in store. Yet for all the changes, SoMa’s real metamorphosis has hardly begun. Long-term development will likely bring an increased number of taller buildings, denser communities mixing homes and businesses, invigorated retail corridors and perhaps even a new neighborhood if part of Interstate 280 running through the district is removed.

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South of Market metamorphosis is just starting to take shape

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San Francisco

“The great thing about SoMa is its eclectic nature of neighborhoods. We want to make sure that is not lost. So the height increases will be in strategic locations. It’s more surgical than we would normally do it.” San Francisco Planning Director John Rahaim

The SoMa of recent decades has been blue-collar and culturally hip, thanks to a mix of historic Victorians, low-income apartments, warehouses, art galleries, museums and nightclubs. But SoMa could see a return to the kind of prominence that it enjoyed at around the turn of the last century. Before the 1906 earthquake, SoMa “was the pinnacle of wealth and stature,” said Hans Hansson, president of San Francisco-based Starboard TCN Worldwide Commercial Real Estate. Current and future development will once again make it “the highest priced real estate per square foot in San Francisco.” Already, residential units in SoMa are fetching $1,200 a square foot on average. “It’ll go higher,” Hansson said. Integral to the kind of district Hansson foresees is the city’s proposed Central SoMa Plan, encompassing about 260 acres bounded by Market Street to the north, Sixth Street to the west, Second Street to the east and Townsend Street to the south. The plan ultimately would add 3,490 housing units on 4.2 million residential square feet and 27,820 jobs on 5.6 million commercial square feet to the area. It also calls for allowing taller buildings at certain locations to spur commercial development. “We are proposing substantial increases in height but not everywhere,” city Planning Director

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John Rahaim said. “The great thing about SoMa is its eclectic nature of neighborhoods. We want to make sure that is not lost. So the height increases will be in strategic locations. It’s more surgical than we would normally do it.” The plan would allow for towers between 130 and 320 feet mostly south of Harrison Street, increasing height limits in that area by 45 to 235 feet. It would permit towers of up to 400 feet for select sites south of Harrison. The plan also ties in with the Central Subway Project, a rapid light-rail system that will run along and under Fourth Street from the Caltrain station near AT&T Park in SoMa to Chinatown. Greater height along this corridor “serves to orient people to the location of this major transit line as well as locate higher-density uses” near mass transportation, the plan says. Transit-oriented development “has been the Bay Area trend for the last 15 years,” said Hanson Bridgett’s M. Brett Gladstone, a San Francisco attorney with expertise on land-use and real-estate issues. “To discourage people from using cars, the city is trying to build jobs and housing along major transit lines.” But Rahaim noted that today’s city dweller, particularly tech workers in their 20s and 30s, are not interested in driving and seek jobs and activities within walking or biking distance.

Rahaim said he hopes the city adopts the plan in about a year, with construction starting as early as 2016. While city leaders tout the plan as striking a good balance between new growth and the preservation of SoMa’s diverse economic and social mix, not everyone embraces its methods. Community activist Jim Meko calls the plan “hogwash,” saying “it displaces a lot of existing businesses and is not respectful of what exists there already.” In contrast, he said, the Western SoMa Plan adopted last year does a better job preserving the mix of uses that has been in the area for decades. Meko, who headed a citizens’ task force that worked on the Western SoMa Plan, said developments are building “similar in scale to what’s already there” and enhancing residential enclaves by including such elements as a back yard or an improved alleyway that’s open only to pedestrians. While the Western and Central plans are separate, a project that envisions Folsom Street as a new shopping and dining corridor would link the two areas as well as other SoMa neighborhoods. It would convert Folsom from a busy one-way street into a twoway civic boulevard lined with retailers, restaurants and outdoor cafes. This redeveloped stretch would also encourage housing developments with ground-level retail such as the Rene Cazenave Apartments, which has already opened at the corner of Folsom and Essex streets and offers below-market rents to low-income residents. Down the line, the city is looking at possibly removing part of Highway I-280 that lands near the Caltrain yard in SoMa. That could lead to the kind of residential and commercial rejuvenation that Hayes Valley saw after part of the Central Freeway was taken down because of damage from the 1989 Loma Prieta earthquake. Once available lots in the Central SoMa Plan are developed, Gladstone said, “the only place that will make sense for more up-zoning for housing and jobs would be the places where 280 currently is.” The pace of construction in SoMa will be dictated by an economy mostly driven by the tech sector, city leaders said. Indications point to strong market conditions continuing for the next two to three years at least. “I think it’s impossible to predict what will happen over the next 20 years,” said Mike Grisso, senior project manager for San Francisco’s Office of Community Investment and Infrastructure. “That said, there’s no question that demand for office space in SoMa is very strong and appears to be growing. The tech companies want to be here because their employees want to be here. I don’t see any of that changing in the short term.” But Markus Shayeb, senior vice president of tenant advisory in the San Francisco office of Houston-based real-estate services firm Transwestern, sees some caution signs. “Everyone else—the non-tech guys—is getting priced out of SoMa because commercial rents are now at $60 to $70 per square foot per year,” Shayeb said. “When those leases are over for the non-tech tenants, there’ll be quite a turnover.” Shayeb also noted that tech firms are doing “incredible leasing,” but much of the space is not occupied. As a result, he suspects that these firms will likely sublease their empty space. While the economy will eventually hit a downturn just because that’s the way market cycles work, he said, a repeat of the dot-com bubble burst of 2000 is unlikely. Today’s tech firms “have great balance sheets and strong business models,” he said. “There’s going to be a market decline, but it’s going to be gradual.”

