The Registry | Q3 2015

3: 2015 A PUBLICATION BY

%

MULTIFAMILY

R&D

RE TAIL

OFFICE

COMMERCIAL & RESIDENTIAL REAL ESTATE

RESTAUR ANT

RE TAIL

HOSPITALIT Y

MEDIC AL

POP UP RE TAIL

RESTAUR ANT

MULTIFAMILY

OFFICE

RE TAIL

HOUSING

B A Y

A R E A

MARKET R E V I E W

SMALL OFFICE

TECH OFFICE

ENTERTAINMENT

SAN JOSE AT A CROSSROADS ONCE AGAIN | PG. 30

RESTAUR ANT

RE TAIL

PERFECTING THE RENTAL HOUSING ALGORITHM | PG. 41

SAN FRANCISCO SKYLINE | PG. 62

Safety. It’s more than a program.

It protects what we value most.

We earn the best EMR of .36 by building safety into everything we do. It’s not just good business practice, it’s good human practice.

Our purpose is simple. We build to improve lives.

Silicon Valley

San Francisco

Sacramento

xlconstruction.com

.36

2014 EMR

22

26

30

This Issue RETAIL 8

Oakland’s Retail Renaissance

The biggest East Bay city is capturing the Bay Area glitter as businesses and residents make it their home CONSTRUCTION COSTS 14

Sky High Construction

Bay Area construction industry is setting the pace for rest of country

COVER ILLUSTRATION

Ramy Wafaa

PHOTOGRAPHS

Laura Kudritzki

INVESTMENT 18

Building Real Empires

Sovereign wealth funds boost their investments in real estate across the region, as well as globally POP-UP OFFICE 22

A Campsyte Around the Corner A San Francisco startup with roots in engineering and architecture plans to take temporary office space mainstream LANDMARK BUILDINGS 26

The Building That’s Already There

Landmark buildings’ unique features draw tech companies

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DOWNTOWN SAN JOSE 30

COMMERCIAL 48

At a Crossroads Once Again

Modernizing Silicon Valley

INDUSTRIAL 34

WORD ON THE STREET 52 Now that the economy in the Bay Area is doing well, again, what worries you the most?

San Jose draws line against residential rezoning, betting commercial development will drive economic base

Moving Things In and Out Bay Area industrial space hits high demand CONSTRUCTION 38

Role Reversal In ContractorClient Relationships The success of today's market created an inverted relationship between those providing and those purchasing services HOUSING 41

Perfecting the Rental Housing Algorithm

Washington Holdings starts rejuvenating a Santa Clara business park for the 21st century

SUSTAINABILITY 54

Covered Assets

Green roofs trending to new heights DESIGN 58

Xactly on Target

Tech firm’s office design provides ‘wow’ factor, encourages collaboration COMMERCIAL 62

Oakland-based Starwood Waypoint is among national star players in the emerging single-family home rental market

San Francisco Skyline

LEASING 44

Jeremy Helsby

Speaking in Tongues with McNellis

FINAL OFFER 64

Group Chief Executive of Savills

Real estate jargon demystified

1

FROM THE PUBLISHER Welcome

I

f there is one thing that I think is missing from this issue, it is a deep overview of how transportation is affecting, and will continue to affect, commercial and residential real estate in the Bay Area.

It is an issue that we have tackled before at The Registry, but I have to say, the acute problem of moving people around the region efficiently and quickly is becoming more and more obvious. And, I don’t think anyone in the region is doing anything about it.

This is an important issue for us to tackle because the broader Bay Area will continue to be a leading and vital part of not only the national, but also the global economy. The prominence of our region will only grow over the next few decades as technology continues to make inroads into every sector of the global economy. If a budding idea cooked up in a dorm room anywhere on the planet has a chance of becoming a business, chances are it will do so in the Bay Area.

So, if our technology is improving, and if our office buildings are getting smarter, and our cars and homes are, as well, then so, too, must our cities. But they cannot do that in a framework that was designed almost a century ago around a transportation network that gave prominence to large, single-rider four-wheelers.

Our region must address this issue head on, and our public transportation systems must work in concert and expand their reaches. The answer to congestion and increased costs of living and working in the Bay Area is not limiting development and limiting how many people enter your city each day. The solution lies in a regional strategy that takes into account population growth, traffic patterns, all modes of transportation and super-duper creative technology to make it all work together.

