The Registry | The Q Q1 2015

1: 2015 A PUBLICATION BY

OPPORTUNITIES FOR GROWTH STAY NARROW | PG. 18

COMMERCIAL & RESIDENTIAL REAL ESTATE

2015

OUTLOOK RENTER NATION TO KEEP MULTIFAMILY PIPELINE BUSY | PG. 30

FREMONT STRIVES TO BECOME AN INNOVATION HUB | PG. 44

NEW ROLE FOR SUSTAINABILITY GURU GEIGER | PG. 49

ISSUE

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MOTOROLA MOBILITY CAFE

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TRULIA

PHOTOS COURTESY OF TAKATA PHOTOGRAPHY & ASHLEY BATZ RENDERING BY STEELBLUE

CENTRAL & WOLFE CAMPUS

6 inside...

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AEC/DESIGN DAVID GALULLO 6

Physically Designing Communication Transforming itself into a design studio has allowed Rapt to take a different approach

SAM ABBEY 12

Busy Bodies All Around Passionate builders, efficient contractors

HOUSING

DEVELOPERS

RON ZEFF 30

STEVE DOSTART 18

The rise of the renter nation will keep the multifamily development pipeline busy for a while longer

Four cycles later, the focus is still narrow and precise, but the opportunities are long term

CHERYL O’CONNOR 36

SCOTT JACOBS 23

The region recovers, but low housing supply and increased prices leaves lowerincome residents struggling

Third generation developer takes bold design further, and Silicon Valley approves it

Fundamentally Strong

Now Needed More Than Ever

Measured Growth

No Ordinary Developer

CONTINUED

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letter from

THE PUBLISHER In September of last year, I had the honor of getting a call from Andrew Ross, a reporter at the San Francisco Chronicle, asking me to provide commentary on the state of the real estate market in the region. He was writing a piece on commercial property demand in San Francisco and was referencing a number of then-recent transactions— the market was reaching fever pitch. My comment was that pricing was at or near its peak, but the real test in San Francisco would be if a company decided to return considerable space back to the market.

A day after the article ran I got an email from a person in the industry asking me what research I had that helped me reach the conclusion that we were closing in on the peak. I worried. Had I overstated what I have been hearing anecdotally in the market? Do I really have anything to point me to that conclusion? Luckily, I recalled a series of reports provided by several of our region’s brokerage houses. One report showed leases reaching record highs. Another showed demand surpassing supply. A third one showed record low cap rates. I did have the research, it just was not prepared in a nicely bound document that in its summary stated that we’re nearing the peak. I, however, did prepare a nice little package back to the person asking me the question.

I mention this story for a reason. In this one small example, you can see the value of collective knowledge about the market. When you have several perspectives on something, it’s much easier to draw a reasonable conclusion.

The great statistician Francis Galton proved this with his ox-weighting game over 100 years ago. In a sense, the very essence of The Registry’s broad Bay Area and industry coverage achieves that. In a small way, by providing feedback from all these exceptional leaders in our industry, the Outlook issue is attempting to provide the reader enough information to make her own conclusions about the industry.

So, as we have done in the past, we wanted this year also to capture the sentiments of Bay Area’s brightest real estate stars and those who shape it each day. We feel confident that the information will be valuable, and if you have any anecdotes to share, please send your opinions our way.

Happy 2015!

Vladimir Bosanac

Q PUBLISHER

Vladimir Bosanac (415) 738-6434 vlad@theregistrysf.com

PRESIDENT

Heather Bosanac (415) 738-6434 heather@theregistrysf.com

EDITOR

Robert Celaschi

DESIGN

Grizzles Creates

PHOTOGRAPHY Laura Kudritzki

ADVERTISING

Denise Franklin (408) 366-1984 df@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. ©2015 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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PHOTOS COURTESY OF LAURA KUDRITZKI & GNU GROUP

GOVERNMENT & ACCOUNTABILITY

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44

Total Market Value of Firm WHAT’S YOUR Q? Q RATIO = Total Asset Value

SERVICES SANDI JACOBS 54

What If…

KELLY KLINE 44

Fremont’s Fortunes Rising Big plans could transform the East Bay city into an innovation hub and stretch northern boundary of Silicon Valley

Imagining better spaces throughout the Bay Area

WILL LOFTIS 58

Prioritizing Healthcare

DAN GEIGER 49

After a career in designing healthcare facilities, a shift to the more strategic side provides a renewed perspective on the industry

San Francisco-based SASB looks to reshape ways in which companies report their sustainability practices

PHILIP MURPHY 62

From Adoption to Accountability

Directionally Resourceful In its 40th year, the communication design firm leader looks at the ever-changing landscape of the industry

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A SPECIAL THANK YOU TO OUR PARTNERS AND HAPPY NEW YE AR TO ALL

BOARD

SPONSORS

(as they appear in photo)

Signature Sponsors

Todd Pearson / All Bay Paint / Director – Membership Anna Mcquillan Rose / Transwestern / Director – Sponsorship Claudia Folzman / Iron Construction / Past President Kimberly Taylor / Arborwell / Chief Financial Officer

Partnership Sponsors

Brian Franklin / Morgan Stanley / President Christine Velasquez / AEI Consultants / Director – Programs Lisa Macaluso / ReelGrobman / Secretary Sarah Edwards / SRS Real Estate Partners / President Elect 2015 CREW SILICON VALLEY BOARD ME MBER S

Rosanna Davidson-McMahon / Washington Holdings / Director – Communications

W W W.CREWSV.ORG

Fellowship Sponsors

Premier Headquarters Office Building SANTANA ROW

±232,340 SF Expansion Up to ±735,000 SF

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TODD SHAFFER CA RE License #01002706 RANDY GABRIELSON CA RE License #00937630 TRACEY SOLARI CA RE License #01269780

struc

tion

AEC/DESIGN

OUTLOOK

PHOTO BY ASHLEY BATZ

DAVID GALLULO 6 | SAM ABBEY 12

The lines are blurring between how people work and how they conduct the rest of their lives. (See story on page 6.)

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DAVID GALULLO

CEO AND DESIGN PRINCIPAL, RAPT STUDIO

DESIGNING COMMUNICATION DAVID GALULLO is CEO and design principal at Rapt Studio. When design is done right, he says, “it can transform the way we live and work while communicating why a company matters to employees and customers.” Rapt Studio specializes in interior, architectural and branding design for apparel, retail, entertainment, technology and residential clients.

The firm’s teams include designers with different backgrounds and expertise, such as interior designers, architects, graphics, user experience/interface and industrial designers.

Davis Galullo: “Innovation is a bit messy.”

GALULLO: First, we stopped defining ourselves as an architecture firm and started operating as a design studio. Which sounds like splitting hairs, but it is a key differentiator. This distinction allows for us to hire the smartest, most talented people from many disciplines—architecture, interior, graphic, and industrial design, video, audiovisual and technology, strategy, journalism and social media—to come together and solve our clients’ complex problems.

Rarely will a solution just live in one discipline, and our clients are coming to realize that they are being required to hire three or four specialized design firms to fulfill a single project need. These firms are rarely coordinated, and the solutions are rarely integrated into a holistic solution. For example, our process of experience mapping allows us to understand all of the touch points of an experience. Whether it is how a user experiences a space or a Web site, if you focus on the experience then the answer may fall into many categories. It may be architectural in nature, or a video may be what is needed to flesh out a meaningful experience. Whatever we learn, our integrated team will deliver, fully woven into the fiber of the project—not forced to be only answered within the confines of architecture.

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PHOTO BY LAURA KUDRITZKI

TR: Rapt Studio has gained a reputation as one of the Bay Area’s most forward and innovative architect and design firms. What has Rapt done to set itself apart from the crowd?

TR: You’ve championed design thinking as a tool for solving clients’ individual challenges. What’s an example of successful design thinking in your projects?

GALULLO: Design thinking is a powerful tool that we use to fully understand and appreciate the sometimes-complex context in which a problem sits, to creatively develop insights and solutions and to efficiently and rationally focus on the analysis and implementation of the solutions within the context. So what may seem like a good solution to a problem outside of the understanding of the context, often times is not a good solution when analyzed within the confines of a company’s cultural initiatives, or operational strategies.

Many times we have clients come to us and request the latest and greatest buzzwords in workplace design—collaborative, huddle space, enclaves, touchdown space—with no regard to how they may be used within the company’s culture, management style of work processes. This is our opportunity to dig deep, and through our experience-mapping and other tools we can fully understand these drivers, develop unique and creative solutions that can be tested against and integrated with the drivers for a much more meaningful workplace, fully stemming from the unique qualities of the company’s DNA.

Transforming itself into a design studio has allowed Rapt to take a different approach to helping its clients—very successfully TR: How does the Bay Area compare creatively from other parts of the country where you have done work? Are we ahead or behind when it comes to workplace design?

GALULLO: We are working with clients all across the globe and while there are many workplace strategies that have been implemented outside of the U.S. first, the Bay Area is a leader in the workplace, leading the charge for the workplace to be developed in a fully integrated manner in concert with cultural and operations clarity as well as an aggressive technology adoption platform.

Workplace innovation only comes when there is an open mind at the highest level of an organization to new ways of working and a dedication to providing the technology to serve these work styles.

The Bay Area, of course, is at the forefront in both arenas with the world’s most innovative executive leadership and a culture of constant technological advancement. This is the place.

TR: Are companies really using space all that differently today?

What are some things that you are seeing in their thinking that excites you? What about it turns you off?

GALULLO: For years, we have spent a lot of time talking about work-life balance. What we are seeing now is the blurring of the lines between how people work and how they conduct their lives. If we were to call out one differ-

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David Galullo

ence in the way people are using their workplace, it would be that they expect more out of it. With most of our clients affording their employees the mobility that comes with cell phones and laptops, people can now work at home on the sofa, or the kitchen table having dinner, or on their terrace enjoying a cup of coffee. This choice, then, is expected in the workplace.

More and more of our clients want technology that works universally, and they want a choice of space to work in—living room, café, and terrace. This excites us as the workplace takes on more of a hospitality feel, efficient and productive, but with an array of special typology that allows for the expected choice.

As to the question of what turns me off? The only conversation that is difficult to have with a client is that which stems from the request for “fun” space that does not fully integrate with and grow out of a company’s “why.” Today when law firms

are including “living room” spaces in their designs, it is hard to not fall into the game of one-upping the guy down the street.

We always find—always—that successful workplace only comes from a meaningful connection to the company’s mission, culture, vision and personality—their why.

TR: Does the level of innovative thinking differ from industry to industry when it comes to designing workplace environments? Are those companies that are not innovating starting to see effects on productivity, and are they able to compete for talent?

GALULLO: Innovation is a tricky word, one that we find many of our clients struggling with. I certainly think that the tech industry is leading the way in innovative thinking, but even saying that does not tell the full picture. Most of our clients are living in a world where technology is

RAPT STUDIO

RAPT STUDIO

PROPHET SF

EVENTBRITE

“Workplace innovation only comes when there is an open mind at the highest level of an organization to new ways of working and a dedication to providing the technology to serve these work styles.”

PHOTOS BY LAURA KUDRITZKI, ERIC LAIGNEL, & MARIKO REED

DAVID GALULLO, CEO AND DESIGN PRINCIPAL, RAPT STUDIO

fueling efficiency and productivity but also communications, brand awareness and connection. So most of our clients are focusing on innovation to that end.

But the struggle is this: Innovation is a bit messy. It thrives in environments that allows for collaboration and group thinking, but also allows for individuality, and seclusion. Innovation thrives in cultures that allow for grassroots efforts to take hold of the direction of thinking, companies that have a passionate drive for smart, over a focus on hierarchy of thought. So we see many of our clients striving for innovative workspace, not fully grasping the environmental, cultural and operational changes necessary to really fuel innovation. I engaged with a CEO recently, whose only direction to our team was to design a space that reminded everyone who worked within it to “break the rules,” because that’s where innovation comes from.

With that our team got to work to understand the culture in which this directive

would live, and we were happy to see that this older-school technology company was making room for messy to reside within its walls.

TR: What advice would you give to aspiring young architects today? Where should they go to learn their trade that will set them up to be successful architects in the future?

GALULLO: Architects, the whole industry really, have been on a years-long march toward compartmentalization. Whether deliberate or not, whether legally driven or not, it is the wrong road. There is an unbelievable tendency to respond with the “that’s out of my scope” which is a shame.

So, my suggestion to aspiring architects is to be an avid consumer of design, be a student of the world, take it all in and pave a new path toward an integrated conversation about architecture from the inside, from the outside, from the virtual world, from the human perspective.

Take a dual major in architecture and psychology, architecture and woodworking, architecture and UX/UI design. Open your mind, collaborate with others and remember that the power of design thinking elevates you to engage in a whole range of important topics that will move the world. Really.

TR: What is your outlook for the industry in the region over the next 12 to 18 months?

GALULLO: Outlook is pretty good.

Look, I’ve been around long enough to know that the favorable climate that we are in at the moment will not last forever, but it looks to us as if we have a couple of more years in it before we see a bit of a downturn. Who knows, though, our strategy around our business model is to provide key strategic design thinking to our clients, which we believe is equally valuable even in a downturn.

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Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

DAVID BERGERON MANAGING DIRECTOR T3 ADVISORS

WHAT EXCITES me about 2015? Simple, the Bay Area is going global. Just as you have established international financial hubs in New York City, London and Tokyo, you’re seeing San Francisco and the entire Bay Area continue to separate itself as the clear market leader for tech companies. For companies that want to be competitive on the global tech stage, they need to have a presence in the Bay Area. Both inbound foreign investors and companies like Alibaba expanding locally are driving the Bay Area’s global economic reach and influence through the tech ecosystem. With increased demand for A+ talent, many tech companies are utilizing innovative real estate strategies and space as a way to get a leg up in the war for talent. No more than ever, space matters!

What worries me the most? Term! Particularly with growth stage tech companies, landlords are pushing for 7, 10 even +12-year terms. This is misaligned with the lifecycle of most venture backed tech companies. There is almost no scenario that plays out where this makes sense for these growth tech companies. Often working with 18-36 months of VC money, these companies will either double or triple in an 18-month time period and require much more space, or not hit their milestones and not receive additional funding and be required to drastically downsize or even go out of business. Either way, seeing the end of a 10-year lease is highly unlikely.

I EXPECT 2015 to be another very positive year economically for Silicon Valley. California seems to be in the best shape it has been in since the Great Recession with more tax dollars, job expansion and wage appreciation.