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Life Bayside Boating, baseball and jogging by the water

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East Bay

A Bright Shining Light in Emeryville Joe Gose

East Bay city civic and business leadership rallies behind effort to increase education opportunities for underprivileged

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“We all know the foolishness of sending a kid home at 2:30 or 3:00 in the afternoon, particularly if they only have two science classes a week— they’re not going to learn anything.” Rich Robbins, CEO of San Rafael-based Wareham Development and a director of I4C

rustrated by the number of graduates leaving high school with an inadequate education and too few workplace skills, East Bay business leaders, unions, higher learning institutions and politicians are pursuing extracurricular activities designed to keep kids in the classroom longer and give them a taste of real-world work experience. To execute the strategy, promoters of the effort earlier this year formed the East Shore Technology Coalition for Innovation, Investment, Industry and Initiatives for Education, known more informally as I4C. The California public benefit corporation is seeking 501c3 non-profit standing. In its first major afterschool program scheduled to roll out this fall, I4C is enlisting some 300 volunteers from various building trade groups in Alameda County to work with students in Oakland, Berkeley, Emeryville and Richmond elementary schools. Among other goals, I4C wants to familiarize students with careers in plumbing, electrical engineering and other vocations to provide them with skills and knowledge that they aren’t receiving during regular school hours, said Rich Robbins, CEO of San Rafael-based Wareham Development and a director of I4C. The programs will provide the students with hands-on lessons, from how to build an electrical outlet to analyzing the breakdown of waste, for example. California State University East Bay is training the volunteers this summer. Other organizations and individuals that have displayed interest in the efforts include Bayer HealthCare, the University of California at Berkeley, Lawrence Berkeley National Laboratory, Alameda County Supervisor Keith Carson and U.S. Rep. Barbara Lee. I4C in 2015 plans to begin summer programs of four to six weeks designed to supplement science, technology, engineering and math disciplines. Too often students spend the first two months of a new school year reviewing lessons that they forgot over the summer, Robbins said, so the initiative would be designed to prepare kids to immediately absorb new material when the fall semester begins. The launch of I4C and the programs in the works represent significant headway for Robbins and Daniel Boggan, Jr., an executive with nearly five decades of experience in various political, business, foundation and academic roles. For years the two have worked with other East Bay business and civic leaders to provide area youth with expanded learning opportunities. Robbins suggests that it has been difficult to convince an

entrenched and intransigent education bureaucracy to support the plans. But he and Boggan place most blame on adherence to a school clock and calendar designed for an agrarian economy, leading to a broader decline in academic performance. “I’m not going to get into policy or try to reinvent the wheel,” Robbins said. “But we all know the foolishness of sending a kid home at 2:30 or 3 in the afternoon, particularly if they only have two science classes a week—they’re not going to learn anything.” While recent programs have served high school students— in April, Wareham, Bayer, the university and other organizations invited some 200 high school students for STEM Career Awareness Day at Wareham’s EmeryStation Campus—I4C is particularly concentrating on elementary students. Research shows that kids who fall behind by the third grade tend to stay behind, particularly in reading math and science, Robbins said. I4C also is challenging the conventional wisdom that people need to go to college and get a degree to succeed in a career and life. Attending vocational schools to learn a trade makes more sense for some, said Boggan, who is a director for Phoenix-based convention and event marketer Viad Corp. and a former executive with the National Collegiate Athletic Association. “We talk as if everybody goes to college—we talk as if everybody ought to go to college—and that’s wrong,” he said. “The whole idea that there’s only one way to be successful is a crock.” In addition to his altruistic reasons, Robbins acknowledges that the initiative could benefit the real estate industry. Wareham’s portfolio includes more than 4 million square feet of commercial space primarily serving the technology and life science industries in the East Bay as well as residential properties. He reasons that strong schools promote vibrant communities and engaged citizens, which will foster higher real estate values amid demand from families and employers. Too many Bay Area companies that need thousands of skilled workers spend millions of dollars searching and recruiting candidates from outside of the region, Robbins said. How much more efficient could the companies operate, he asked, if they had a deeper employment pool in their own back yard? “Over the last 15 or 20 years, we’ve watched with shock as more and more people gravitate toward private schools while the public schools have been challenged by myriad issues, whether philosophical, political or financial,” Robbins said. “The kids in those challenged communities have not gotten a fair shake, nor have they gotten an education with career-path skillsets and abilities to deal with the world we live in.”