And we have all those pieces at our disposal. What we lack is leadership and organization.

Michelangelo is credited with saying, “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.” If companies in the Bay Area are aiming high, why can’t our cities and local governments?

This discussion will become more prominent in the months to come. Already, I am seeing a number of events organized around this topic, which means that some in our community are thinking about it correctly.

The hard part now comes with identifying leaders who can make an effective change in the region and galvanize those of us who live here to support ways to make our region a place where growth can scale.

VLADIMIR BOSANAC PUBLISHER

2

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The Best . . . it’s as simple as that!

In 1935, the Bay area and northern California welcomed a start-up commercial real estate company founded on the premise that integrity would be the cornerstone for their business model and knowledge, hard work and professionalism would ensure their reputation in an exciting, growing market. Fast forward to 2015 and Newmark Cornish & Carey have solidified their place among the best commercial real estate companies in California, with global connections throughout the world. Year after year, Newmark Cornish & Carey sets the benchmark and exceeds industry standards, while building a clientele that reads as a “who’s who” in Bay area corporate, industrial and retail circles.

Give us a call for a consultation, whether you’re buying, leasing, selling or expanding . . . Let us show you why we’re

Number One!

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Contributors PUBLISHER

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

PRESIDENT

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

EDITOR

Nancy Amdur

DESIGN

Grizzles Creates

PHOTOGRAPHY Laura Kudritzki

ADVERTISING

Denise Franklin (408) 366-1984 df@theregistrysf.com

ADAM FELSON

JOHN MCNELLIS

Adam launched Colton Commercial & Partner’s Project Management Division in October 2014 to serve commercial landlord and tenant clients.

Felson comes from a background that includes work at Vornado Realty Trust’s 555 California Street, Equity Office Properties, and Jones Lang LaSalle. He believes getting key players together early to set expectations is the recipe to a winning project. Felson's past clients have included local growing start-ups, commercial landlords with national assets, and international corporations.

A graduate of the University of California at Berkeley and Hastings College of the Law, John co-founded McNellis Partners in 1982. John serves on the national Board of Trustees for the Urban Land Institute, is also a Governor of the ULI and a member of the ICSC. He sits on the national Board of Directors for Outward Bound USA and the board of directors of Rebuilding Together Peninsula. He is a former board member of Lambda Alpha International (Golden Gate Chapter) and the Peninsula Conflict Resolution Center.

NEWS

news@theregistrysf.com

FEEDBACK

letters@theregistrysf.com

ETHICS POLICY

The Registry embraces a strict ethics policy for its staff and contributing writers, including columnists and freelance reporters. No person employed by or affiliated with The Registry has accepted or will accept any compensation, monetary or otherwise, in exchange for editorial content. All information that appears in the magazine is selected solely for its informational value to readers.

The Registry is a registered trademark of Mighty Dot Media, Inc. ©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. CORRECTION Correction from The Q's Q2 Tech Issue Word on the Street, page 58

We listed the president of the Society of Marketing Professional Services as Ginger Sotello, Partner, Pahl & McCay and the name should have been listed as Ginger Kelly, Business Development Manager, RIM Architects.

6

AMY NORQUIST Amy has worked for more than 20 years in environmental research and education. Prior to founding Greensulate, she spent three years as Deputy Director of the multimillion-dollar Beacon Institute for Rivers and Estuaries overseeing research and development efforts on major green and sustainable building initiatives. A guest lecturer at Columbia University and New York University Sustainability Working Group and the nation’s most highly respected spokesperson for the green roof industry, Amy’s accolades include being named a “Top 5 Start-Up” at the Opportunity Green Conference as well the winner of the 2010 Excellence in Design award from The Center for Environmental Innovation in Roofing.

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

For 38 years, Wareham Development has created spaces

415.457.4964 warehamdevelopment.com

for people who create the future. From cutting-edge startups to Fortune 500 giants, these innovators have been drawn by our purposeful design, abundant amenities, proximity to colleagues, and our commitment to sustainability. And most of all, by our realization that the right workspace is the engine that drives creativity and discovery. We invite you (and your ideas) to discover what we mean.