Corporate balance sheets are the healthiest on record. We are seeing more hiring and more M&A. The Fed doesn’t seem too keen to increase interest rates, so that will continue to help the entire real estate market on both the residential and commercial side.

Technology should continue to lead the way. However, we do need to watch out on the rental rate side. Landlords are becoming increasingly aggressive and could potentially push the envelope too far. We are also beginning to see early signs of companies taking more space than they currently need. Is this is a foreshadowing of things to come? Only time will tell.

JEFF CUSHMAN EXECUTIVE MANAGING DIRECTOR CUSHMAN & WAKEFIELD

I CAN’T remember being this busy in late December. Most of my clients remain very bullish on the market in 2015 and I’m very optimistic heading into the new year. Everyone knows that the market is tight in Palo Alto, Mountain View and Sunnyvale, but I’m excited that demand has really started to surge in Santa Clara, North San Jose, and Oak Creek (Milpitas). There is a lot of value being created across Silicon Valley.

We are not seeing signs of over-building, which is reassuring. I am, however, concerned that we are not paying enough attention to our transportation infrastructure. Traffic is not going to get any better and Caltrain (Baby Bullet service) is at capacity.

GREGORY M. DAVIES | FORMER SENIOR VICE PRESIDENT | DTZ

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PRINCIPAL, SC BUILDERS

PHOTO BY LAURA KUDRITZKI

SAM ABBEY

Sam Abbey photographed at the newly completed HQ of Eventbrite, the online marketplace for live events.

BUSY BODIES ALL AROUND SAM ABBEY is the “S” in SC Builders Inc., which he and Chris Smither founded in 1999. SC Builders is a mid-sized commercial general contractor with offices in Sunnyvale and San Francisco. It has built corporate offices for Facebook, Intuit and Motorola Mobility, among others. Its portfolio also includes life science labs and data centers. Abbey has been in the construction business since he was 16, and the executive team has nearly 80 years of combined construction experience.

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important to us that our employees are engaged and focused on the work that we have, and that we are positioned for success with new opportunities while still exceeding the expectations of our existing clients. We are not willing to sacrifice our quality of work for quantity. We are committed to building in strong, smart, unique and positive ways, and it is hard to do that if everyone’s hair is on fire.

TR: We love asking the construction companies how busy they are. How busy is SC Builders?

TR: How full is your pipeline into the next two or three years?

ABBEY: 2014 was a strong year for our company. We don’t have anyone sitting on the bench. Our offices in Silicon Valley and in San Francisco have continued to secure new business and grow. As a company, we tend to be very selective about the work that we go after, so although we are busy, we have not overextended ourselves. It is

ABBEY: The type of work that we do usually has a six- to 12-month runway, and 2015 is looking to be a great year for us. We have a 90,000-square-foot senior housing facility tenant improvement that is starting in Q1 of 2015 in San Mateo. We have a three-story (90,000 square feet) out-of-the-ground office building along

INTUIT COOK CAMPUS CENTER

FACEBOOK MENLO PARK CAMPUS

PHOTOS BY JASPER SANIDAD, ISSAC SALINAS, TAKATA PHOTOGRAPHY, & JOE FLETCHER

REAL PAGE

with a one-story (35,000 square feet) lab building scheduled for the start of Q2.

We also have projects slated at Stanford [University] during the summer break.

These projects, along with our ongoing tenant improvement work with key clients like Xilinx, Genomic Health, Intuit and Qualcomm—along with a handful of confidential technology clients—have us looking forward to a strong 2015 and 2016.

TR: How competitive is the market right now (for labor, materials…)?

ABBEY: The market is very competitive regarding all supply lines for the construction industry. Some of the key areas where we are seeing issues affecting construction are in the MEP trades (mechanical, electric and plumbing). Labor demand is very high, and we believe this will continue to be a pressure point through 2015. We are not seeing material shortages causing issues at this time.

TR: Your company works across a broad range of clients, from corporate office to institutional to mission-critical work. Is this what a modern construction company

MOTOROLA MOBILITY CAFE

in the Bay Area has to have in order to be successful?

ABBEY: There are successful companies who operate in fewer market sectors, but we choose to invest in these core markets because we believe in diversification for the well-being of our company and, quite frankly, because it is really interesting to be in each of those markets. We would like our employees to have the opportunity to enhance their resumes in unique and

building. It is something that influences everything that we do, from the type of people that we hire, to the type of work that we pursue. Being a good builder is not about chasing every project for the sake of having more work. We want to do interesting, challenging and fun projects so that our teams are excited to come to work.

We are strategic about the work we pursue. We choose to focus on winning projects that are interesting and challenging, and then use our time executing the

Passionate builders, efficient contractors positive ways—working these key markets, as well as in life science, helps us keep our employees learning and growing as construction professionals.

TR: How do you differentiate your work and product from others?

ABBEY: Several things differentiate our work product from others: First and most importantly, we are passionate about

work flawlessly. Our project teams are staffed with experienced builders. Our principals are actively involved in every project; we are builders and we ensure that our clients not only have an experienced project team, but also have direct access to the owners of the company. We focus on efficiency, and we believe that clean, safe job sites are essential to running an efficient job that results in time and money saved for our clients.

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Sam Abbey MOTOROLA MOBILITY

G2 INSURANCE

“We focus a lot of our time and energy in hiring and retaining the top 20 percent of the talent in the market.”

SAM ABBEY, PRINCIPAL, SC BUILDERS

TR: There are companies that are not as successful as others, even in these times.

What have they done to be in that position?

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TR: What concerns you about our market now? How is your company mitigating those concerns?

ABBEY: The commercial real estate market is cyclical, and it has been going strong for a few years now, so the concern is similar to 2007—i.e., what goes up, must come down. At some point the market is going to turn again and, as Marc Andreessen said recently, “When the market turns, and it will turn, we will find out who has been swimming without trunks on.”

In the past few years the level of construction activity has grown tremendously, and clients want projects built faster and cheaper than it has been done before.

These expectations really force us to think out of the box and collaborate with the design community as well as the subcontractor community even more closely to meet and exceed those expectations. New means and methods and pre-fabrication through BIM and other technologies have

been significant accelerators for our speed to market.

We have diversified our service offerings over the last several years and are a financially solid company. Our bonding capacity is over $200 million, which says a lot about our financial strength. We have positioned ourselves so we can make smart business decisions independent of market fluctuations.

TR: What hurdles do you anticipate in the industry in the next year?

ABBEY: In addition to the ongoing challenge to find more talent to join our team, we are going to see some changes in where people are choosing to build. We are seeing more opportunities in the East Bay and the Peninsula than in the past, and we need to be able to service those markets efficiently.

Technology will continue to evolve, and we need to stay abreast of the newer technologies and adopt them quickly. Hiring the top 20 percent of the talent in the market will become even more competitive than it is now.

PHOTOS BY TAKATA PHOTOGRAPHY & JOE FLETCHER

ABBEY: I can only speculate on why others are not being as successful. I do know that our success is due to hiring the right people, having strong, consistent leadership, and not being afraid to take calculated risks.

We focus a lot of our time and energy in hiring and retaining the top 20 percent of the talent in the market. We want the right people on our team, and we want them to be a part of our team for the rest of their careers. We have very low employee turnover because we are very selective about who we hire.

We have strong and consistent leadership. One of our principals is involved in every project from start to finish. We not only lead the company through clearly defined company goals, we also stay actively involved in the operations, because we are builders and it is what we love to do.

We are committed to growing by seeking out new challenges, and we do this in a

way that is in line with our vision, which is to be strong, smart, unique and positive.

Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

THINGS THAT excite me in 2015: Five Things—1. Custom Spaces clients (new and old) continuing to experience success. 2. Growing our awesome team. 3. Developers and tenants working in unison on big picture projects. 4. South Park San Francisco gets a makeover 5. CNBC and Bloomberg get into a bidding war over Vladimir Bosanac to become a full time anchor after his web series goes viral.

Things that worry me in 2015: Only one—Industry players around the Bay Area with a small-market mentality towards the growth we’ve experienced. We need to change the conversation from “when is it going to end,” to “how can we come to the table and keep the market healthy.” San Francisco is on the cusp of a self fulfilling prophecy, I would love to see that talk go away in 2015.

JON DISHOTSKY | PRINCIPAL | CUSTOM SPACES

SONIA GREENLEE SENIOR VICE PRESIDENT JLL

THE STRONG market conditions, coupled with virtually no recent increases in hotel room supply have driven up ADR (average daily rates) for hotels. While not great news for consumers, it is great news for creating financial conditions that could lead to more new hotel development in the Bay Area. Additionally, the lack of new supply and higher room rates is driving strong demand for many ownership groups to try and buy into this market. Transaction activity is very strong, and with each sale new owners typically plan on investing money into the asset.

The biggest challenges our projects and owners face is the increasing costs of construction and the shortage of quality labor resources available. With the huge building boom in San Francisco well underway and continuing to be strong in 2015, many of the best contractors and subcontractors are very busy. Pricing is consistently coming in higher than our clients have budgeted. Even conservative cost estimating is proving to be difficult to achieve as trades are being selective on what new work they take on, and they are able to demand higher prices. This has been a tremendous change in the last 12-18 months.

Many projects were planned and financial analysis done based on lower projected costs.

If pricing continues to rise or doesn’t start to come back into line, owners may begin to postpone planned projects that aren’t absolutely critical until the market changes.

I’M MOST excited about witnessing some of the new speculative Business Parks take shape throughout Northern California, specifically watching the e-commerce industry evolve and grow and see how these businesses utilize new buildings to maximize their efficiency. In addition, it is exciting to witness the resurgence of the manufacturing sector in Silicon Valley and see how this trend will impact surrounding markets.

Also, the industrial sector seems to be very healthy, and we don’t have a lot of concerns heading into the new year. Perhaps most concerning is surrounding California’s ability to attract and maintain new businesses to the state and in general make it more business friendly for manufacturing/warehousing and the light industrial segments of our business community. We need local municipalities to make this their top priority to help create jobs and grow industry in the state.

GREIG LAGOMARSINO | EXECUTIVE VICE PRESIDENT-CORPORATE DIRECTOR | COLLIERS INTERNATIONAL

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Great real estate litigators know when to mend fences.

And when to tear them down.

AT WORK / MSR ATTORNEYS / GISELLE ROOHPARVAR, ANTHONY LEONES, ALLISON WOPSCHALL & GALE CONNOR

The path to victory doesn’t always lead directly to the courtroom. That’s why at Miller Starr Regalia, we create practical, result-oriented strategies that break down barriers to resolution. We utilize every tool at our disposal, including negotiation, mediation and arbitration. It’s a real-world approach that saves our clients time and money.

If going to trial is unavoidable, we know how to win. Our Litigation Group is comprised of real estate specialists who’ve tried—and won—complex real estate cases in state and federal courts throughout California. And because we wrote the definitive treatise on California real estate law, we’re ready to hit the ground running… and lead our clients to success. Meet our talented problem solvers at msrlegal.com.

San Francisco Walnut Creek Newport Beach msrlegal.com

DEVELOPERS

OUTLOOK

PHOTO COURTESY OF MATTHEW MILLMAN

STEVE DOSTART 18 | SCOTT JACOBS 23

“Everybody wants to be a building owner right now,” says Steve Dostart. (See story on page 18.)

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STEVE DOSTART

PRESIDENT, DOSTART DEVELOPMENT COMPANY

MEASURED GROWTH

S

Four cycles later, the focus is still narrow and precise, but the opportunities are long term

teve Dostart founded his namesake development company in 1999. An advocate of transit-oriented design, Dostart has overseen the development of more than 2 million square feet of offices in campuses and individual buildings in Palo Alto, Mountain View and Sunnyvale.

Before setting out on his own, Dostart was a partner at The Mozart Development Co. He is a past president of NAIOP Silicon Valley and still sits on the organization’s board. He’s also a member of the Stanford Real Estate Counsel, the Policy Advisory Board for the Fisher Center for Real Estate & Urban Economics, the Grand Boulevard Initiative and the Atherton Community Center Advisory Committee. Dostart previously served on the management board at the Graduate School of Business at Stanford University, where he was an Arjay Miller Scholar.

TR: How many business cycles have you gone through up to now?

How does this cycle compare to the others you’ve witnessed?

DOSTART: I started working for the Trammel Crow family in Dallas back in 1986 fresh out of college. I was very excited about a series of three articles that the Wall Street Journal ran on what a great place the Trammell Crow Company was to work—how all their MBAs became millionaires and how working together was such a great thing. One of the older, more seasoned guys inter-

viewing me asked me if I had any idea how bad things were about to get. And did they get bad. The job I ended up taking with them was running the numbers on failed projects, trying to figure out how to work with lenders and partners to get through the worst of times. One of my mentors remarked that it is best to lose big the first time you go to Vegas so that you respect how bad things can get. I think that this initial exposure to the perils of development was a first rate education in paranoia and risk aversion.

When I came out of business school in 1990, it was remarkably similar. I was hired by John Mozart as a junior guy to work on a huge redevelopment project in East Palo Alto, the former Ravenswood High School site and the current home of IKEA. Within a week of starting my job, Saddam Hussein invaded Kuwait and all new development came to a screeching halt. My life went right back to workouts and trying to lease up buildings that were struggling at rents half of pro forma. It almost felt like a hex. That downturn lasted for about six years before we could do any new development. Starting in 1995, we had a wonderful string of about 10 new buildings in about a 30-month window,

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PHOTO BY LAURA KUDRITZKI

Steve Dosart: “I like things to be boringly positive.�

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Steve Dosart

including buildings for KPMG, Netscape, Network Appliance, Morgan Stanley, law firms, brokerage firms, pharma companies, tech companies, etc. That is when I got my education in development. John remarked that this was the kind of time when I should bring a cot into the office and just work as long and hard as I could because it wouldn’t last.

I started my own company in February of 1999 and worked as fast as I could to get four new buildings developed for firms like TDK, Goldman Sachs, professional firms and start-ups.

Fortunately, these were buttoned up before the market tanked in 2000.

I did virtually no new deals from 2000 until 2007, when at last I bought a couple existing buildings to rehab and a large former HP campus in Mountain View that I was planning to redevelop with Rockwood on a speculative basis. While I got the rehabs done and leased just in the nick of time, and I mean by days, the market cratered again before we finished our entitlements on the new development at the former HP campus. That deal went through nine lives, including buying back our own loan, before the market started coming back again in 2010. Then we pre-leased it to Synopsys and it became a home run.