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change the industry change the world ONE PROJECT AT A TIME $780,000 average value of small to mid-size projects in 2013

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Redwood City

San Francisco

San Jose

retail

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Retail Development 38 | Transportation 47

Not finding what youâ&#x20AC;&#x2122;re looking for? Neither are retail chains shopping for space in the Bay Area. (See story on page 38.)

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Retail Development

Marking Up the Property Jenna D’Illard A lack of new retail development

in the past few years has put the Bay Area in a bind. “We are reaching a point in the Bay Area where there is so little space that it is negatively impacting growth as retailers look to other markets where better class space is available,” said Garrick Brown, director of research at Cassidy Turley, a national commercial real estate services firm. Of the approximately 50 retail development projects currently on the firm’s radar for the Bay Area, only about a dozen are under construction. Many have yet to break ground. Of those slated for completion, space is leasing at rapid rates.

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Retail Development

“Land is so coveted and tight, and there is so much competition not just from a retail standpoint but for office, research and development and high-density residential.” James Chung, senior managing director and principal with Terranomics, the retail arm of Cassidy Turley

“The good news is that we are seeing the development pipeline picking up,” said Brown. “We are two years behind, but we should see more balanced market conditions. We are still looking at two years of aggressive rental rate growth before there is enough supply to meet demand and restore some equilibrium.” Cupertino-based Hunter Properties’ major project, Almaden Ranch, is a 350,000-square-foot shopping center in San Jose at Highway 85 and Almaden Expressway that will include major retailer Bass Pro Shop. The site is one of the last remaining large parcels of land in Silicon Valley and is expected to open in 2015. Hunter also is developing Village Oaks, an approximately 300,000-square-foot shopping center at Cottle Road and Highway 85 in San Jose. That project includes barbell anchor tenants Target and Safeway. In September, Cypress Equities companies plans to break ground on a multi-level retail center in San Francisco with approximately 250,000 square feet on six levels. The project is slated to open in the fall of 2016 on Market Street between 5th and 6th. “There are very few larger developments of this size and scale coming out of the ground in the Bay Area,” said James Chung, senior managing director and principal with Terranomics, the retail arm of Cassidy Turley tasked with leasing Village Oaks. “Land is so coveted and tight, and there is so much competition not just from a retail standpoint but for office, research and development and highdensity residential.” Like Village Oaks, many of the proposed developments throughout the Bay Area include anchors such as Target, Sprouts, Walmart or Safeway. These models have emerged well from the recession as other merchants like bookstores and office suppliers have tapered off in the midst of online competition. In general, large retailers aren’t as interested in small quiet neighborhood centers, says Randol Mackley, senior vice president for SRS Real Estate Partners’ Northern California region. “If you look at Silicon Valley, retailers want to locate in established and proven commercial districts, they are not very good at pioneering,” he said. Those tend to include convenience vendors like coffee shops or dry cleaners. Demand is driving renovations in dynamic locations, often with mixed-use components. One such is the The Village at San Antonio Center, the Merlone Geier Partners redevelopment

Retailers fight for scarce locations around the Bay Area

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project on San Antonio Road in Mountain View. The Safewayanchored project will start construction on Phase II this fall and include about 400,000 square feet of class A office space, a 167-room business class hotel, an eight-screen theater and 80,000 square feet of restaurants and retail. “This trend that we are seeing is driven by market demand,” said Mike Grehl, vice president with Merlone Geier. “People like to live in a more urban mixed-use environment than they have in the past. The idea that they can be in an environment where they can work, shop and live without ever getting in a car.” Of the 60 retail markets in the United States recently surveyed by Cassidy Turley, the Bay Area topped the charts in terms of low shopping center vacancy rates with San Francisco ranking the highest on the list. While shopping center vacancy rates for the San Francisco market, which includes San Mateo County, were 2.5 percent at the end of last year, San Jose saw vacancy rates of 4.8 percent, and the East Bay of 5.7 percent. In the past, if Class A space wasn’t available retailers would settle for higher caliber Class B space. But a fundamental shift has taken place. Now, instead of settling on lower tiered space or holding out until new product becomes available, retailers are going to other markets. “Major merchants that want to come into Silicon Valley are willing to go to Seattle, Portland, Salt Lake City and other communities that are very embracing,” said Mackley. “They will go where they can make the numbers work and also where the political and business climate is not difficult.” A market that is too tight doesn’t allow enough movement making new development even more critical, said Brown. Of the space that is available, leases are filling up quickly. “An interesting dynamic that we are seeing with shopping centers is that we have a waiting list of clients now,” said Brown. “It’s literally difficult in research to track the marketplace because a lot of it never gets advertised. Every broker has a waiting list of clients, and every shopping center has a waiting list.” Chung said this dynamic makes every deal even more critical as property owners and retailers angle to get the best value possible. “Competition is so fierce, it makes these deals difficult to transact,” says Chung. “People are really evaluating everything more closely with each opportunity at hand.” Rising rental rates have also caused a shift in dynamics among retailers. Mom and pops have yet to resurge post-recession while independents are opting for safer franchise options, says Brown. Economic winners in this dynamic include best-of-class retailers who have been able to stay strong against their competitors. Landlords also win out as they command higher rents.