DEVELOPMENT

Emeryville

Berkeley

Richmond

Marin County

Palo Alto

Sun Valley, ID

RETAIL

8

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Oakland’s Retail Renaissance The biggest East Bay city is capturing the Bay Area glitter as businesses and residents make it their home WORDS

David Goll Laura Kudrtizki

PHOTOGRAPHS

A

s retailers large and small gravitate toward Oakland, it's beginning to stem the leakage of the estimated $1 billion in sales that flow out of the Bay Area's third-largest city each year.

More than 900,000 square feet of commercial space—much of it retail—has recently been completed, is under construction or in the planning pipeline in the under-retailed city of more than 400,000 people.

Some of the new and redeveloped projects are retail only, but others are mixed-use developments combining residential units with office and retail space.

Contributing to this growth is the thousands of new housing units being built in the city as Oakland catches an eastward wave of renters, homebuyers, artists and business owners priced out of San Francisco.

"It is one of the major reasons," said Keira Williams, a retail specialist in the city’s Economic and Workforce Development Department, about the economic flight from San Francisco.

"Rents are so much higher there. But others come here intentionally to be in Oakland. This is where they want to be."

Williams also credited Oakland’s simpler and less-costly permitting process with encouraging development in the East Bay city.

The city's sales tax revenue—from both brick-and-mortar and online sales—reflects the rebounding retail sector. In 2014, Oakland collected more than $49.8 million in sales tax revenue, up nearly 4 percent from the previous year's total of just over $48 million. Williams said those figures represent a dramatic uptick from several years ago during the recession, when annual sales tax revenues hovered around $40 million.

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Latham Square, located at the intersection of Telegraph Avenue and Broadway, is expanding the street to provide more pedestrian area and improve traffic flow.

9

10

such as the Rockridge district where the median annual household income of $116,000 more than doubles the citywide median of $52,000. More retail also is locating in the city’s revitalized downtown and Uptown areas, especially along the Broadway corridor where a number of mid-sized mixed-use projects will generate more than 1,000 new residential units and 76,500 square feet of retail space.

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BOTTOM RENDERING

potential and is very hot right now. It has an authentic urban feel that's attractive to millennials. You have companies employing millennials, internet and social media companies moving to Oakland. We are seeing an influx of retailers, including boutiques and great restaurants. There is a retail renaissance going on in this city."

This retail resurgence is strongest in Oakland's more affluent neighborhoods—

Steelblue

Shops at the Ridge, a multi-level outdoor shopping center, catering to Oakland and Berkeley residents.

TOP RENDERING

Largest of the planned projects is the 300,000-square-foot Shops at the Ridge, a redevelopment of the Rockridge Shopping Center at 51st and Broadway by Carlsbadbased developer Terramar Retail Centers and designed by Oakland-based JRDV Urban International. It will be anchored by a new 70,000-square-foot Safeway grocery, where an existing, smaller Safeway in the center will relocate. The renovation and expansion also will create rooftop parking lots, elevated walkways and second-level restaurants and cafés. The first phase of the project is scheduled for completion by late 2016.

Though other anchor tenants have yet to be announced for the project, Williams said an existing Chase bank on the outskirts of Rockridge Center will relocate to the middle of the redeveloped plaza.

City officials are seeking to attract apparel, home merchandise and sporting goods stores, she said.

Because of projects like Shops at the Ridge, Solomon Ets-Hokin, senior vice president of the retail services group at real estate brokerage Colliers International in Oakland, said his business in the city has been revived. Though based in Oakland, Ets-Hokin said for many years, almost all of his leasing activities occurred in neighboring East Bay cities with healthier retail economies. That has changed.

"Oakland has been under-retailed, so we have a lot of pent-up demand," EtsHokin said. "This city has a lot of retail

JRDV

Paseo, a new retail thoroughfare in Uptown Station that connects Broadway to Telegraph Avenue.

r San JoSe a

e na

T E. IN EGRITY .

waterproofing contractor. For the past 30 years roofing manufacturers and consultants have bestowed their highest awards and recommendations upon Alliance. Contractors, property owners, and property managers have praised Alliance for continual service, expertise, and immediate response. Experience, integrity, safety, and expertise are the elements that set Alliance Roofing Company apart from its competitors.

408-261-2595 contact@allianceroofingcal.com â– www.allianceroofingcal.com 630 Martin Avenue, Santa Clara, CA 95050

RTISE.