That would make four cycles so far—and three of them were incredibly bad. I’m always nervous that the next one is right around the corner.

TR: Here is a question that most people hate to answer. Is it different this time?

DOSTART: I am always paranoid. What gives me the most confidence right now is that the national economy is experiencing “slow but steady” growth. I like things to be boringly positive, but not crazy enthusiastic—as that brings violent change. I see the Silicon Valley as a leveraged bet on the national economy. A lot of work for the country, and the world, is disproportionately done here. What makes me the most nervous now is that far too much capital is coming into the Valley to chase returns, and prices have escalated too far based on actual leasing activity. That makes it extremely risky to buy new property now, as there is a long way to fall when the next downturn comes.

I am trying to reposition as much as possible to properties that will lease even in a recession, albeit at a lower rent. I think that the more urban properties at transit will continue to lease during a recession; in a reverse musical chairs scenario, they will pull folks out of the business parks. I think that most tenants would prefer to be in walkable, amenity-rich, transit-oriented ecosystems. We are making a couple of big bets right now in downtown Redwood City, developing wonderful product at costs higher than we would have dreamed to exit only a few years ago. What I know is that this product will lease in any market. The return will suffer, but it will lease. All that said, of course the market will have a correction. And I think that with the increase in speed that we all get information through the net, it will happen more swiftly than

before and catch huge numbers of us by surprise. Not for the faint of heart and deeply important to have resilient financing in place.

TR: How competitive is today’s environment for a developer compared to past cycles? What characterizes this environment?

DOSTART: There is just too much money and everybody wants to be a building owner right now. I have friends who are tech executives and they also want to get into the game. This means that the money is less rational, not really understanding the risks, and it has driven me to pretty much focus entirely on off-market deals that are beyond the reach of folks who just want to buy something and don’t have the stomach for entitlements and development.

TR: What have you learned during this cycle that you did not anticipate?

DOSTART: Values in Palo Alto and Mountain View have increased beyond my wildest expectations (probably two or three increments more), and that I really should have gotten into downtown Redwood City earlier. Barbara Pierce, a council member in Redwood City, encouraged me to do so, and I just missed it. The good news is that we still got in.

TR: You’ve recently submitted a development project for Redwood City. Most of your past projects have been closer to your home base of Palo Alto and Mountain View, so what is it about the mid-Peninsula town that appeals to you? Do you foresee a development boom around in that area in the near term?

DOSTART: I have lived about five minutes south of downtown Redwood City for about 15 years. I’ve been supporting music and school oriented non-profit work in the Redwood City elementary school district for the past 10 years. About three to four years ago, friends told us to check out the new theater and restaurants in the downtown. That’s when my family started driving north to go out instead of south.

What is unfolding in Redwood City is unlike anything we have seen in the other suburban towns in the southern Peninsula, given the amount of residential that they are bringing into the downtown. The first big moves were made by RREEF on their big project with the theater, the restaurateurs and small-business owners who came to service those folks; and the city, who made Courthouse Square a focal point of what has become a thriving ecosystem. There are currently around a thousand residential units under way in Class A residential buildings, and very highquality office buildings following right behind. This will be a “walk to work” kind of environment. The baby bullet (Caltrain) service, which has become incredibly important, is 33 minutes from San Francisco compared to nearly 50 minutes to Mountain View.

“I see the Silicon Valley as a leveraged bet on the national economy. A lot of work for the country, and the world, is disproportionately done here.”

STEVE DOSTART, PRESIDENT, DOSTART DEVELOPMENT COMPANY

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601 MARSHALL STREET – 144,500 SQUARE FEET OF CLASS A OFFICE IN THE HEART OF VIBRANT DOWNTOWN REDWOOD CITY

IMAGES COURTESY OF MATTHEW MILLMAN | RENDERING COURTESY OF KORTH SUNSERI HAGEY ARCHITECTS

DOSTART DEVELOPMENT’S OFFICE SPACE MAKES YOU FEEL AT HOME

TR: Redwood City has reached its development cap (or will very soon). What other towns appeal to you as a developer, and where do you see opportunity—office, residential, other?

DOSTART: We will still keep trying to do work in our other favorite cities: Palo Alto, Mountain View and Sunnyvale, with a preference to be as close to transit as possible. I would love to do a deal in Menlo Park, when they sort out what it is they actually want, and could see us expanding a town or two to the north or south depending on how conditions develop. I really like having projects less than about a 20-minute drive from the office because that means that I personally will get to stay close to what is happening with them. I think that is very important and one reason that we have kept our growth very measured and very close to home.

TR: Many tech companies have been gravitating toward San Francisco, and the city has captured a lot of attention as a center of innovation for the region. Yet Silicon Valley more broadly continues to grow, and continues to offer the type of product that doesn’t exist in San Francisco. What is your perspective on that evolution, and how do you see it playing itself out throughout the region?

DOSTART: Both will thrive. For example, our new building in downtown Redwood City would be an ideal headquarters for an up-and-coming Silicon Valley company or, because we are literally two blocks from a 33-minute train ride to San Francisco, the Silicon Valley outpost for a South-of-Market-based company.

I will stick to my knitting where I know the politics, the people and the properties.

TR: What are biggest challenges the region faces today?

DOSTART: In the detailed picture, cities are starting to get tired of all the new projects. Kind of like the Hawaiians getting tired of too many tourists by the end of the season. Bigger picture, I think housing near jobs is possibly the biggest issue. Politically, we are starting to grapple with what our world will look and feel like in 20 years as we add more housing/commercial at transit nodes.

Everyone is wondering whether the walkable world will reasonably offset potential traffic problems from higher density.

TR: What is your outlook for the industry in the region over the next 12 to 18 months?

DOSTART: Barring an unforeseen shock, I think it will look pretty much like it looks right now. If there is a big shock, the financial markets can become illiquid in the blink of an eye, and some folks will have a very tough time.

TR: What else should we be asking that we are not asking?

DOSTART: What makes this business fun? What gets me excited to go to work every day are the people who love being a part of creating our physical environment. There are so many folks who actually care about this—the planners, staff and council at the cities, those in the professional side like architects and engineers, our contractors and brokers, and even some of our better competitors. While we are all trying to earn a living, most of these folks deeply care about what we are doing and want to help us all find our next better place. It inspires me to do my very best.

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integrity. enjoyment. uniqueness. ever forward.

CEO, LANDBANK INVESTMENTS

SCOTT JACOBS

TR: In November of 2014, Sunnyvale’s City Council approved a major project of yours, the Central & Wolfe campus. Approval proceedings are never easy and take months to complete. What has this process taught you about the development business in the Bay Area?

Scott Jacobs photographed on a scissor lift 50 feet high overlooking the future site of the Central & Wolfe campus.

NO ORDINARY DEVELOPER

PHOTO BY LAURA KUDRITZKI

Third-generation developer takes bold design further, and Silicon Valley approves it

SCOTT JACOBS is CEO of Landbank Investments LLC, a third-generation, family-owned commercial real estate development company. Landbank has acquired, developed, leased, managed and provided over 4 million square feet of office and R&D space to technology companies in the Bay Area since 1957. The company builds “user-centric environments that are thoughtful, sustainable, amenity rich and transit served—extraordinary places that create opportunities for extraordinary experiences.” Its most ambitious project is Central & Wolfe, a 770,000-square foot office campus in Sunnyvale. It will replace a nine-building, 1970s office park built by Jacobs’ father.

JACOBS: Looking back on the 18-month entitlement process, I can say with a pretty high degree of certainty that if we had designed the Central & Wolfe Campus to be just another standard, high-density cookie-cutter project, then I think we would have had little chance of getting it approved. Some people might have thought that the bold design of the Central & Wolfe Campus was risky. However, I think that the bigger risk would have been to go with an ordinary design. We want to create unexpected projects—something new, something beyond the ordinary.

Most of Silicon Valley was originally zoned for relatively low-rise, low-density developments. But that’s changing. As a result, we’ve adapted our approach to project design, the entitlement process and addressing community interests.

Increasingly, many Bay Area cities expect higher quality design and more substantial community benefits from new construction projects. I think new developments should try and exceed these expectations from the outset of a project, rather than forcing communities to drag them there kicking and screaming. It makes the entitlement process a whole lot more enjoyable for everyone involved.

Similar to many of today’s leading technology companies, our goal is to create a well-designed product that delivers an extraordinary user experience. Central & Wolfe’s “users” include not only the tenants, but also their employees, Mother Nature, and the surrounding community.

A user-centric approach to project design, as opposed to a developer-centric one, can greatly increase the odds of getting a high-density infill project approved.

Real estate projects, especially large ones, can have a significant and lasting impact on the character of a city, as well as on the quality of the community members’ experiences within it. That’s why we think it’s important to adopt a community leadership mindset during the design and entitlement process.

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Scott Jacobs

“I’m a big believer in the value of being personally involved in all aspects of the entitlement process, from bi-weekly calls and meetings with city staff to community outreach and hearings.”

SCOTT JACOBS, CEO, LANDBANK INVESTMENTS The community is a key stakeholder in our projects—they’re our partner, just as we are theirs. It’s important to choose your partners carefully. Sunnyvale was a great partner throughout the entitlement process for our Central & Wolfe Campus. They’re a fantastic business- and resident-friendly community with a strong sense of their history, as well as their future as a global center for innovation and technology.

My team and I worked really closely with city staff and the community during the entitlement process in order to make the Central & Wolfe Campus even better than when we first presented it to them.

I’m a big believer in the value of being personally involved in all aspects of the entitlement process, from bi-weekly calls and meetings with city staff to community outreach and hearings. Principal-toprincipal interaction can be invaluable.

Listening to the community’s thoughts, desires and concerns firsthand really helps me better understand the community’s interests. If you show the community that you truly care about them, then they’re much more likely to care about you and your project.

Another important aspect of the entitlement process is the ability to tell your project’s story well. Every exciting and innovative project has an interesting story behind it. Discover your project’s story and tell it with genuine enthusiasm. People tend to remember and share stories, more so than dry facts.

Get involved with projects that you truly believe in. Be passionate about them.

Fall in love with your projects. If you don’t, how can you expect the community to?

TR: We know that CBRE and CTBT already have started marketing the project. What interest have you received so far? Are you satisfied with the level and quality of interest from potential occupiers?

JACOBS: The discussions we’re having with Silicon Valley’s leading technology

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companies are overwhelmingly positive.

Sunnyvale’s office vacancy rate is a scant 4.8 percent, and 73 percent of the 9 million square feet of office/R&D space currently under construction valley-wide is either pre-leased or user-owned. So from where I stand, things look great.

I think the reason why technology users are really excited about Central & Wolfe is because it incorporates so many of the major recurring design themes found in today’s user-driven campuses: enhanced sustainability; the elimination of surface parking; abundant open space; rooftop gardens; lots of amenities; really large floor plates; a healthy, comfortable environment; and unique architecture.

Why are all these design themes so important? Take large floor plates for example. Leading-edge technology companies understand that collaboration and interaction are key drivers of innovation. Having more employees on one highly walkable floor plate helps remove psychological barriers to interaction.

However, when you separate people by different floors and different buildings, collaboration drops off precipitously.

That’s why companies such as Google, Facebook, Apple and Nvidia are building their own campuses with massive floor plates. And, larger floor plates are more space-efficient than smaller floor plates.

That means that you can have more employees per 1,000 square feet of space, which in turn reduces a projects’ asking rent per employee.

There’s a huge gap in the market today between what large technology users really want and what spec developments are delivering.

Users have also been extremely receptive to Central & Wolfe’s focus on creating healthy, comfortable indoor environments that are free of toxins and filled with highquality air, lighting, acoustics, daylight and connections to nature. Given everything that we’re doing on this front, we’re also considering pursuing WELL Building certification.

Historically, Silicon Valley hasn’t exactly been a hotbed of exciting, creative and innovative office/R&D architecture. The building designs definitely haven’t kept pace with the innovation going on inside.

That’s changing though, and it’s the large technology users that are leading the way.

These companies are increasingly coming to view the real estate that they occupy as a fantastic opportunity to influence their brand while also projecting their goals and values to their customers and employees.

In today’s ultra-tight technology labor market, the single biggest challenge that most companies face is attracting and retaining the best and brightest. I think that in order to help meet that challenge, companies need to focus more on the quality of their employees’ user experience.

Let’s say that I’m an employee trying to decide between working for Company A or Company B. Company A is located in a cookie-cutter office park. Company B is headquartered in an exciting, next-generation workplace environment, a place that has its own gravitational attraction and makes you say, “Wow, that’s so cool!” Now all other things being equal, I’m going to be pretty tempted to go work for Company B, since Company B’s workplace environment suggests that Company B really cares about the quality of my daily experience.

Inspiring real estate can be a compelling HR tool, and the companies we’re talking to get that.

TR: This project approval took a lot of energy for you personally and the organization. What is next? Where will Landbank as an organization focus in the next 12 to 18 months?

JACOBS: 2015 is all about the construction and leasing of the Central & Wolfe campus. This is no small feat. Central & Wolfe is the largest project that Landbank has developed, and a campus of this scale and complexity requires an experienced team.

So over the past two and a half years we’ve engaged and partnered with some of the

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Scott Jacobs

This 48,000 square foot building is located at the corner of Wolfe Rd and Arques Ave in Sunnyvale. It’s one of the nine buildings that will be demolished as part of the development of the Central & Wolfe Campus. best minds and most experienced people in their respective fields. We’ve assembled a seasoned A-team that has millions of square feet currently under development.

Just recently, Bob McIntire, Bob Olson, and Nova Partners’ construction management group joined our Central & Wolfe team.

We’re ready to execute on this project and see this campus through to completion.

Beyond that, I’ve got several new and exciting project concepts that I’m working on, so stay tuned.

PHOTO BY LAURA KUDRITZKI

TR: As a developer, what excites you about the Bay Area, and what does not?

JACOBS: I absolutely love the Bay Area. I love the creativity, innovation, technology, disruption, reinvention, resilience, unbridled optimism and the sense that almost anything is possible.

I love the Bay Area’s casual unpretentiousness, the natural outdoor wonders, the climate and the people.

I love the startup culture, the desire that people have to want to help others succeed, that it’s OK to move fast and break things, and that there’s no shame in trying hard and failing—just dust yourself off and try again.