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Retail Development

BAY AREA RETAIL PIPELINE

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21 14

CENTRAL VALLEY REGION

16 12 11 1

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2 13 9 2 3

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PROPOSED DEVELOPMENT UNDER CONSTRUCTION (See key on opposite page.)

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Retail map content by:

ID# PROJECT | Square Feet PROPOSED DEVELOPMENT

UNDER CONSTRUCTION

1 Mission Rock | 125,000

1 Market Street Place | Redevelopment | 270,000

2 Visitacion Valley | 105,000

2 Serramonte Center | Expansion | 857,000

3 South San Francisco Towne Centre | 225,000

3 Gellert Marketplace | Redevelopment | 61,000

4 San Antonio Village Phase II | Redevelopment | 80,000

4 First & Main | Redevelopment | 33,800

5 Sunnyvale Town Center | Redevelopment | 577,000

5 Santa Clara Towne Center | Redevelopment | 164,000

6 Monticello Village | Redevelopment | 40,000

6 Homestead Square | Redevelopment | 200,000

7 Santa Clara Square | Redevelopment | 125,000

7 Cupertino Village Pads | Expansion | 139,000

8 Vintage Oaks | 35,000

8 Main Street Cupertino | 130,000

9 Grafton Station | Expansion | 118,000

9 Sun Garden Retail Center | 168,000

10 Gale Ranch IV | 125,000

10 Almaden Ranch | 386,000

11 The Fox Uptown | Redevelopment | 113,000

11 Village Oaks | 277,900

12 3001 Broadway | 37,500

12 The Block at Pacific Common | Expansion | 50,000

13 The Village | Redevelopment | 38,000

13 Persimmon Place | 155,000

14 The Orchards at Walnut Creek | 149,000

14 Brooklyn Basin | 200,000

15 DVC Plaza Shopping Center | Redevelopment | 191,000

15 Alameda Landing | 300,000

16 Point Molate Resort and Casino | 300,000

16 Rockridge Safeway | Redevelopment | 55,000

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Retail Development

Making First Impressions Count Robert Celaschi

Real estate investment and management company Jamestown doesn’t buy a lot of Bay Area

property but its deals grab attention. Last year it acquired Ghirardelli Square for a reported $54 million. In 2011 it bought the 600,000-square-foot Alameda South Shore Center for $181 million. The company is still in a buying mode in the Bay Area, even at the market’s heady prices. “I think it is overpriced, but I think it is about finding the right opportunities where we can find value,” said chief operating officer Michael Phillips. “It’s important to understand that you are buying things with true fundamentals.” Jamestown was founded in 1983 with headquarters in Atlanta and in Cologne, Germany. It targets assets primarily in 24-hour cities with strong demographic growth. Phillips describes the company as “a careful buyer of quality real estate that is non-commodity, or could be made noncommodity through our repositioning.” Jamestown also pays attention to local culture. “San Francisco has embedded neighborhoods with some real cultural sensibilities, and assets with a real story behind them,”

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he said. “It’s important to understand the local drivers for those stories in individual neighborhoods.” Jamestown has also paid particular attention to two aspects of commercial real estate, office lobbies and food. Some of their lobby upgrades have included water features and a bicycle-themed art installation. “Repositioning an asset or shifting the public perception of an asset is about a variety of things. It certainly is about first experiences, and lobbies help tell that story,” Phillips said. “I think we are very focused on food as a fundamental in creating a sense of place and culture for people.” That can be a coffee bar or artisanal food at Ghirardelli Square or the Off The Grid events that bring a collection of gourmet food trucks to Alameda South Shore Center.

“To me it is sort of what reinforces a sense of connectedness for people,” he said. “Doing it in a way that is humble and local and without artifice is an essential part of it.” Jamestown doesn’t ignore the basics. It plans to upgrade Ghirardelli Square’s infrastructure in the coming year. Then it plans to fill it with businesses that will attract locals as well as tourists. Paying attention to fundamentals also means getting out when the time looks right. Jamestown bought and sold 400 Post St. in San Francisco, and the company just announced a sale of Pacific Place in San Francisco to J.P. Morgan for a record-breaking $965 per square foot. “There are assets that’s appropriate to hold for the long term, then there are assets that are about paying attention to where you are in the cycle,” Phillips said. “We think it is important to strike a balance in a diversified portfolio.”

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Transportation

Powering Up the Shopping Center Michele Chandler

Volta Industries may soon bring its free-to-use charging stations for electric cars to a mall near you. In January the startup moved its headquarters to San Francisco from Hawaii, where it launched in 2010 and now operates 22 charging stations at shopping centers and other locations on the island of Oahu. Stoked with $2.5 million from angel investors and venture capital institutions in Hawaii and California, Volta is aiming for a major expansion in the Bay Area and other electric vehicle hotspots on the mainland. By the end of this summer, Volta co-founder Scott Mercer said, the company expects to have 100 of its electric charging stations up and running, up from the 30 now operating in San Francisco, Los Angeles, San Diego and Phoenix. Finding locations with high visibility and an upscale clientele is key. “We want to move quickly… there’s a bit of a real estate land grab here,” said Mercer. “It’s just about going after the best properties in California and making sure that we lock them down. That’s important to the business right now.”