Alliance Roofing Company is renowned as Northern California’s leading commercial roofing and

PE

EXP

I

C EN

EX

ER

T HE N

The real estate community in Oakland is very excited. It's an affirmation of what most of us already know, but coming out of the recession we're just getting our mojo back.

Mike Ghielmetti President of Signature Development Group

12

Oakland Development Pipeline PIPELINE ADDRESS/PROPERTY

RESIDENTIAL UNITS

COMMERCIAL/RETAIL

2270 Broadway

223

8,000 SF

2315 Valdez St

235

15,000 SF

23rd & Valdez St

193

31,500 SF

3093 Broadway

432

22,000 SF

Jack London/Water Street Market

700

32,000 SF

Oak Knoll

935

72,000 SF

Shops at the Ridge

–

300,000 SF

Temescal Projects

–

30,000 SF

Uptown Station

–

50,000 SF

RESIDENTIAL UNITS

COMMERCIAL/RETAIL

–

7,500 SF

RESIDENTIAL UNITS

COMMERCIAL/RETAIL

100

50,000 SF

RESIDENTIAL UNITS

COMMERCIAL/RETAIL

3,000

200,000 SF

OWNERSHIP CHANGE ADDRESS/PROPERTY

Jack London Gateway RECENTLY COMPLETED ADDRESS/PROPERTY

The Hive

Brooklyn Basin Kapor Building Macarthur Station Shops At Broadway TOTAL

–

10,000 SF

624

42,500 SF

–

39,000 SF

RESIDENTIAL UNITS

COMMERCIAL/RETAIL

6,442

909,500 SF

courtesy of the City of Oakland

UNDER CONSTRUCTION ADDRESS/PROPERTY

DATA

Tenants will include local and national shops, dining and beverage venues, including Drake’s Brewing Company from neighboring San Laeandro, Phoenixbased natural and organic grocer Sprouts Farmers Market and CVS Pharmacy.

The same corridor, traditionally known as the city's Auto Row, has also become home to the Hive, a redeveloped block featuring 104 apartments and 100,000 square feet of office and retail space with an eclectic mix of cafés and restaurants, clubs and art galleries that serve as a millennial magnet. It also boasts several corporate headquarters, including that of its developer, Signature Development Group, which spent $50 million on the renovation.

Signature has become a huge player in Oakland's revitalization, orchestrating the development of Brooklyn Basin, formerly known as the Oak to Ninth project. The $1.5 billion project will transform 65 acres of industrial land on the city's waterfront into a city-within-a-city with 3,100 residential units, 200,000 square feet of office and retail space, 30 acres of parkland and a 200-boat marina. It's expected to generate 10,000 jobs. Signature officials did not return messages seeking comment.

Williams said there is not yet a specific proposal for retail at the Brooklyn Basin site, where initial grading for construction is now under way.

Mike Ghielmetti, Signature president, said in a statement on his company's Brooklyn Basin Web site that, "The real estate community in Oakland is very excited. It's an affirmation of what most of us already know, but coming out of the recession we're just getting our mojo back."

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Sap center

T E. IN EGRITY .

waterproofing contractor. For the past 30 years roofing manufacturers and consultants have bestowed their highest awards and recommendations upon Alliance. Contractors, property owners, and property managers have praised Alliance for continual service, expertise, and immediate response. Experience, integrity, safety, and expertise are the elements that set Alliance Roofing Company apart from its competitors.

408-261-2595 contact@allianceroofingcal.com â– www.allianceroofingcal.com 630 Martin Avenue, Santa Clara, CA 95050

RTISE.

Alliance Roofing Company is renowned as Northern California’s leading commercial roofing and

PE

EXP

I

C EN

EX

ER

N0W

CONSTRUCTION COSTS

14

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Sky High Construction Bay Area construction industry is setting the pace for rest of country WORDS

Neil Gonzales courtesy of RLB

PHOTOGRAPH

C

ranes have crowded the skies. Not the flying, feathered kind but the massive steel machines fixed high atop buildings.

Since the start of the economic resurgence in 2010, construction cranes have increasingly become fixtures in the ever-transforming skylines across the Bay Area from San Francisco to Oakland and down the Peninsula to San Jose.

The proliferation of cranes in the Bay Area and other major markets nationwide has prompted the independent global property and construction consultant Rider Levett Bucknall to take formal stock. According to RLB, 23 tower hoists marked the San Francisco skyline as of May—about the same number as what was tallied a few months earlier for the firm’s first North American Crane Index report.