I love the hyper-growth potential for many leading-edge technology companies as well as the boom-and-bust opportunities that come with it. Many of these companies are also at the forefront of the evolution of workplace strategy.

These are just a few of the things that get my inner developer going. The Bay Area sets the stage for new and exciting real estate concepts and opportunities. I’m very lucky to live in this time and place.

TR: Are you optimistic about the industry in the short run?

JACOBS: My crystal ball is hazy at best and filled with cracks. So for what it’s worth, I’m very positive about the near-term outlook for well-located Bay Area real estate.

Barring some unforeseen disaster, I can’t point to any catalysts today that I think are likely to cause a sudden change in the positive Bay Area market conditions in the near-term.

We try to position ourselves to thrive in all markets—up, down, sideways. In particular, we strive to remain disciplined by not getting too caught up and overextended in white-hot markets. The temptation to lever up and buy into momentum can be really strong during the good times.

At some point though, this market—just as with all markets—will eventually turn.

One thing that I’m certain of is that the catalysts for that turn will catch a lot of people off guard.

TR: What challenges do you foresee for the region going forward? How can we mitigate those?

JACOBS: Some of the biggest challenges I see for the region are climate change—this is a global challenge that will affect all regions, high cost of living—especially housing, income inequality, traffic and education. In order to address these issues, we’re going to need strong, open-minded, forward-thinking leadership, communitylevel support and a willingness to make individual sacrifices for the greater good.

We also need to stave off complacency.

Silicon Valley doesn’t have an inalienable

right to its great fortune and success.

It’s possible to recreate Silicon Valley somewhere else, and believe me, there are lots of other well-funded places trying to do just that. If you think I’m crazy, then go talk to Detroit. In 1960, Detroit had the highest per-capita income amongst all major American cities. Today, Detroit’s unemployment rate stands at around 15 percent, down from a whopping 28 percent in 2009.

We need to constantly reinvest in, reinvent, retool and reimagine this wonderful, dynamic place we live in. The nature of the universe is change. Don’t ever take what we have for granted.

TR: What else should we be asking that we are not asking?

JACOBS: Here are a few questions that I’ve been asking myself: How will a near-future with self-driving cars and a shift away from the car-ownership era, towards the car-as-a-service era, affect the way in which we design expensive structured parking solutions today? What will the car-as-a-service era eventually do to today’s increasing parking ratio requirements?

How will we meet California’s 2020 and 2030 Net Zero Energy goals for all new buildings in light of the current trend towards higher-density developments?

What can I do to help prevent catastrophic climate change? This, in my opinion, is the biggest challenge that the world will face for many, many decades to come. Let’s get on it.

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BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

PHIL MAHONEY EXECUTIVE MANAGING DIRECTOR NEWMARK CORNISH & CAREY

WHAT EXCITES me the most about 2015 for the Valley’s Commercial market is the breadth of the demand. It is no longer just Apple, LinkedIn, Google, Amazon, etc. that are growing. A host of homegrown local growth companies such as ServiceNow, Aruba, Palo Alto Networks and HortonWorks mixed in with multinational stalwarts like Qualcomm, Broadcom and TSMC that have, or will, expand. In terms of overall square footage, it will be hard to imagine how 2015 could eclipse an amazing 2014, but nevertheless, this coming year should be a robust one as there is strong momentum coming out of Q4 .

As always, it is what you don’t see that can derail you. 9-11, Lehman Brothers, etc. are examples of macro economic or geopolitical events that lead to a lack of confidence, which in turn led to a decline in local activity. If we have learned anything from the past, it is that the Valley is not immune to these conditions. Left to our own devices, no pun intended, the Valley will do just fine. Unfortunately, we are rarely left alone and play in a larger sandbox that does include Europe and the Far East.

I AM particularly excited about the hiring boom we are experiencing. Increased hiring necessarily means continually improving employment statistics, and that translates into augmented demand for office space. San Francisco Bay Area companies will also continue to lead the way in the repurposing of older buildings as urbanism and Millennials influence transformative change. We are forever changing and molding the shape of the Bay Area workforce.

Most worrisome is the increase in interest rates, which is inevitable—leading to less available venture capital and higher costs of doing business in a very desirable, albeit expensive business environment. Also, the recent stock market declines will likely foreshadow future trends.

MARGARET DUSKIN | EXECUTIVE DIRECTOR | CUSHMAN & WAKEFIELD

ERIK DOYLE MANAGING DIRECTOR CAPITAL MARKETS | JLL

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THE OVERALL positive impact that long-term anchor tenants such as Google, Apple, Gilead, Salesforce.com and LinkedIn are having on the Bay Area real estate landscape is very meaningful and exciting. All of these companies have made substantial capital investments into facilities and developments throughout the Bay Area. Also, their increased appetite for real estate immediately surrounding their respective headquarters has decreased the available inventory and will likely cause other tenants to relocate rejuvenating other submarkets.

Also, the innovative ideas and visions from many startups are truly amazing. In addition to the pioneering ideas in software and manufacturing that have been a staple in the Bay Area for so long you have companies such as Uber, Tesla and Zenefits that are transforming and shaking up traditionally stale industries such as the taxi, auto and human resources.

HOUSING

OUTLOOK

PHOTO COURTESY OF CARMEL PARTNERS

RON ZEFF 30 | CHERYL O’CONNOR 36

The new look of a modern housing complex. (See story on page 30)

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FOUNDER & CEO, CARMEL PARTNERS

RENDERING COURTESY OF CARMEL PARTNERS | PHOTO BY LAURA KUDRITZKI

RON ZEFF

FUNDAMENTALLY STRONG The rise of the renter nation will keep the multifamily development pipeline busy for a while longer

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RON ZEFF is founder and CEO of Carmel Partners, a real estate investment management firm specializing in U.S. multifamily properties. Currently, Carmel manages approximately $3.6 billion in real estate assets for more than 60 institutional investors including endowments, foundations, pension plans and family offices. Based in San Francisco, Carmel has offices in Los Angeles, Irvine, Seattle, Denver, Honolulu, Washington D.C. and New York. Prior to forming Carmel Partners in 1996, Zeff was a partner with Trammell Crow Residential in San Francisco.

In 2014, Zeff was awarded the prestigious Spirit of Life Award by the Real Estate and Construction Council of the City of Hope. He will be honored by the City of Hope on May 7th in San Francisco for his contribution to the causes championed by the cancer research organization.

TR: Multifamily development in the Bay Area, as it is in most markets across the nation, is on a tear. Are you worried that there will be an overabundance of product soon? What does that mean for the market more broadly in the Bay Area?

ZEFF: Overall, the fundamentals for the multifamily market are very strong across the country and the Bay Area. However, the total supply of housing (single family plus multifamily) remains low relative to historical production levels. In the Bay Area, we are seeing increases in new construction deliveries. So far, the new deliveries are not worrisome, as the market is absorbing new deliveries, and rents remain strong. We see deliveries peaking in mid-2016 and, assuming the job growth remains at current levels and there is no significant increase in single-family construction, the multifamily market fundamentals will remain positive.

TR: What trends have emerged in the industry since the end of the Great Recession that characterize this market? Are these trends lasting?

ZEFF: One of the most significant trends we have seen is the decline in homeownership rate and the emergence of a renter nation. During the prior decade, housing preference favored homeownership, and the availability of mortgage credit pushed the homeownership rate up to nearly 70 percent in the United States. The Great Recession significantly tightened the availability of mortgage credit, which has caused the homeownership rate to trend down below 65 percent, and it appears it’s headed to the low 60 percent range. This trend has strengthened demand for multifamily.

Another trend is the preference of the consumer to choose to rent and pay a premium for higher quality product. Many of our projects have a higher level of finish compared to what is traditionally thought of as rental product. In many cases, we are providing a high-quality condominium level of home finish to satisfy the consumer’s preference. A decade ago, consumers seeking a higher level of finish would have had to purchase a home in order to find a similar level of quality to what is found in our apartments today.

Ron Zeff photographed rooftop at Carmel Rincon.

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Ron Zeff

“People are looking for location as an amenity, whether it’s near work, play or transportation options.”

RON ZEFF, CEO, CARMEL PARTNERS

TR: On the demand side, are you seeing indicators that imply a healthy multifamily market over the short term and mid-term? Why? ZEFF: The key indicator of job creation has led to strong multifamily demand. Continued venture capital spending and increases in tech-related employment in the Bay Area, as well as population growth over the last seven or eight years with no significant new development, has created pent-up demand for housing. In the early 2000’s, tech growth was not sustainable. Today we are dealing with real companies with real products and more sustainable business plans, which should keep the tech demand growing.

TR: How is the product evolving? What is different about multifamily building today from what was built prior to the recession, or even earlier?

ZEFF: We are seeing a return to urbanization across all of our markets, and that is resulting in higher density and often mixeduse development. People are looking for location as an amenity, whether it’s near work, play or transportation options. Units have trended smaller, but with more open and flexible floor plans.

In terms of amenities, the trend is away from the showcase clubhouses that are rarely used, in favor of amenities that bring energy to the property and foster community among the residents. For sociability, we seek to create extended living spaces throughout the property for our residents to congregate or entertain friends, whether it be indoors or outdoors. We continue to focus on large functional fitness areas that can truly replace the traditional gym membership.

Lastly, recognizing the way people work has changed dramatically. We have replaced traditional business centers with coffeehouse-inspired Wi-Fi cafés and included conference rooms and flex work space.

TR: Where do you see Bay Area rental prices going? Are we close to reaching peaks, or do you foresee continued expansion as the employment picture continues to improve across the region?

ZEFF: New construction deliveries should moderate the current double-digit rent growth in most submarkets, but strong demand for rental housing will continue to put upward pressure on rents in the Bay Area. Some submarkets will see the effect of rental lease-up concessions, which will create lower net effective rents in the short run while new supply is absorbed. However, we see Bay Area rent growth outpacing inflation over the long run. Increased rent growth is supported by higher wages in the Bay Area, and the tendency of renters to spend a higher percentage of wages on housing costs than other markets in the U.S. TR: 2015 may be the year that really transforms the East Bay market.

Do you see that happening, and where do you foresee the greatest amount of activity in that region?

ZEFF: The East Bay will continue to see the highest rent growth as those submarkets benefit from renters being priced out of the urban core. Impact from new construction should be minimal in 2015 as absorption exceeds deliveries. So far, there has been a lag of deliveries in the East Bay markets compared to Silicon

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PICTURE COURTESY OF CARMEL PARTNERS

Carmel The Village is located in Mountain View, CA and has 330 Units and 42,500 sqft of Retail

City of Hope’s Real estate and ConstRuCtion CounCil pResents tHe

honoring

Thursday, May 7, 2015 MarrioTT Marquis cityofhope.org/rec/spiritoflife

Ron Zeff

Valley. Oakland can be a challenge for development, as land values require more expensive dense high-rise construction focused around transportation and downtown walkable areas.

Other East Bay markets that are centered around transit and walkability will fare well.

TR: What risks do you see in the market today? What should we be worried about?

ZEFF: Clearly, an economic downturn accompanied by a loss of jobs would put downward pressure on the multifamily market and the absorption of new supply. We believe that the national economy will be characterized by regional winners and losers over the next couple of years, and in our mind the Bay Area is a regional winner.

TR: With the fund that you had just raised, where will you focus your investments? Where do you see opportunity, both geographically and investment type wise?

ZEFF: Our focus is making investments in multifamily housing, and we do this in seven core markets: New York, Washington D.C., Denver, Seattle, Northern California, Southern California and Hawaii. We look at both acquisition/renovating and development opportunities within the sector and compare them, intending to identify the best risk adjusted returns. We seek to have diversification across our geography and types of deals.

“We believe that the national economy will be characterized by regional winners and losers�

RON ZEFF, FOUNDER & CEO, CARMEL PARTNERS

Our primary business is buying existing apartment buildings and investing in renovations to reposition the property and increase value, as well as ground-up developments. Currently, we are expanding our ground-up development business, as we believe these deals will offer very compelling risk adjusted returns. We also continue to invest in multifamily debt instruments.

ZEFF: We continue to stick to our discipline of identifying and structuring what we think are the best risk-adjusted investments in the multifamily space. Recently, this has led us to increase our ground-up development pipeline, which we believe will continue into 2015. Beyond that, we will continue to be active in the market and seek out the most compelling opportunities to invest in multifamily, but it is hard to predict what that will look like in 2016.

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PHOTO COURTESY OF CARMEL PARTNERS

TR: What is in your pipeline in 2015 and 2016? How are you approaching the market over the next 24 months?

Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

WHAT EXCITES me about 2015? A lot: New construction. New construction. New construction. The average office building in San Mateo County is 30 years old. Today’s modern urban tenants are screaming for new product. “Don’t take me to my dad’s office building” is a common tread with companies today. New construction and major building rehabs are all possible due to the ongoing market momentum; a brisk, growing job market and economy; continued strong VC funding feeding our region and the wide spread influx of migration into the Bay Area (and in particular San Mateo county). The growth from many renowned industry-leading and established companies as well as an abundance of startup companies in bloom is all very exciting for us heading into 2015. Certainly we are also in a very competitive climate, but that in itself is also what gets me up each morning.

Worries? Heck, in a market like this, there’s no time to worry. It’s all about capitalizing on today’s market conditions for our clients. In a market like this, it is important that we identify clients’ needs and provide accretive solutions, which typically requires constant adjustments to the business plan. Data and indicator tracking on a daily basis will remain critical to be able to adjust recommendations and projections quickly. This will allow clients to make well-educated decisions on their real estate needs. While the vibe feels great going into 2015, it’s still very important for us as service providers to stay on top of our game and remain plugged in to any potential pendulum swings (shifts) that may arise, whether from global or homegrown issues.

JORDAN ANGEL DIRECTOR HFF

MIKE MORAN MANAGING PRINCIPAL CASSIDY TURLEY

WHAT EXCITES me about 2015 is cheap, accessible, debt and equity capital coupled with continued tenant demand. Whether we are talking about life insurance company lenders, banks, or CMBS, interest rates are low and the Bay Area remains one of the most desirable markets to make loans. Commercial real estate equity options are plentiful given the influx of foreign and institutional capital to our region proving this out as a top tier international market.

Thanks to the unique factors that exist in the Bay Area, the new economy, which includes the technology industry and the developing growth of the Internet of Things, thrives here.