San Francisco-based start-up is poised to change the way cars are charged at retail locations

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Transportation

Volta has teamed with national shopping mall developer General Growth Properties since 2012. That’s when the startup installed its first sleek, silver, 7-foot-tall charging stations at several Hawaii shopping destinations, including Ala Moana Center in Honolulu. In the Bay Area, General Growth operates Eastridge Mall in San Jose and San Francisco’s Stonestown Galleria Mall. General Growth would not comment for publication about the potential additional charging stations at its Northern California properties. Volta has also installed electric vehicle charging centers at Whole Foods Market stores in Hawaii and Southern California. “Overall, we see the EV charging stations getting a lot of use, and an additional benefit to our customers is that they are free to use,” said Whole Foods Market spokeswoman Hilary Maler in an email. “The feedback we have received is that our customers love having them.” So far, Volta has received funding from Epic Ventures, an early stage software and Internet infrastructure venture firm; the Ulupono Initiative, a Hawaii-based social investment fund co-founded by eBay founder Pierre Omidyar; and Hawaii Angels, an investment network for seedlevel private equity investors. What sets Volta apart from other companies that power up vehicles? It doesn’t charge motorists to top off their car batteries. And, other than minimal costs associated with installation, property owners don’t pay anything, either. Installing each station costs Volta between $20,000 and $40,000, depending on the location. Volta covers the cost of electricity and maintenance for the charging units. “All of our revenue comes out of the advertising side of the business,” Mercer explained. This year, the company expects to bring in about $2 million to $3 million in revenue, but is not yet profitable and is seeking Series A venture funding. Volta’s founders selected Hawaii as a test market because of the state’s nexus of high gasoline prices, small driving distances and generous initial government

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support. Hawaii also tied with Washington state last year for the largest share of the U.S. electric vehicle market, according to automotive research site Edmunds.com. Starting in 2012, Hawaii law began requiring public places with 100 or more parking spaces to have at least one electric vehicle charging station. “EV drivers quickly learn the whereabouts of free stations and seek them out,” according to a 2012 guidebook prepared by non-profit Plug In America for the state of Hawaii. “They also frequently reward site hosts by shopping at their businesses and suggested that fellow drivers do the same.” Volta selects its charging station locations based on traffic and wants only highly visible space. “We don’t have a charging network that’s in the back of the corner of some library,” Mercer said. “We have stations that are front and center in really good locations, and they’re getting used 8 or 10 or 12 hours a day.” Volta typically charges $2,500 to $3,500 a month per station for ads, and signs companies to advertising deals lasting about one year. Ad rates vary, depending on how many people are likely to see the station, Mercer said. In Hawaii corporate sponsors include banks, insurance companies, solar firms, health care businesses and financial services companies. Mercer said the sponsor network for the new stations on the mainland would not be announced until those locations officially open. Mercer said average stays at its charging docks last 45 minutes to about two hours while vehicle owners visit nearby stores, restaurants or movie theaters. The units are popular at Oahu’s Pearlridge Center, a busy, 1.4 million square foot mall about the size of Westfield Valley Fair. It started out with two Volta charging stations in 2012 and now has five, all located in premium parking spots right at the mall’s entry doors. The center, owned by Glimcher Realty Trust, is considering adding more Volta charging units. “It’s rare that I see one available, and that’s a good thing,” said mall General Manager Fred Paine.

Photo Courtesy of Volta (left) and by Eustacio Humphrey (top)

“It’s rare that I see one available, and that’s a good thing,” Fred Paine, general manager at Oahu’s Pearlridge Center

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Spaces

photo by Laura Kudritzki

co-working 52 | Smart Buildings 56 | data centers 62 | final offer 64

Stricter regulations are making it tougher to keep spaces sustainable in a way that wonâ&#x20AC;&#x2122;t break the bank. (See story on page 57.)

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Co-working

A living wall brings life and color to the atrium. Joe Fletcher

RocketSpace aims to be a co-working space that also nurtures the ventures setting up there.