“There has been no slowdown in construction within the San Francisco marketplace since our count in November of last year,” the report said. “Many

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buildings in [the South of Market district] have begun topping off, but they have been followed by many others taking root.”

Nationally, the construction industry is still in recovery mode with some markets seeing activity slowing down. But the building bonanza in the Bay Area has reached a point where companies are turning down work or needing to bring in labor from outside the region because of the sheer volume of projects that users want completed quickly. Even an escalation in construction costs has not stalled construction in the Bay Area.

“We’re definitely setting the pace for the rest of the country,” said Mike Humphrey, the San Francisco regional manager for DPR Construction.

Other markets where DPR has an office, such as San Diego, Phoenix and Houston, are stable and healthy but not anything like the Bay Area, Humphrey said. “The Bay Area seems to continue to be a boom market,” he said.

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The United States Construction Perspective first quarter 2015 report by commercial real estate services firm JLL indicated as much. The construction industry “is still in the early stages of its recovery and will continue to grow in response to overall economic growth,” the JLL report said.

According to JLL, the number of office construction starts nationwide increased from 11.6 million square feet in the first quarter of 2012 to 20.8 million square feet

office projects exceed the city’s capacity for allowable office space usage fivefold,” the RLB report said. “The technology boom that now reaches beyond Silicon Valley and into San Francisco is also exacerbating the housing crunch being felt throughout the Bay Area, which is leading to additional development pressure for housing stock.

“The greatest concentration of cranes is within the Transbay redevelopment district with the largest looming examples at the Salesforce Tower, 350 Mission St.

unrealistic deadlines. One high-tech assembler wanted TICO to finish a project quicker than what was deemed reasonable, Marmesh said. So TICO did not take the project.

“All contractors have a reputation to keep,” he said. “If we feel a project is not realistic, there’s no reason why TICO should associate with something like that.”

The industry—which RLB estimated to have grown nationally to $982 billion in the fourth quarter of 2014 from

There has been no slowdown in construction within the San Francisco marketplace. Many buildings have begun topping off, but they have been followed by many others taking root. for the same period this year. Construction is particularly strong in San Francisco, the Southeast and the Northwest but has eased up in Houston and the Northeast, the report said.

Part of the drivers behind the Bay Area surge involves all the leading technology companies based in the region, such as Google, Facebook and LinkedIn, Humphrey said. “They have major campuses in the Bay Area and are competing for talent,” he said. “They’re using their workplaces as recruiting tools.”

John Marmesh, a partner with San Jose-based TICO Construction Co., had the same take. “Corporate users want to differentiate themselves in the design of their buildings,” Marmesh said. “It goes back to recruiting and how to get the best engineers.”

Catherine Stoupas, a San Franciscobased senior project manager for RLB, pointed out that the development demands coming from the tech sector, in turn, are fueling the appetite for additional housing, hospitals, schools and other types of construction.

In San Francisco, the tech-driven commercial construction is “currently climbing into the skyline while proposed

16

and 181 Fremont St. The health-care sector is also seeing development in the Mission Bay/Dogpatch district with the expansion of UCSF Mission Bay.” Today’s users also can’t get into their buildings fast enough. “They want it quickly built and to get in,” Marmesh said.

For instance, TICO has a high-tech client that is asking for a project in Silicon Valley to be finished by year -end. In response, Marmesh said, TICO has “committed and supplied” the labor necessary to meet that demanding schedule.

But such a commitment has become more challenging to do now compared to normal years because of a labor shortage partly resulting from so many workers already busy on various jobs. “It’s probably the busiest I’ve ever seen,” Marmesh said.

“It’s great for the trades, but it’s hard to find labor.”

Some construction companies are going to Sacramento or Modesto to find workers for projects in San Francisco, Stoupas said.

Those in highly specialized trades such as electrical and glazing are also in great demand but low supply, Humphrey said.

At times, construction firms end up passing on projects because of their heavy workload coupled with a potential client’s

$943 billion early that year—has been experiencing a rise in construction costs, but that’s not slowing down contractors and subcontractors.

Labor and material expenses may be increasing, Stoupas said, but companies are enjoying “bigger profit margins” than before because of all the work they are landing.