We have a diversified base of companies supporting our economy with the ability to grow through the entrepreneurial spirit that has always existed in San Francisco.

Two things worry me in 2015, our cost of living and foreign market volatility. The drastic cost of living increases over the last few years not only serves to push people out of the Bay Area but will also magnify cyclical bumps in the commercial real estate market. To be sustainable, our housing stock must keep up with our economic growth. A foreign slowdown, particularly in China, could negatively impact our commercial real estate market through decreased capital inflow as well as cause a drag on global growth that could import deflation.

THE TIGHT market in San Francisco and relatively cheaper housing costs will create tremendous opportunities for well-located suburban markets, especially those near transit and amenities. Investors will focus there as conditions improve and returns remain strong.

Housing costs and lack of available space of significant size will cause tenants to seek well located office space in close-in markets like Oakland and Emeryville and in outlying markets with strong amenity bases like Walnut Creek, Pleasanton, San Rafael and along the Peninsula.

GEORGE ECKARD | EXECUTIVE DIRECTOR | CUSHMAN & WAKEFIELD

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CHERYL O’CONNOR

EXECUTIVE DIRECTOR, HOMEAID NORTHERN CALIFORNIA

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PHOTO BY LAURA KUDRITZKI

Cheryl O’Connor: “The region has created more than 300,000 jobs since 2011, but permitted only 62,000 additional homes.”

PHOTO BY LAURA KUDRITZKI

Prosperity drives up rent, making it harder for low-income renters

NOW NEEDED MORE THAN EVER CHERYL O’CONNOR is executive director of HomeAid Northern California, a non-profit founded in 1999 as the charitable arm of the Home Builders Association of Northern California. HomeAid has built shelters for the transitionally homeless in nearly every county in the San Francisco Bay Area in collaboration with the homebuilding industry and its vendors, partners and suppliers. In addition to providing a safe, comfortable home, the shelters typically offer counseling and job training as core components of their programs. Prior to joining HomeAid in 2011, she ran O’Connor Consulting with a focus on management and marketing strategies for homebuilders.

TR: What is HomeAid, and how long has the organization been active in the Bay Area?

O’CONNOR: Formed 15 years ago as the charitable arm of the Building Industry Association of the Bay Area, HomeAid’s mission is to build new lives for homeless individuals and families in Northern California. HomeAid accomplishes its mission through its role as a conduit between the building industry and service provid-

ers, spurring new partnerships that build and remodel housing and shelters for the homeless and people in need throughout the nine-county San Francisco Bay Area.

HomeAid has completed 25 housing projects valued at $14.5 million and collected labor and material donations worth more than $7 million.

TR: How did you become involved with the organization?

O’CONNOR: Joining HomeAid was a natural fit. I have worked in the home building business for more than 35 years, having spent the majority of my career in executive sales and marketing positions.

When I was appointed executive officer of the Building Industry Association of the Bay Area in 2008, I sat on the HomeAid board of directors and became an ardent supporter. When I was offered the HomeAid executive director position, I was thrilled knowing that I would have the opportunity to transform my many building industry relationship into even more housing for families in the Bay Area.

TR: What are some of your key projects here in the Bay Area? How large of a geographic area do you cover?

O’CONNOR: HomeAid Northern California covers the nine-county Bay Area. Our flagship projects include Oma Village in Novato, in partnership with Homeward Bound, and Nika’s Place/ DreamCatcher in Oakland. Oma Village is a brand new contemporary, green, affordable housing project in Marin County that will house 14 formerly homeless working families in Marin County. Nika’s Place will shelter homeless teens and sexually exploited minors in a safe haven in Oakland. HomeAid and its partners also built the residences at Shepherd’s Gate shelter for women and children in Livermore, and construction is underway on the Mission Solano Bridge to Life shelter buildings for homeless families and individuals.

TR: How involved is the real estate community in the initiatives driven by HomeAid? O’CONNOR: The HomeAid board of directors is comprised of the principals of most of the major home building companies in the Bay Area including Shea Homes, Richmond American Homes, Ponderosa Homes, Brookfield

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Cheryl O’Connor

“I wish more people would truly appreciate how philanthropic the building industry is to people in need” CHERYL O’CONNOR, EXECUTIVE DIRECTOR, HOMEAID NORTHERN CALIFORNIA

TR: As the economy around us improves and unemployment decreases, what

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effect does that have on your organization and the people it serves? Does the need for your services diminish or does it keep growing steadily?

O’CONNOR: We are fortunate to live in one of the most prosperous metropolitan areas in the world, and if you are in the higher income brackets, then you can afford to live here comfortably. But with that prosperity comes an even greater demand for HomeAid and its services.

Here’s why: The region has created more than 300,000 jobs since 2011, but permitted only 62,000 additional homes.

The restricted housing supply drives up home prices and rents, which leaves more lower-income people struggling to make ends meet. In other words, it is a lot easier to become homeless in the Bay Area than many people might imagine.

HomeAid partners with service providers that help people who have become homeless or are at risk for becoming homeless due to circumstances such as job loss, medical issues or domestic violence. They also help veterans returning from combat, domestic violence survivors, emancipated foster youth and families caring for a child with major health issues. HomeAid cannot build or remodel shelters and permanent supportive housing fast enough to meet the overall Bay Area need. And it is not only people in desperate situations such as the homeless who need affordable housing, either.

But no housing—affordable or not—is free. Asking the home builders and ultimately, the homebuyers, to subsidize the

vast jobs-housing gap will only widen the affordability chasm further. John Burns Consulting just mentioned in a study that the city of Houston, Texas, built as many single-family homes last year as the entire state of California! And that is why homes in Houston are affordable to the majority.

Ideally, the Bay Area would encourage every community to build more housing for all income levels, which would increase the supply, stabilize prices and improve affordability. We have created the problem we are experiencing in the Bay Area with our constrained supply and no-growth attitude.

TR: What are some of your organization’s priorities for 2015?

O’CONNOR: HomeAid Northern California builds and remodels five to seven projects each year and helps hundreds of low-income and homeless Bay Area residents with housing. Next year, HomeAid will focus on replicating in other communities its successful projects such as Oma Village in Novato to provide permanent supportive housing.

With major home builders’ support, HomeAid will seek to broaden the Bay Area conversation about solving our region’s housing deficit and truly provide housing for all. I have worked in all segments of the building industry, and I believe we can and should have meaningful collaboration between affordable housing developers, commercial developers, market rate developers and apartment builders to provide a menu of ways to build

PHOTO BY LAURA KUDRITZKI

Homes, DeNova Homes, KB Homes and Warmington Homes. HomeAid also recently added more commercial and apartment builders to its governing board, including XL Construction and Lennar Multi-Family, which will help us build higher density project in the urban core.

In addition to serving on the HomeAid governing board, these industry leaders act as builder captains during the planning and construction phases of the shelter and affordable housing projects at no cost to the projects. The value of the contributions from builders, subcontractors and suppliers totals more than $7 million in donations since HomeAid formed 15 years ago.

To help the future residents of the new housing successfully rebuild their lives, HomeAid also partners with service providers including Homeward Bound and STAND! For Families Free of Violence, which provide services and support to the residents. The Building Industry Association of the Bay Area also gives us tremendous support with in-kind donations of rent and other support.

Most of the building industry leaders who make such significant financial and leadership contributions to people in need through HomeAid never publicize their efforts. But Bay Area communities should know that homebuilders are quietly giving back. I wish more people would truly appreciate how philanthropic the building industry is to people in need.

more housing. It has been done before. The BIA Bay Area compiled a white paper called “On Common Ground” in 2005 in partnership with the Non-Profit Housing Association that addressed ways to increase the housing supply. We need “On Common Ground 2.0.”

announcing

OUR 2015 BOARD OF DIRECTORS

TR: What can the real estate industry do more in this region to support these goals?

O’CONNOR: The real estate industry can collaborate in crosssector partnerships and include for-profit builders, developers, commercial developers and builders, affordable housing builders and apartment builders to come together with solutions to house Bay Area residents. Providing housing for all will not happen by simply adding impact fees to market-rate development, which just adds more cost to housing, raises rents and housing prices, reduces supply and does not get us to the solution of adding thousands of units. Housing for all has to come from a variety of ideas and sources, like cap-and-trade funding, state funding, public/private partnerships, regional funding measures and housing funds.

We have the best and brightest working here in the Bay Area.

Why can’t we come up with solutions to the housing crisis?

Housing is a social issue, and it is everyone’s responsibility. Our children and grandchildren will not be able to live here unless we find solutions. Why can’t we create something like Seattle did in 1981? Its voters approved one bond and four levies to create affordable housing, which has funded over 10,000 affordable apartments for seniors, low- and moderate-wage workers, and formerly homeless individuals and families, plus provided down-payment loans to more than 600 first-time homebuyers and rental assistance to more than 4,000 households.

It is with great pleasure that we present our 2015 Board of Directors.

President-Elect / Delegate Elizabeth Swift, F&M Bank Past President/Director-Sponsorship Holly Neber, AEI Consultants Treasurer Linda Giffin, Argo Insurance Brokers Secretary Cheryl Hayes, Bank of the West Director - CREW Cares Sandra Weck, Colliers International Delegate/Director - Membership Teresa Moss Fluegel Chicago Deferred Exchange Company

TR: What are you looking forward to in 2015?

O’CONNOR: HomeAid is looking forward to completing two of its major projects: Oma Village will house 14 formerly homeless working families in Novato, and Nika’s Place will shelter 16 homeless teens and sexually exploited minors in Oakland. We wish it could be more. These projects are just a drop in the bucket compared with the need.

I am also looking forward to collaborating with the building and development communities to develop and implement ideas, and possibly legislation, to finally put a major dent in building more affordable housing and housing for all.

President Dana C. Tsubota, DeNova Homes, Inc.

Director - Programs Kim Scala, Scala Law Director of ECHO Andrea Landsberg-Reeder Sunset Development Company SPECIAL THANKS TO OUR 2015 SPONSORS PLATINUM SPONSOR

GOLD SPONSORS

TR: What challenges do you anticipate having in the next year?

O’CONNOR: Capital funding for shelter development and affordable housing development remains limited, especially in the wake of the state’s dissolution of redevelopment agencies and a loss of $250 million in funding per year. HomeAid has helped fill the gap for the smaller service agencies and shelter providers, but we need many more funding opportunities. Affordable housing is both expensive to build and subsidize, and the residents may need supportive services for years. We need a permanent and reliable source of funding to take care of our most vulnerable residents or we risk becoming a region better known for its failings than its successes.

SILVER SPONSORS

East Bay CREW always welcomes new members and inquiries.

For more information go to www.eastbaycrew.org

SHAKE IT UP SAN FRANCISCO BAY AREA

CA

Northern California attracts the world’s leading visionaries — just like you, innovators and fresh thinkers who work tirelessly to find the right mix of ingredients that will change the way we see the world. At Colliers International, we’re passionate about finding the perfect blend, too. Our professionals combine knowledge, creativity and insight in equal measure to execute real estate strategies that align with your growth plan.

Are you ready to shake it up? colliers.com/norcal

Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

2015 WILL be the East Bay’s turn. The San Francisco and Silicon Valley job creation boom will continue through 2015, with real estate prices causing many tenants, developers and investors to look at the East Bay. The main economic drivers including the Port of Oakland, refineries, bio tech, government labs, health care, multifamily, housing, retail and manufacturing will also increase job growth helping real estate in the East Bay. Concerns on the horizon include housing becoming too expensive for the working class, beginnings of anti-growth and when do we reach the top of the economic cycle before possible market corrections.

EDWARD DEL BECCARO | MANAGING DIRECTOR | TRANSWESTERN

WHAT EXCITES me the most about 2015 is the continuing evolution and maturation of San Francisco neighborhoods. That will be exciting to watch through 2015 and beyond.

Given the large investments in retrofitting existing buildings and new developments, Mid Market, Transbay and Mission Bay neighborhoods are coming to life more and more every year and adding to San Francisco’s vitality.

The potential depletion of Prop M, which allows office product to be constructed and converted, in San Francisco continues to worry me. The impact of an inability to add significant new supply would not only challenge growing tech companies, but likely negatively impact average businesses in San Francisco, as we would anticipate a sharp rental rate increase in 2015 across all real estate sizes and classes if Prop M depletion occurs.

ELIZABETH HART SENIOR VICE PRESIDENT NEWMARK CORNISH & CAREY

We are in the biggest commercial real estate construction boom that we’ve seen probably in a generation, and Green building standards are very much part of the mix, really almost universally. To a degree, new construction is the low hanging fruit for Green building. I am hopeful that going forward we will see energy efficiency improvements become just as ubiquitous with Silicon Valley’s base of existing buildings.

What worries me about this market is that I get the sense that there is a lot more ‘shadow space’ out there than normal. Some big deals have been cut with the tenant immediately putting a big chunk of their future growth space on the sublease market (Box, Evernote, plenty of others). Others I’m sure have sizable supply simply banked for the rapid growth they assume will continue. I don’t think this puts a chokehold on growth in the near term. In the short term, quite the opposite—it does keep available inventory tight, maybe tighter than it should be. What would concern me is if we start to see a rapid rise in available sublease space as a percentage of the overall market. That could negatively impact rents in a big hurry.

MIKE COBB SENIOR VICE PRESIDENT COLLIERS INTERNATIONAL

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FOURTH ANNUAL

Real Estate and Law

(REAL) Symposium

1:00 PM - 5:30 PM FOLLOWED BY NETWORKING COCKTAIL RECEPTION

The REAL Symposium provides real estate and business professionals with the opportunity to engage in discussion with industry leaders on cutting-edge trends, challenges and legal issues pertaining to the industry.

PAUL BREST HALL STANFORD UNIVERSITY BUILDING 4, 555 SALVATIERRA WALK STANFORD, CALIFORNIA 94305

Visit our website to view full agenda and register.

www.REALsymposium.org

GOVERNMENT

OUTLOOK

PHOTO BY LAURA KUDRITZKI

KELLY KLINE 44 | DAN GEIGER 49

San Francisco’s City Hall photographed from Van Ness Avenue. (See story on page 49.)

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KELLY KLINE

ECONOMIC DEVELOPMENT DIRECTOR, CITY OF FREMONT

Kelly Kline photographed at Thermo Fisher’s new diagnostic center, which has given her a lot to smile about.

FREMONT’S FORTUNES RISING AS THE city of Fremont’s economic development director, Kelly Kline serves as a liaison to the business community.