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All Together Now Jenna D’Illard

Photos by Chad Ziemendorf

Co-working space has moved from a start-up phenomenon to a maturing real estate niche

Co-working isn’t just for hipsters

anymore. What started in the early 2000s as a movement of freelancers and creative individuals working in community spaces is starting to cluster around specific business models. Innovators in the Bay Area are playing a key role in this global movement as industry participants shape models that cater to tech-minded entrepreneurs and startups. As of December 2013 there were 14,000 “workspace-as-a-service” locations worldwide, according to Palo Alto-based Pacific Workplaces, a provider of on-demand office space in the Bay Area. The total includes co-working places, business incubators, office business centers, virtual office providers and other shared office

space-related ventures. Combined, they represent a $10.9 billion market. The nation’s 3,100 co-working places accounted for 16.1 percent of total such revenue for 2013. Co-working specifically saw 43.2 percent in annual growth, the highest among all other non-traditional office categories. Pacific Workplaces used data from the Global Workspace Association, online magazine Deskmag, San Franciscobased CloudVO and Lafayette-based Emergent Research. Bay Area providers of co-working space find themselves in a prime position to benefit from high rents coupled with demand for flexibility among individuals and small companies. Some have geared their co-working space toward specialist. At the same time, larger traditional business centers have entered the co-working space or are including communal spaces in their existing setups. The benefits of co-working are no longer confined to coffee, Wi-Fi or happy hours for some of these new players. Some new models offer not only space for individuals and small companies to operate, but also different levels of service from networking and training to incubation. San Francisco operations like RocketSpace Inc., Runway and The Vault target their services to individuals and groups with a clear focus and direction rather than using the space for whatever work comes along; requiring application for admittance and providing hands-on guidance and mentorship to some members. Kevin Smith, an attorney with an international consulting resume, last year co-founded The Vault at 415 Jackson Street in San Francisco’s Financial District. It’s an offshoot of Seedchange, a firm he also co-founded that connects investors with startups that it shepherds through the early stages with consulting and mentorship. “The Vault was not really meant to be a feeder for Seedchange,” said Smith,

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Co-working

whose team located and then built out the site after being disappointed with other co-working options in the city. “Although some day we hope we can do a better job of using it that way. What we really wanted was a way to create a stage for Seedchange to operate on.” Not all participants in The Vault directly enlist Seedchange’s services but some do. The members include companies like app and software developers LoungeBuddy, SwiftKey, Ellipsis Health, CloverPop, Indix and LawPal; marketing company TurnClick; and social media aggregator Stackla. They range as small as two people and as many as eight. San Francisco-based RocketSpace opened in 2011 after founder and CEO Duncan Logan failed to find an affordable and appropriate space where his team could be surrounded by other like-minded tech types. Now real estate merely serves as the platform for training, events and other services. Logan plans to raise capital later this year to expand the concept internationally.

“It’s very hard for tech companies to innovate in a vacuum,” said Logan. “But this is not just about real estate, it’s about creating an ecosystem and environment.” Tech isn’t the only sector to benefit from growth among co-working options. Even co-working providers that are open to any type of business are offering newer amenities such as childcare or environments focused on health and wellness. Pacific Workplaces Group, which operates 15 more traditional office business centers through its Pacific Business Centers brand, partnered with Chicago entrepreneur Jamie Russo last year to open Enerspace, a co-working facility in Palo Alto. That location is bursting at the seams said Pacific CEO Laurent Dhollande. “People can work from anywhere,” said Dhollande who has watched the non-traditional office market for 20 years. “We are seeing a transformation in how people relate to the work place.” Pacific also has launched CloudVO, which operates the CloudTouchdown network, a membership card system

that gives access to a global network for mobile workers who need a day office, meeting rooms, or virtual offices on a pay-per-need basis. Regional and international players are also making moves in the space. Santa Cruz-based NextSpace, which operates eight California co-working locations including sites in San Jose, San Francisco and Berkeley, last summer acquired a Chicago co-working company. Its sites are open to anyone. Luxemburg-based Regus recently submitted plans to add another location to its large Bay Area line-up, the latest in downtown San Jose. The co-working industry has only begun to take off, said RocketSpace’s Logan, claiming the model will prove sustainable despite market fluctuations because of the fluidity it provides for members to scale up or down as needs change. “In many ways, office-as-a-service plays better in uncertain times as workers and companies want flexibility and don’t want to take big bets in a weak economy,” he said.

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Photo Courtesy of The Vault (top) and by Chad Ziemendorf (bottom)

“It’s very hard for tech companies to innovate in a vacuum. But this is not just about real estate, it’s about creating an ecosystem and environment.” Duncan Logan, CEO of RocketSpace

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Smart Buildings

warm my space cool my space

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Managing space now requires tech savvy as well as an understanding of government regulations.

Profitable Sustainability photo by Laura Kudritzki

Robert Carlsen

Firms take holistic approach in managing facilities and meeting stricter regulatory requirements