She has worked in municipal government for the last 20 years, concentrating on downtown revitalization, retail recruitment, corporate retention and small business development. Kline is a past chair of the Silicon Valley Economic Development Alliance, a regional collaboration to promote Silicon Valley as a dynamic place for business.

TR: The city of Fremont has had a long history of industrial development and manufacturing, but now there are plans to expand the role the city plays in the Bay Area through the Warm Springs/South Fremont Community Plan. Can you please give us an overview of this project and the timing of its delivery?

KLINE: Warm Springs represents an opportunity that is unprecedented in the Bay Area—an 850-acre Innovation District (http://www.thinksiliconvalley.com/innovation-district/) that is more than double the size of Mission Bay. Already anchoring the district is Tesla Motors, who is reinventing manufacturing in their 5-million-square-foot factory. By the end of 2015, BART will open the new Warm Springs/South Fremont Station, the only station between Oakland and San Jose functioning as a major employment center. Our new community plan calls for a greater density and mix of uses, including up to 4,000 new housing units, 20,000 jobs and related amenities. A new Innovation Way will be the new

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signature address for South Fremont. We expect that much of this development can and will occur in the near term.

TR: Have there been other projects that have come forward as a result of the Warm Springs/South Fremont Community Plan?

What are they?

Big plans could transform East Bay city into an innovation hub and stretch northern boundary of Silicon Valley

KLINE: Private and public investment has started in earnest.

Thermo Fisher cut the ribbon on their new diagnostics center just south of Tesla. Their $85 million investment is the largest in their company history.

Companies such as Lam Research, Delta Products and Seagate are also investing millions into the expansion of their companies and expect to reap the rewards of adjacency to the city’s transitconnected innovation hub.

On the public side, the city of Fremont is itself investing in key infrastructure including a new bike/pedestrian bridge that will connect BART to the new Innovation Way, the center of the

TR: The housing component is also a very important part of it, and Lennar is one the companies that will lead the charge through its redevelopment of 112 previously industrial acres around the Warm Springs District. What opportunities does Fremont provide for home building and expanding the very tight housing stock our region has?

KLINE: Warm Springs alone can accommodate up to 4,000 housing units, and downtown Fremont can accommodate 2,500 more.

A large portion of the Warm Springs units will be on the Lennar site, in much higher densities than have traditionally been built in Fremont. The introduction of housing into this traditional industrial zone is a strategic play. Vital innovation districts inter-mix commercial development with residential units to create that live/ work environment that is desired not only by millennials, but by the rest of us, too!

TR: What are some of the city’s priorities over the next few years as these plans come to fruition?

Innovation District. The city has funded the conceptual and final design of the Bridge and the plaza. The plaza is designed to provide a strong public space that will encourage vibrant interaction, entertainment and retail options. Construction is anticipated to be fully funded through the recent voter approval of transit Measure BB. Last but not least, the city has received preliminary mixeduse development plans from both Lennar and Toll Brothers.

Combined, they will develop approximately 150 acres of land surrounding the new BART station.

TR: Are the residents on board with this project? Have you seen resistance to the initiative?

PHOTO BY LAURA KUDRITZKI

KLINE: The Fremont community has been involved in planning for this area since the NUMMI plant closed in 2010, taking cues from the city’s General Plan, which calls for Fremont to embrace a more “strategically urban” approach, especially near its transit hubs. During the downturn in the economy, Fremont used this time to plan for growth that would increase its innovation profile and secure its economic future. The community has largely embraced this plan, especially with the commitment of near-term developers to fund, and build, a new elementary school within the Innovation District.

KLINE: Fremont has a sense of urgency to move the Warm Springs and Downtown Districts as far along as possible. Our priorities fall into three categories: infrastructure, public/private development partnerships and innovation.

Our infrastructure projects encompass everything from iconic bridges, to grand boulevards, to public plazas to more operational items such as shuttles and bike lanes. And since we can’t do it all, we are relying on public/private partnerships to provide the catalyst projects that will spur more development over time. This includes our work with Lennar, which is in progress, and with TMG [Partners] and Sares Regis, who will build the first block of Fremont’s new Downtown along Capitol Avenue.

Last but not least, we are working on the “intangibles” that will provide the connective tissue, the coolness, and the community that will breathe life into this significant financial investment.

This includes everything from nurturing our emerging arts scene (check out FUSE – Fremont Underground Social Experience; http://bit.ly/1tL1OLa) to conducting Innovation EcoLabs, which enlists a broad range of Silicon Valley stakeholders to help Fremont strengthen its innovation ecosystem in Warm Springs.

TR: Where do most of Fremont’s inhabitants work? Do you consider yourself a bedroom community, and is that something that the city would like to change?

KLINE: Fremont has a fairly even jobs/housing balance in that the daytime population is similar to its residential population.

However, because of Fremont’s central Bay Area location, it still has its fair share of commuters. We estimate that about a quarter of our residents work in Fremont, although the City’s robust

“The cooperation among economic development professionals in the Bay Area would probably surprise most everyone. We are all under-resourced and rely on each other to share best practices.” : KELLY KLINE, ECONOMIC DEVELOPMENT DIRECTOR, CITY OF FREMONT

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Kelly Kline

“The Bay Area functions by default as a “virtual city” of more than 3 million” KELLY KLINE, ECONOMIC DEVELOPMENT DIRECTOR, CITY OF FREMONT

plans to add jobs in Warm Springs will only improve that ratio over time.

TR: What are the obstacles that the city faces in light of these plans that it has to mitigate?

KLINE: Now that we have a solid plan to manage school impacts, the next challenge for Warm Springs is to focus on transportation. We expect BART to help mitigate concerns about congestion, especially once the connection is made to Milpitas and north San Jose in fall 2017. Here again, the passage of Measure BB, along with the city’s traffic impact fees, will help fund many improvements to roads that will enhance access and circulation throughout Warm Springs.

Our other challenge in the post-redevelopment era is financing.

However, we haven’t let that stymie our plans. The city has a portfolio of land assets that we will be taking to market over the next two years. Additionally, we will be working in partnership with developers to facilitate infrastructure financing districts as well as applying for grants to leverage these investments.

KLINE: I’ve previously worked in environments with more established reputations, whereas Fremont’s identity is going through a stunning transformation as an emerging stealth player in Silicon Valley. Much of my time is spent introducing investors to this

TR: Are the cities in the region more cooperative today than they were in the past? Is that one of the obstacles that the region faces, and could it affect development in the future?

KLINE: The cooperation among economic development professionals in the Bay Area would probably surprise most everyone.

We are all under-resourced and rely on each other to share best practices. We also understand that our local economies are very much interconnected, and that our real competition lies outside the Bay Area. However, we can always do more regionally, and many issues demand that kind of collaboration: transportation, affordable housing and workforce development, to name a few.

The Bay Area functions by default as a “virtual city” of more than 3 million. It’s time to tap into our collective assets for the greater good of the region!

TR: What else should we be asking that we are not asking?

KLINE: I’m often asked about Fremont’s demographics, which are truly global and add an extra dimension to our city, including the dining scene! If you’re wondering about my favorite lunch spot in Fremont, I’d recommend Shalimar in Walnut Plaza.

PHOTO BY LAURA KUDRITZKI

TR: You previously were redevelopment manager in Cupertino, and before that were downtown manager for the San Jose Redevelopment Agency. What challenges does Fremont have that are different than Cupertino’s and downtown San Jose’s?

market opportunity or changing their perceptions about the city.

Our economy has evolved from an old-style industrial city into a center for advanced manufacturing and high-growth, hardwareoriented industries such as clean technology and biomedical devices. It’s happened so quickly that market perceptions haven’t kept pace. That’s why we created ThinkSiliconValley.com as a way to tell our story directly to the business audience.

Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

WHAT EXCITES me most about 2015 is the continued growth and development of what was once considered secondary or even tertiary markets. With so much demand coming from larger/established companies in addition to the rapid growth of younger/venture funded organizations, it will be interesting to see how some of these submarkets adjust to this uptick in demand and how the older properties in these cities are re-positioned structurally and aesthetically.

What I worry most about in 2015 is how companies will deal with both the rising costs of construction for tech tenants (due to the increase in overall construction and additional costs to meet the revised Title 24 code) and the ever-bullish mindsets of Silicon Valley landlords who will be pushing the length of lease terms far past any reasonable visibility for a high growth company.

In 2015 we will likely see some fallout from the competitive tech industry in that not every startup that has made a big bet on space will actually be the next billion dollar success story and younger, venture funded companies may begin to give space back across various geographies. As an example, the rapid growth and massive expansions of so many high growth companies we have seen over the past few years in from Palo Alto to San Francisco will be hard to maintain across the board, and it will be interesting to see what happens to our commercial real estate world once companies begin to shed space as they adjust their footprint. A few high profile situations like this may start to have a broader impact on real estate decision-making.

RHONDA DIAZ CALDEWEY MANAGING DIRECTOR PRINCIPAL TERRANOMICS

HUGH “SCOTTY” SCOTT MANAGING DIRECTOR JLL

WHAT EXCITES me the most about 2015 is in the retail front, we are seeing so many innovative concepts emerging alongside the creative energy we have going on in the tech world: food emporiums of all sorts and cultures, the craft beer movement with lumberjack baristas, new-era private clubs, the online retailers opening up brick-and-mortar showrooms, the continuation of international retailers choosing San Francisco as an entry point, and our mecca of world-class culinary talent.

Change, cycles and disruptors are inevitable. Every time it’s different. Building the right foundation to navigate anticipated change is the challenge.

The boom is creating jobs, a growing residential, daytime population and visitor growth. Demand is high for retail, restaurants, housing and office space. There have been major cultural shifts in San Francisco before…the beats, the hippies, jazz and funk music…and this era will go down in history as another substantial one. The new-wealth hoodies, the homeless, the too-tight suits and cropped pants strut alongside plaid shirts and Edwardian moustaches, old wealth baubles, long-time natives, power suits and politicos. The sidewalks are crowded, and on their way to becoming even more so. San Francisco’s pioneering spirit once again is paving new frontiers for not only what the City will become, but will impact future generations beyond our seven square mile borders.

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CHIEF OF MARKET STRATEGY, SASB

DAN GEIGER

Dan Geiger is greener than ever; photographed at 888 Brannan, San Francisco.

FROM ADOPTION TO ACCOUNTABILITY

PHOTO BY LAURA KUDRITZKI

San Franciscobased SASB looks to reshape ways in which companies report their sustainability practices

DAN GEIGER was the first executive director for the local chapter of the U.S. Green Building Council of Northern California, the organization that created the Leadership in Energy and Environmental Design program, or LEED. After seven years in that position, he left this past November to become chief of market strategy for the Sustainability Account Standards Board. Geiger is a social entrepreneur with more than 25 years of start-up, executive and leadership experience and has consulted on business planning, strategy and organizational development in the non-profit, for-profit and philanthropy sectors.

TR: You recently moved on from your role as executive director of Northern California’s USGBC chapter to lead the adoption strate-

gy for the Sustainability Account Standards Board. What should the real estate industry know about SASB? GEIGER: SASB is a non-profit organization that arose to fill the market need for standardized sustainability information. SASB develops standards for public companies to disclose material sustainability information in their filings to the Securities and Exchange Commission. With the data resulting from SASB standards, investors will be able to compare the sustainability performance of companies within an industry and direct capital to the most sustainable outcomes.

SASB will issue standards for 80 industries in 10 industry verticals, or as SASB calls them, sectors (five are completed).

In regard to the real estate industry, the

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Dan Geiger standards are organized among different sectors, e.g. real estate and AECs are in infrastructure, there is a separate sector for renewables, construction materials are in non-renewable resources, and so on. A good way to learn about this is to check out the SASB Standards Navigator, at www.sasb.org.

My role at SASB is to drive market adoption and identify and provide the services and support that companies, investors, lawyers and accountants need to use and implement SASB standards.

GEIGER: I’ve known Jean Rogers, SASB’s founder and CEO, for several years from my work with USGBC. She was a Principal at ARUP. When Jean was in the formative stages of getting SASB started, we had lunch and talked about her vision for corporate accountability through sustain-

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TR: Over the last seven years, you worked hard on sustainability adoption. Which big moments made you especially proud?

GEIGER: USGBC-Northern California Chapter has done so many great things, it’s hard to single out a few. But at the risk of leaving something out, here are my top three.

First off, the overall growth in the organization, membership and movement are truly impressive. USGBC’s impact on the built environment, public policy and sustainability overall is phenomenal.

Another highlight was The Road to

Greenbuild in 2012, when we were the host chapter for Greenbuild in San Francisco— the best Greenbuild ever! Also that year, we developed the California Best Building Challenge, a Clinton Global Initiative that challenged leading companies to reduce energy, water and waste in some of their existing facilities by 20 percent in two years. Some of the buildings in the Challenge were already LEED certified, so this initiative inspired them to really stretch and reach for the sky.

My proudest moment was the launch of the Building Health Initiative last fall.

This initiative is truly a game-changer.

We mobilized more than 30 corporations and institutions from multiple sectors, including global leaders among real estate owners, tech companies, product manufacturers, health care institutions and the legal profession—to advance green building as a health issue. The enthusiastic and passionate response of our partners was overwhelming. Some of them jumped on board without skipping a beat. Standing on stage with our founding partners at

PHOTO BY LAURA KUDRTIZKI

TR: You had been involved with SASB prior to taking your new post. How did you get started with the organization, and what have your roles been to date?

ability disclosure. I told her I thought that this is a fantastic idea, and that such an organization was crucial to moving the market. She asked me to join the Advisory Council. I did, and I’ve been following SASB’s work ever since. So we recently had lunch and found what we think is a great match between SASB’s current priorities and my strengths, particularly my experience with USGBC.

“SASB has worked amazingly fast to develop rigorous sustainability accounting standards for 35 industries in five sectors. By 2016, we will have issued standards for a total of 80-plus industries in 10 sectors.”

DAN GEIGER, CHIEF OF MARKET STRATEGY, SUSTAINABILITY

Green Building Super Heroes last year announcing this initiative was one of the most inspiring moments of my life.

TR: Market adoption seems like the natural next step after the creation of sustainability accounting standards. What are your priorities for the coming year or two?

GEIGER: SASB has worked amazingly fast to develop rigorous sustainability accounting standards for 35 industries in five sectors. By 2016, we will have issued standards for a total of 80-plus industries in 10 sectors.