READ ON

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photo by Laura Kudritzki

Smart Buildings

eeting California’s stringent energy savings requirements for commercial buildings has become the main challenge for building management firms, and the challenge is about to get tougher with new state Title 24 lighting standards slated for July 1. In addition to the California Public Utilities Commission’s requirement calling for a 60 percent to 80 percent statewide reduction in electrical lighting consumption by 2020, the California Energy Commission is requiring commercial building construction to reach to zero net energy compliance by 2030. Obviously, these laws are affecting the costs of operating a building as well as focusing on the total cost of ownership over time. The latest Title 24 standards will also require many more retrofit projects to meet new construction standards for lighting than under the previous code. Energy management systems will now need to monitor lighting use via photo-sensors, occupancy sensors and multi-level lighting controls. The new regulations also require building buyers to amp up their study of energy usage data. The state energy commission said heating, cooling and lighting account for 57 percent of the total energy used in commercial buildings. Building owners also need to re-examine their commitments to LEED certification for new construction or retrofits. “When facing LEED renewal after five years, owners are facing a return on investment dilemma while having to adhere to the new requirements,” said David Ford, senior vice president of the national building management firm Transwestern in San Francisco and treasurer of the Bay Area chapter of the Institute of Real Estate Management. “Should they raise rents? There are a lot of questions that have not been addressed before.” CBRE’s technical services engineers are already providing building owners with detailed monthly energy audits, energy efficiency reviews and a preventative maintenance program, said Mary Wiese, managing director of the firm’s asset services division in San Francisco. Finding people who can keep up with technological innovations and handle the evolving regulations and evolving codes is also a major challenge. One commercial real estate investor and building operator in San Francisco, The Swig Co. LLC, recently

Light and heat must be more closely monitored to comply with Title 24 standards.

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Smart Buildings

“The days of cost per square foot for construction, or utility cost per square foot, are long gone.” Tom Bowen, western regional director at McKinstry teamed up with high-tech tenant Project Frog, a component building company, to boost the sustainability of Swig’s 1920s-vintage building at 501 Second St. Calling the project a “living laboratory,” the team set up a showcase in Project Frog’s 13,000-square-foot office to highlight some of the building’s unusual features, including a system from Lutron Electronics that maximizes interior daylight while minimizing the need for supplemental electric light. Other displays include information on the Comfy system, which allows occupants to interact with the building’s heating and airconditioning system through the cloud, and Lantana Luminaires, an energy efficient LED lighting system designed by Project Frog. Building management firms striving to keep up with onsite technological trends should definitely look at these kinds of partnerships, said Deborah Boyer, Swig’s senior vice president of asset management. “Collaborate with the best and brightest,” Boyer said. “In working with Project Frog, we were looking for points of connection in a landlord-tenant interchange relationship, and in this case it was a connection with sustainability.” Which brings us to the relatively new concept of what the Institute of Real Estate Management terms “profitable sustainability.” The value of considering the total cost of ownership is to “make design and construction choices that optimize the present value of all the costs incurred and all of the value delivered over the life of the facility asset,” said Tom Bowen, western regional director at McKinstry, a national full-service, design-build-operate-andmaintain firm specializing in energy and facility services.

That strategy is particularly important in areas where new construction could be limited and the building must be viewed as a contributing asset over time, Bowen said. “This holistic approach is taken by looking at ways to renovate existing facilities as well as meet increasingly demanding California regulatory requirements for buildings,” he added. He said McKinstry’s clients are broadening their decisionmaking processes when building or renovating space since there are now financial, human and environmental factors that need to be considered. “The days of cost per square foot for construction, or utility cost per square foot, are long gone,” Bowen said. Some of these financial factors include churn, return on investment, building revenue, operating cost, capital expenditure as well as human factors such as aesthetics, noise, satisfaction and productivity, while environmental factors include code compliance, waste, energy efficiency certification and renewables. McKinstry’s game plan for total cost of ownership includes setting up an operational and financial model for the building and its owner’s business interests, then moving on to set up first costs, operational costs, future capital replacement costs, churn costs (due to occupant relocation and space use changes), LEED first costs and operations costs. If it’s a new building, McKinstry generates benchmarks that provide context based on the owner’s other facilities. Bowen said that once design is complete, the tool can be used as the basis for developing an operating plan that optimizes operational choices for the selected design.

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Data Centers

The

Center Robert Carlsen

While tech giants such as Apple, Facebook and Twitter spend huge amounts of money building data centers in cold, remote places in order to take advantage of natural air-conditioning, mid-size businesses in the San Francisco Bay Area and elsewhere are seeking more affordable data storage options to keep up with growing demand. The worldwide digital universe is doubling in size every two years and will multiply 10-fold by 2020, from 4.4 trillion gigabytes to 44 trillion gigabytes, according to the latest Digital Universe Study by co-analysts EDC Corp. and International Data Corp. In another demand study by Digital Realty Trust Inc. and Forrester Consulting, midmarket North American firms (up to $500 million in revenue) identified network connectivity options, including carrier availability and carrier density, as a top priority in data center investment decisions (82 percent). They also overwhelmingly indicated they are planning some form of expansion within the next four years (88 percent) by either building a new data center or expanding a current site. “Our midmarket clients are increasingly seeking a single source for all their data center requirements, including not just power, space, cooling and connectivity, but also access to strategic partners such as cloud services, network services and managed service providers,” said Bill Stein, Digital Realty’s interim CEO. With the Internet as a distribution model proving to be more efficient than all other forms of communication, traditional software vendors need to have an Internet service strategy, said Joe Huebner, director of business development for Carlson Design Construct, a data center design-build services firm. He said locations like the San Francisco Bay Area will always be important for digital delivery because it is so well connected to a large population of end users and because its telecommunications infrastructure is mature and robust. In the past five years Carlson has seen “a significant increase in designing and building for owners/operators that are leasing wholesale and retail space to support consumer and business demand,” he said. Small to mid-size companies are still moving toward an outsourcing model, typically co-location or cloud, he said. These companies usually don’t have large enough loads to justify relocating for lower utility cost and cooler climates. “Outsourcing to co-location and cloud service providers is