So we are now ready to go to market.

The organizational priority I will be working on is corporate adoption of SASB standards. We’re already in conversations with leading companies in several industries and are setting goals to formalize commitments with others.

In order to gain widespread adoption, we’ll need to build an ecosystem of intermediaries and service providers, such as the Big Four accounting firms, securities lawyers, investors, stock exchanges, soft-

ware companies, consultants and more.

This is one of the strategies I’ll be driving as well. We can learn a great deal about this from USGBC’s model and achievements in building its diverse and passionate network and membership.

Like USGBC, SASB is about “all in.”

I’m tremendously excited about working with the SASB board and executive team to build these partnerships. We’re poised for success, much like LEED was when I started with USGBC more than seven years ago. We have great support already. For example, Michael Bloomberg recently became chair of the board. Two former chairs of the Securities Exchange Commission are on the board, and PwC just donated $1 million and six months of pro-bono work to develop implementation tools and guidance for companies to integrate SASB into their disclosure processes.

I could go on, but you get the picture.

TR: SASB has issued standards for 35 industries in five sectors, but real estate has not yet been addressed. When can we expect to see a standard for the real estate industry?

GEIGER: Real estate is part of the Infrastructure sector. We are now recruiting industry working groups— which will convene in May 2015—to advise on standards development. I think many USGBC members will be interested in participating in this process. We’ll need their expertise.

The full standards research, review, commenting and approval process takes about a year. The target date for release of provision Infrastructure standards is October 2015.

TR: When you do create an industry brief for real estate, will you discern commercial real estate from residential real estate or even from industrial real estate?

The Infrastructure sector contains five industries that relate to real estate and green building: infrastructure construction; architecture, engineering and construction; home builders; real estate owners and developers; and real estate investment trusts.

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SERVICES

OUTLOOK

PHOTO BY LAURA KUDRITZKI

SANDI JACOBS 54 | WILL LOFTIS 58 | PHIL MURPHY 62

One size (or one color) doesn’t fit all. (See story on page 54.)

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SANDI JACOBS

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PRESIDENT, SIDEMARK

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SANDI JACOBS is president of SideMark, which provides interior design, furniture services and workplace consulting.

SideMark serves a full range of commercial, government and institutional markets through distribution relationships with Teknion and more than 200 other manufacturers of furnishings, materials and workplace technologies. Jacobs, a certified interior designer, joined the office in 1989.

Now she and her brother, Bruce Paul, senior vice president of finance and operations, have purchased the company.

Imagining better spaces throughout the Bay Area.

TR: How did the decision to purchase the company from founder and CEO Randy Horton come about?

JACOBS: I thought owning SideMark wouldn’t be much different than running it. It’s only been two months, and I was wrong. It’s not about added responsibility or stress; that hasn’t changed much. It’s the opportunity to dream—“What if?”

What if we had a fleet of electric cars for our employees that helped them be more productive with their time and helped us have a smaller energy footprint as a company? The ideas keep coming, and they are exciting!

I started working at SideMark in 1989.

We were a small firm of five people, which we’ve grown over the last 25 years. I took over running the company six years ago and have been the CEO, Randy Horton’s succession plan. Whether it’s ambition or insanity, I haven’t determined yet. Maybe it’s a little of both. I am fortunate to have my brother, Bruce Paul, as my partner. He joined me in running SideMark a couple of years ago. His vast business experiences bring a clean perspective to our business in driving change for the future. This insanity must run in the family.

Sandi Jacobs: “We’re taking a curated approach to projects” PHOTO BY LAURA KUDRITZKI

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Sandi Jacobs

“Whether it’s ambition or insanity, I haven’t determined yet.

Maybe it’s a little of both.”

SANDI JACOBS, PRESIDENT, SIDEMARK

TEKNION SHOWROOM

TEKNION SHOWROOM

TR: As your Silicon Valley clients open offices in San Francisco and scale up to a larger footprint in the Bay Area, how does SideMark help them through that transition?

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SWA

as an organization. As we learn from our clients we work together in applying that knowledge to ourselves.

TR: Are you optimistic about 2015? Why?

TR: What will your biggest challenge be in 2015? How will you overcome it?

JACOBS: Yes, I’m very optimistic about 2015 for multiple reasons. First, the office isn’t going away. It is surely being redefined. We want to work with our clients to understand why and how they come together to work. Each client and project is different and each solution, team and services need to meet those unique client requirements. Clients in the Bay Area are pushing the envelope more than we see in other places in the country. This “front line” workplace design challenges us to do more research and be a collaborative resource for our clients and their design teams.

I’m also excited because it’s SideMark’s 30th year! We’re redefining ourselves, focused on disruption and transparency

JACOBS: To be seen as more than furniture. Selling a chair is not an exciting career. When I talk to our team about purpose, we discuss that we aren’t curing cancer and so what is our higher level purpose as an organization? We are part of a team creating the environments that people spend a significant amount of their lives in. We make work feel good!

We can overcome this by learning from our clients, influencers and the market.

This market is on the leading edge of workspace design. Changing needs create opportunities for new thinking and offerings. Our clients are looking for customized solutions that meet their individual needs as an organization.

PHOTOS BY LAURA KUDRITZKI, MARIKO REED, & SHERMAN TAKATA

JACOBS: Young talent wants the city life. They want to be in the action and be in a hip and cool place while they are young. Our clients know that their space is a tool to attract and keep top talent.

They are going to where the talent is. As you travel around the Bay Area, you can see construction going on everywhere.

San Francisco’s skyline is peppered with cranes. It’s an exciting time in the Bay Area, as many of our clients and potential clients strategize to meet a pent up need for space and growth.

SideMark is an engaged, active part of the team supporting our clients’ growth.

This team includes the design firm, project management firm and construction company; and is the dynamic force that brings the clients space to life. SideMark’s

portfolio of services is designed to ensure success for all of the business partners on the team. The partner stakeholders on a project become our clients as well.

CAMPARI

TR: As tenants keep pushing to reduce the square footage per employee, what challenges are becoming more evident that you are forced to resolve?

JACOBS: Visual noise. Our reduced workspace per employee has created collaboration, varied spaces to meet and work differently within the office. Now the challenge is: Where to do heads-down work and concentrate? Statistics say it takes 10 minutes to get absorbed into your work, and 20 minutes to get back to that level when you’re interrupted. Is collaboration coming at the cost of productivity?

Lower workstations were still allowing for visual privacy when seated. This reduced visual distractions, “visual noise,” when an employee is doing heads-down work. Today we’re seeing an increasing use of height-adjustable desking, a positive trend for allowing sit-to-stand work throughout the day. While height-adjustable desks are a positive trend in many ways, they also create new challenges to providing privacy.

Is there a possibility that providing

different workspace solutions for people with different work styles is in our future?

Can working remotely on a periodic basis provide the concentration workspace people need? We’ve been talking about the multiple generations in the workspace for years now. As we see more and more millennials [in the work place], will the current dynamics continue to change? These are all questions that industry experts are discussing and companies are evaluating.

In addition, the SideMark team members are pulling solutions from a wide variety of manufacturers from local custom houses to international online resources.

We’ve provided popcorn machines, golden gnome side tables, vintage Danish lounge furniture and so much more.

TR: What can the industry do better to support the changing environment of workplace design? Are you driving those messages back to your suppliers, and how receptive are they?

JACOBS: Velocity—things need to happen faster. Pair that with clients not wanting an off-the-shelf solution; this speed-tomarket drive brings its own challenges.

How do we work faster, better, smarter?

Our industry has bettered its lead times.

The process to design, plan and execute a client project is still a long cycle. This is counterintuitive to velocity. In many cases we’re the team of client, design firm, construction company and other stakeholders that has come together to solve these challenges collaboratively. It’s exciting to think outside the box and challenge ourselves within that process.

JACOBS: One size doesn’t fit all. Our focus with the client’s team is specialized in meeting the needs of each client.

We used to sell cubes and the question was, “What size and what color?” We’re taking a curated approach to projects now.

SideMark’s major manufacturer partner is Teknion, and they work with us collaboratively in customizing client solutions.

TR: What trends are you identifying in the industry that give you pause? How are you preparing SideMark to deal with them?

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WILL LOFTIS

VICE PRESIDENT & LEADER OF NORTHWEST HEALTHCARE SERVICES, JONES LANG LASALLE

ST. HELENA HOSPITAL, NAPA VALLEY

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Will Loftis: “There are still significant savings to be had in the construction and operation of healthcare facilities.”

PRIORITIZING HEALTHCARE WILL LOFTIS is vice president and leader of healthcare project and development services at Jones Lang LaSalle for the northwest region, which includes Northern California. He works out of the firm’s offices in San Francisco. Before coming to the global real estate services firm, he had been a design principal and project manager at SmithGroupJJR in San Francisco. Over a career of more than 30 years, Loftis has worked across Northern California, Boston and London. Loftis has taught classes in architecture at Cambridge University in the United Kingdom as well as at Northeastern University in Boston.

Loftis also is one of seven Burlingame residents appointed to that city’s planning commission.

After a career in designing healthcare facilities, a shift to the more strategic side provides a renewed perspective on the industry.

TR: What impact has the Affordable Healthcare Act had on healthcare development?

LOFTIS: Clearly, the impact of the ACA has yet to play itself out. A couple months ago we learned that in 2013 the cost of healthcare grew at its slowest rate in more than 50 years—some even say at the slowest since we started keeping track. While the ACA certainly played a part, it would be disingenuous to say that it’s even the primary cause. There are surely many factors at play. For example, we know that the cost of healthcare historically slows in a down economy. In any case, at the same time we learned that the Medicare costs that impact the public debt—the very thing we actually want to control—didn’t slow down.

Here’s the issue in a nutshell, as I understand it—and this is complicated stuff so I don’t want to overstate my understanding: Right now, the U.S. spends about 17 percent of GDP on healthcare, and if we do nothing it’s projected that percentage would rise to 30 percent of GDP around 2030. Since Medicare spending accounts for 20 percent to 25 percent of all healthcare spending, the increase in public debt due to healthcare spending would be onerous if not insurmountable.

So, this is the underlying reality that catalyzed the passage

of the ACA and has had an enormous impact on the action of healthcare providers across the board. In general, Medicare revenues to providers are set to fall because of the ACA, so the cost side will have to be managed by every reasonable means, and providers have aggressively started to do that. It’s probably fair to say that the primary response has been a move from inpatient to outpatient services because it’s much cheaper to provide care outside a hospital.

TR: Who are the thought leaders of healthcare development in the United States? Is California on the forefront of that evolution?

LOFTIS: There’s no shortage of really smart thinking about healthcare across the country and some of it is certainly in California. To start, you really can’t have a discussion about innovation in healthcare at all without Kaiser Permanente’s name coming up. They have been providing high-quality coordinated care for a very long time. They seem prescient in our current situation.

With regard specifically to healthcare real estate, providers are looking first to deliver high-quality care without building at all, if that’s possible. Buildings are expensive, and purpose-built healthcare buildings can quickly become functionally obsolete as they lag fast-paced advancements in medical technology. Add to this [that] there are always the additional risks that those buildings might be in the wrong place—because the market was misjudged, or the provider fails to capture sufficient market share, or because the population served changes over time. The decision about location is a key component of the equation.

It has become increasingly difficult to talk about healthcare real estate without talking also about the innovative thinking that will impact real estate decisions. Advances in so-called “mHealth, “mobile health” and “telemedicine” will likely have huge repercussions on how much and what kind of healthcare real estate gets built. For example, I attended an AIA-sponsored tour a couple years ago at a Sutter Health e-ICU—electronic intensive care unit—where an “intensivist,” an ICU physician, supervised the care of several hundred ICU patients across the state from a nondescript office suite where nurses and technicians monitored patient vitals via impressive technology workstations. Some of these patients were in very remote locations with no immediate access to an intensivist.

Specifically with regard to innovation in healthcare real estate, you can’t help but think of the move in very recent years toward

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Will Loftis

“Mergers and acquisitions benefit both parties.”

WILL LOFTIS, VICE PRESIDENT & LEADER OF NORTHWEST

so-called hospitals without beds, sophisticated ambulatory care centers that provide everything you might need in one convenient and accessible location: urgent care, primary care doctors, specialists, diagnostic imaging, laboratories, outpatient surgery…everything but hospital beds. If you need a hospital bed, you would be referred and admitted, but if the need can be met without admission, the need to build and staff expensive hospitals is diminished Kaiser built several of these on the east coast—they call them hubs, I think—and this also seems to be the Palo Alto Medical Foundation model, as I understand it.

TR: What are the general trends in hospital construction and development that are on everyone’s mind?

LOFTIS: IF we’re speaking strictly about hospital construction, it’s size and cost: How do we not overbuild, and how do we build cost effectively? But, as I said previously, the focus in healthcare real estate right now is on outpatient rather than inpatient facilities.

Since it’s very expensive to provide care in a hospital setting, and because hospitals are so expensive to build, there’s been a noticeable uptick in new medical office buildings and sophisticated ambulatory care facilities. This is especially true in California now that a lot of money has been spent building replacement hospitals built to comply with the state’s seismic mandate. These new facilities are being located very strategically in a rush to secure market share, but also very cautiously so that you don’t make a bet on the wrong location. Where and how much of what should I build? And if I am competing for market share, can I win?

It’s a real chess match.

Another broad trend is consolidation. Mergers and acquisitions benefit both parties. Large healthcare systems with money can capture broader market share, and smaller independent systems without access to affordable capital can undertake modernization or expansion projects otherwise out of their reach.

TR: Are there some regions in the world that we could/should be emulating?

LOFTIS: The answer to that question should be painful for Americans, I think. I just read one annual assessment of healthcare systems in 11 developed nations, which noted that the U.S. spends nearly twice as much money per capita on healthcare while we were ranked fifth in overall quality of care and eleventh in infant mortality. I saw another ranking that placed the U.S. thirty-seventh among health care systems. How can that be? That makes no sense at all. Either all the rankings are wrong or we should be emulating several other countries. Clearly something needs to change.

TR: Is the industry (hospital development, healthcare management) innovating fast enough or is there much copying of what seems to work for one system or another?