really just the market becoming more efficient with the use of capital and also operations,” said Huebner. “Some of our customers have their own cloud products and others provide wholesale data center space for cloud providers, but in either case the cloud is driving demand.” There are still content delivery, social networking and streaming video companies such as Google, Facebook and even newcomers like Twitch that want local and regional data centers near large end-user populations. “Having a relatively close proximity to the end user decreases latency (the amount of time it takes for data to go from one point to another), which remains a concern for the quality of services, particularly with online gaming and parts of the video supply chain,” he said. With the Bay Area having a big population and an acceptable climate for data centers, Huebner said that “considering where we were five to seven years ago, operating efficiencies have improved dramatically for companies building new or acquiring new leased data centers.” In the case of very large internet enterprises, the energy savings of moving infrastructure to cheaper energy markets can be justified due to the size of the deployment, plus bigger efficiencies on the cost of land and special tax treatment. “But if you are a Bay Area company with a 500kW requirement, you are not likely to find a co-location site next to a hydroelectric project,” he said. “These smaller workloads will continue to get deployed near company resources, existing utilities and major airports.” By comparison, Heubner said that co-location data centers are typically smallest up to 1 megawatt, medium size from 2MW to 10MW and large centers topping 10MW. Meanwhile, companies are also concerned with the security aspects of sharing data storage sites, though even some financial firms have recently seemed to become more comfortable with outsourcing—sometimes even in multi-tenant facilities, Huebner noted. “Carlson has performed many design-builds for financial institutions over the past 20 years,” he said, “In some cases we have seen these sites get sold and partially leased back, setting up a multi-tenant scenario. However, with recent news regarding password and financial data breaches in retail and online services, anything that is perceived to marginalize security will get a higher level of scrutiny.”

Businesses, IT firms refocus on data center expansion projects

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Final Offer

Harry Freitas: Up From The Ranks As interviewed by Robert Celaschi

Harry Freitas took over in April as San Jose’s director of the Planning, Building and Code Enforcement Department. Freitas started working for the city in 1990 as an engineer in design review and inspection for freeway projects. Since then he has worked his way up to senior engineer, manager of the Transportation and Development division and deputy director of Public Works. We sat down with him to take stock of his new job and the opportunities and challenges that lie ahead.

You’ve been with the city for nearly 25 years. Now that you are head of Planning, Building and Code Enforcement, what are some goals and projects you’ve been itching to implement? FREITAS: I think our biggest challenge right now is to keep up with the pace of development in San Jose and properly resource the department. We are running a 20 percent vacancy rate [in the department] right now. We have a tremendous amount of people who have been in their positions for a year or less. [We need] to close the service delivery gap. We are getting survey numbers from 2013, and we are getting about a 75 percent satisfaction rating from our customers. This department did 180,000 individual building inspections last year. This year we are going to do over 200,000. We can’t have one-quarter of our interactions be negative. Then we are going to start focusing more on some planning challenges that the city has. We work in really tight partnership with out Department of Economic Development. We want to capture as much market share as possible with the spiking of the real estate industry right now.

But the big driver is tech. They want to go where the talent is, and the talent seems to want to live in San Francisco. A: The high tech industry, for some of those high-flying companies, is very interested in young talent. Talent that will give you many hours of their day. Eventually they will grow up. Adobe is a mature company, and they told us that their employees want to go home at night and have dinner with their families. I don’t think we are in competition with San Francisco at all. We’re taking the long view: I know Adobe is going to be here in

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five years. I know Cisco is going to be here in five years. The high-end social software [company] is really [a] boutique.

How well has San Jose coped since with demise of California’s redevelopment agencies? FREITAS: I think pretty well. I think one of the biggest hits has been in our ability to do affordable housing. We have a big homeless problem in San Jose. In north San Jose we were counting on some redevelopment money, and that has all dried up and gone away. So it is hurting in some ways.

An April study session for the council showed that one site on West San Carlos Street has its highest potential value as residential only, and it drops significantly if retail and office are added. With that kind of financial pressure you can dictate what actually gets built, can you? FREITAS: In certain ways you can. There are policies that are going to eliminate those wholesale industrial conversions. The council has put strict controls in the General Plan to really restrict and put a lot of difficult hurdles in people’s way to convert jobs land into a residential designation. We are still producing tons of housing, just not at the densities that some developers would like to build it.

What was the biggest surprise in your new job? FREITAS: A really pleasant surprise is how many people from different sectors have reached out and sincerely said they want us to be successful and help me transition into my new job. The industry, the chamber, fellow departments in the city, the staff. I feel some tremendous outpouring of support for some changes and improvements.

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