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LOFTIS: The industry is innovating as fast as it can, I think. Fast enough? That’s hard to say. With revenues set to become more constrained by healthcare reform, prioritization is key. There are plenty of things to be done still. There’s the rollout of electronic health records necessary to support coordinated care. That’s a very complicated and costly challenge. There’s the so-called “leaning” of caregiving processes—that’s the elimination of no- or low-value steps in the process of giving care to streamline the cost of care. There are mergers and acquisitions. It seems there’s no end to the things that might be pursued. But I would say that, for the most part, everyone seems to be working from the same playbook—evidenced by the fact you hear the same things said again and again at conferences and breakfasts—so that these many innovations are being broadly pursued.

TR: What worries you the most about the industry in 2015?

LOFTIS: I think we should all be most worried about the ability of government and industry to patiently and effectively make adjustments to the ACA to get where we need to be—that is, achieve the savings that absolutely have to be achieved. There was no question that something had to change. The course we were on was simply unsustainable. Did we do the right thing? Probably yes and no.

It seems highly unlikely we got it just right, and it seems highly likely that we’ll be course-correcting for some time to come.

The question arises whether or not we have the will and ability to do so.

TR: What are the industry’s biggest opportunities in the near future?

LOFTIS: There are still significant savings to be had in the construction and operation of healthcare facilities. In construction, many healthcare systems are already pursuing, or at least investigating, alternative project delivery systems. Design-build and lean construction methodologies are increasingly more common and will continue to be. On the operations side, we’ll continue to see an increase in the outsourcing of facilities management that became commonplace on the corporate/commercial side a decade or more ago. The really big opportunities to address the costs of healthcare though are related to technology, especially mobile technologies and telecommunications. A lot of time and money is being invested right now in enabling remote care so that consumers can get care where and when they need it. The biggest changes will be in the way healthcare is provided.

TR: You have recently transitioned from an architect role to lead JLL’s consulting efforts in this space across the Pacific Northwest.

What surprised you the most about that transition?

LOFTIS: It’s a bit early to say. I’ve just started making the transition now. I can’t help but observe how much more it costs to build in California—especially hospitals. That’s an ongoing challenge.

Arizona: Emerging Tech Hub for Bay Area Firms Talent Pool, Entrepreneurial Culture Perfect Fit for Growing Companies

B

ay Area companies looking to expand outside of California are quickly discovering Arizona’s innovation culture and strategic location are big draws for growth-minded CEOs. The Grand Canyon State has welcomed a burst of expansions from Bay Area businesses in recent months, from tech start-ups to established firms, which are taking advantage of Arizona’s low-cost of doing business and tapping into its skilled and available workforce.

Even the CEO and co-founder of San Francisco-based Zenefits, which Forbes called the “hottest start-up of 2014” said Phoenix “is poised to become one of the great tech hubs in the country.”

Last November, Zenefits’ Parker Conrad announced he was planning to create 1,300 jobs with the opening of new offices in Scottsdale, Ariz. Conrad said his cloud-based, human-resources company needed a strong talent pool and an entrepreneurial culture to support his rapidly growing workforce. He found it in Arizona.

“Arizona has a great culture for tech and supporting innovation,” he said.

Zenefits is just the most-recent Bay Area company to choose Arizona to advance its growth plans. Over the past year, four more Bay Area companies have made significant expansions in the Grand Canyon State.

The other companies that have joined this mini-

boom include: Gigya, a software development company whose technology is used by some of the country’s biggest brands to build better customer relationships; Prosper Marketplace, a peer-to-peer lending institution; Weebly, a website creation service targeting small businesses; and Silicon Valley Bank, which pledged to lend $100 million to high-growth companies in Arizona’s life-science and technology sectors.

But Arizona wants to make clear that its homegrown companies equally benefit from Arizona’s regional relationship with California. Leading Arizona’s economic development efforts, the Arizona Commerce Authority (ACA), works to build an environment where both states have enhanced business and cross-border trade opportunities.

For example, California is the world’s 9th-largest economy, presenting tremendous potential for Arizona companies that are looking to expand in the Golden State.

“Our focus continues to be building bilateral business relationships between Arizona and California,” said ACA President and CEO Sandra Watson. “We are also working with Arizona businesses that are looking to expand and export into new markets.”

The ACA has opened two strategically located offices in Santa Clara and Santa Monica that support expansion efforts in the northern and southern regions of California.

Arizona’s assets can’t be ignored.

• Its growing innovation culture led Fast Company in 2013 to rank Arizona No. 1 in the country for “entrepreneurial activity.”

• Arizona’s low cost of doing business and simplified tax system make the state a best place for business. o Arizona’s corporate and individual income tax rates are among the lowest in the United States – by 2017, corporate income tax will decline by 30 percent, for a final rate of just 4.9 percent. o Arizona has created a variety of tax programs that benefit companies in the state – no franchise tax, no business inventory tax and no estate tax. Arizona has experienced a 10-year trend in business property-tax reductions.

• The state boasts a young, skilled workforce that is continually fed by three world-class universities and the largest community college system in the country.

Advancing an innovation culture is what Arizona works to achieve every day.

The ACA is the single point of contact for businesses looking to expand and can help with a broad range of services from confidential site-selection, customized research, cost-analysis and coordinating local visits.

For more information, visit azcommerce.com.

PHILIP MURPHY

PRESIDENT & CEO, GNU GROUP

people. Then the clients started coming to us because signage is such a small part of the budget, and was low on the architect’s list: “We are looking for somebody who will basically plan it, design it, draw it, find somebody to build it, manage it. We want one set of eyes responsible for it.”

I think the reality is: Will people keep coming to us? If they do, we need to adapt.

We started training our project managers to take on those responsibilities. The design-build side of our business is now about 30 percent of our revenue.

Philip Murphy: “You’ve got to learn what things are in scale, out in the world...”

DIRECTIONALLY RESOURCEFUL

PHILIP MURPHY is president and CEO of GNU Group, a planning and design firm he joined in 1990 and acquired in 1994. The foundation of GNU’s practice is communications design—identification features that establish presence; sign systems that guide visitors; displays for merchandising products and services; identities to establish new brands; marketing programs that tell great stories and sell projects.

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TR: GNU has just celebrated its 40-year anniversary. What is new and what has stayed the same during these four decades?

MURPHY: We have always considered ourselves a professional service resource for real estate clients. That has not changed in 40 years. Our changes have always been in response to the dynamics of the real estate industry and markets.

The technology and materials are different, but it’s interesting in that those aren’t the demands from the clients. They are more outcomes of what is being developed into the buildings. The biggest change came about in the mid-’90s. We had clients that for years had done the traditional delivery systems, where we would act like an architect or interior designer. We would do the drawings, and they would find a sign company, and we would manage those

MURPHY: NOT at all. Our introduction to the world of real estate was a product of our early connection to SWA, a leading international landscape architecture, planning and urban design firm. It defined our area of specialization. Our clients have always been developers, owners, operators and managers of real property. The professions that shape their world (architects, planners, landscape architects, engineers and contractors) have always been a part of our client mix.

I look at the business probably differently than most designers do. Most designers think of a project. I think of markets.

Wherever the real estate market is going, that’s where we need to be. When I bought the firm and changed the business model in 2000, I focused more on the real estate market, and made sure, as the market was moving, that we were thought leaders.

Healthcare got significant. There was a time when it was 60 percent of our business. I think of us looking ahead, where is the market going and being responsive

IMAGE PROVIDED BY THE GNU GROUP; PORTRAIT BY LAURA KUDRITZKI

In its 40th year, the communication design firm leader looks at the everchanging landscape of the industry

TR: The company was spun off from a planning/landscape architecture firm in the early ’70s. Have you expanded your relationships across the industry since that time?

Has that been a difficult process for the evolution of GNU Group?

“I look at the business probably differently than most designers do.

Most designers think of a project. I think of markets.”

PHILIP MURPHY, PRESIDENT & CEO, GNU GROUP to those needs. Those needs come from architects and designers.

TR: At its core, GNU Group is a communications company. You enable your clients to visually communicate with their customers and make the experience of passing that information easier. How does this work in today’s ever-connected, digitally savvy society?

MURPHY: CREATIVITY is at the heart of what we do but delivering information in ways that best work for the users is fundamental. We’ve had to dig deep to figure out how to solve some of the communications problems, especially in healthcare. For years we developed sign programs, and it became clear when clients showed up on site or in the building they used our signage. We felt the real key to making that work is giving them that information before they get in the car. We now have the ability to give you a Google map to get to the site, to give you a text to say, “Park in Lot A, enter Building 2, go to Floor 3 and go to Department 202.” You can now print out directions before you leave, and the signs will match up to those directions.

We developed a web-based training program that we license to our clients, and they can push the information out to their stakeholders. That’s the Total Wayfinding System. It’s most meaningful in healthcare, but we are starting to see that in the corporate world, too.

We strive to employ technology that people need to experience, navigate and understand their environments.

Electronic, digital, Web-based, apps and many other emerging technological advances are all part of the mix, but ultimately, it’s about the customer experience.

TR: Are you optimistic about the industry as a whole in 2015? Why? MURPHY: WE are subject to the idiosyncrasies of real estate’s cycles. The current cycle is up, way up. Our work for corporations, developers and institutions has never been stronger, and there is nothing

on the horizon in 2015 that portends an early end to this cycle. 2014 will be the culmination of a 14-year business plan and a record year for us. In 2015 we will become an employee-owned company, so all GNUs can continue to share in GNU’s successes in the future.

What’s interesting about our particular field, there isn’t anybody who has a significant market share. We are able to jump on airplanes and do things.

TR: Are there any innovations that are emerging in your industry that will be transformative over the years to come?

MURPHY: TO be honest with you, I don’t know where the industry is going to be in 10 years, but it is not going to be where it is today. Technology is going to drive it. It’s not that you are not going to need signs, but you need to support them. Innovation will always come from opportunities to improve on the experiences of their customers. We see client responsiveness, technology, turnkey project delivery and thought leadership as continued drivers for us in the future.

We actually have our own installation crew. I never thought we would get into that business, but it allowed us to be more responsive to our clients when they asked for the turnkey. Certainly things are going faster. It is unbelievable how fast some clients need things to get them approved by the city.

When I look at our competitors, I think they continue to be challenged in the oldfashioned way in that when the business is good, they have X number of bodies, and when the economy gets bad, they shrink. We work really hard so that when it does get slow, how do we move into different markets?

TR: When you walk around the mall or an airport, do you find yourself overly critical? Is it a learning experience or are you frustrated?

MURPHY: MORE observant than critical.

There are some amazing things being done

in the environmental branding and wayfinding world, and while we are among the leaders with our Total Wayfinding System, there are always things to learn.

I have gotten a lot of kidding over the years from acquaintances who can’t understand my need to fondle signs. It’s my way of being up close and personal in understanding how things are done. We draw things on pieces of paper, and you’ve got to learn what things are in scale, out in the world. We work with cities and are told, “You can’t have a sign larger than 10 feet tall.” We need to get people to understand scale. The spatial relationship is critical.

We are continually working on language that is more common to people.

Healthcare has its own language with “MRIs.” How to you translate that? It’s not uncommon to hear that “Everybody knows it is the Murphy Cancer Center, why call it Building 1?” Because it’s easy to put “Building 1” on a sign.

If you think of the younger people today, they live on their mobile phones.

That’s where the information they want has to be. Then you have the individuals who figure it out on their own because they have a good sense of navigation. Then you have a population that is getting older who wants to grab the first person they see and ask, “How do I get to so-and-so?”

At Kaiser Oakland we just finished an electronic directory system. You press a button for what language you speak, and everything on that directory changes to that language. And you press a pad on that directory, and it transfers directions to your phone.

TR: What else should we be asking that we are not asking?

MURPHY: About the importance of what we contribute. Our work is a relatively small financial component of any property, but it has profound influence on branding, function, efficiency, and in many cases, projects can’t get permission to operate until we solve the code and ordinance requirements.

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Word on the Street

BROKER SPEAK WHAT EXCITES YOU ABOUT 2015?

NICK SLONEK PRINCIPAL & MANAGING DIRECTOR AVISON YOUNG

WHAT EXCITES me the most about 2015 is the Transbay Terminal and surrounding South Financial District area. It is in the most exciting commercial real estate market in the country and is arguably the most sensational development in the country. Avison Young represents some big users interested in locating there so we are getting to know it quite well. The architecture of the Terminal, upcoming retail amenities, high-end residential and surrounding office projects will truly solidify San Francisco as a world class, 24-hour city.

Affordable housing continues to be an issue in San Francisco. With the ever-increasing tech population continuing to flow into San Francisco, many companies are having a hard time paying the salaries needed for employees to afford living in San Francisco. Face it, not a lot of college grads are looking to live in suburbia these days. It is a real issue.

WE ARE at an interesting place in the innovation cycle for the retail sector; the strength of the market is moving that along quickly, forcing tenants, landlords and brokers to adjust quickly and stay on their toes. Those adapting the most quickly and those willing to take reasonable risk in innovation will flourish.

Change is inevitable and keeps our work exciting. I look forward to participating as retail, a very dynamic product type, continues to evolve. I expect to see more tension between landlords and tenants on issues like percentage rent and reporting sales as the shift to omnichannel retailing continues. I foresee an expansion of the trend of landlords using more unique and experiential retail to attract millennials in office and multi-family projects in addition to retail projects.

LAURA SAGUES SENIOR ASSOCIATE CBRE

ANDY ZIGHELBOIM DIRECTOR EASTDIL SECURED

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WE REALLY like the supply/demand dynamics in the Silicon Valley. In fact, one could argue we are significantly under developing. With over 13 million square feet of demand, including 22 tenants looking to secure 100,000 square feet or more, and 80 percent of the new development already committed, it’s hard to imagine getting over our skis. Once the remaining product that is out of the ground is delivered, this will represent just 1 percent of the overall inventory.

We’re also expecting to see another robust year of IPO activity. Of the nearly 600 firms that are in the IPO pipeline, approximately 55 percent of the those firms are Californiabased technology companies. And of those, most are headquartered in the Bay Area. This liquidity translates into significant increases in both headcount and space absorption.

I don’t think there are any new risks that we haven’t already contemplated recently (ie: traffic, housing, exporting jobs, geopolitical, etc). Perhaps there is some concern around Google’s rapid expansion within the market. If Google sneezes, the market could catch a cold. Another concern is local cities feeling pressure from constituents to raise impact fees to egregious levels.

YOU NEVER KNOW WHEN INSPIRATION WILL STRIKE. BUT YOU CAN BET ON WHERE. For more information

For 38 years, Wareham Development has created spaces

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