Expenses rose 6.1 percent in San Francisco over the course of 2014— compared to Las Vegas’ 3.6 percent, New York’s 4.4 percent and Honolulu’s 13.3 percent, according to RLB’s first quarter 2015 report on U.S. construction costs. The national average increase was 5.5 percent.

Part of the reason for the rising costs is “the fact that the construction industry in 2015 is smaller than it was prior to the start of the recession,” according to RLB. “As construction activity picks up, this smaller-sized industry is, in some areas of the country, struggling to keep up with demand. Although the actual costs of labor and material continue to increase slowly, the gap between demand and supply leads to upward pressure on bid prices as increasing construction activity chases static resource availability.”

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INVESTMENT

BUILDING REAL EMPIRES

S

Sovereign wealth funds boost their investments in real estate across the region, as well as globally WORDS

Greg Lamm

overeign wealth funds, like those controlled by oil rich United Arab Emirates or large U.S. public pensions, are increasing their investments in real estate properties to diversify their portfolios.

While a few Silicon Valley properties have been the target of sovereign wealth fund investments in recent months, local commercial real estate brokers say they are not seeing a stampede of similar deals. Foreign investors and sovereign wealth funds continue to favor trophy office properties in traditional foreign gateway cities such as San Francisco and New York.

The total assets of sovereign wealth funds have doubled since 2008, topping out at $6.31 trillion, according to a recent report by the London-based data-tracking firm Preqin. With all that money piling up and oil prices low, sovereign wealth funds have shown a willingness to venture beyond conservative investments such as government bonds and are increasingly looking at investing in real estate, according to the Preqin report.

Preqin’s research found that real estate assets held by sovereign wealth funds reached a record high of $742 billion in 2014.

About 60 percent of sovereign funds have some assets invested in real estate. That includes some of the world’s largest funds such as the Abu Dhabi Investment Authority and Kuwait Investment Authority.

“There has been significant growth in the proportion of sovereign wealth funds that allocate capital to real estate since 2013,” according to the 2015 Preqin Sovereign Wealth Fund

18

Review. “The interest of sovereign wealth funds and other institutional investors has enabled the private real estate market to enjoy a period of success, with private real estate assets under management reaching an all-time high of $742 billion at the end of 2014.”

The world’s largest sovereign fund, Norway’s Government Pension Fund Global, controls $818 million in assets, according to the Preqin annual review. The Norway fund has been investing heavily in real estate, both in the U.S. and in Europe and Asia.

According to Real Capital Analytics, the Norway fund invested $7.6 billion globally in real estate in 2014, more than any other sovereign fund.

Its influence has been growing around the Bay Area, as well, where the fund has already made inroads through several large investments. In January 2014, the fund’s manager, Norges Bank Investment Management, purchased a 47.5 percent interest in the 945,249-square-foot 425 Market St. office building in San Francisco.

In September last year, Norges Bank bought a 49.9 percent stake in The Orrick Building. The 10-story Class A, LEED Platinum office building, also known as Foundry Square II, is located at 405 Howard St. in the city’s South Financial District.

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PROPORTION OF SOVEREIGN WEALTH PROPORTION OF SOVEREIGN WEALTH FUNDS INVESTING IN EACH ASSET CLASS FUNDS INVESTING IN EACH ASSET CLASS 2013 2013

2015 Preqin Sovereign Wealth Fund Review *Preqin has only been collecting private debt information on sovereign wealth funds since 2014.

82% 82%

2015 2015

81% 81%

2013 2013

2015 2015

86% 86%

86% 86%

2013 2013

51% 51%

2015 2015

2013 2013

54% 54%

2015 2015

59% 59%

2013 2013

57% 57%

2015 2015

2013 2013

2015 2015

2013 2013

2015 2015

60% 60%

47% 47%

31% 31%

33% 33% 24% 24%

0% 0% PUBLIC EQUITIES PUBLIC EQUITIES

FIXED INCOME FIXED INCOME

PRIVATE EQUITY PRIVATE EQUITY

REAL ESTATE REAL ESTATE

2013 VS 2015

INFRASTRUCTURE INFRASTRUCTURE

HEDGE FUNDS HEDGE FUNDS

PRIVATE DEBT* PRIVATE DEBT*

DATA

NOTABLE SOVEREIGN WEALTH FUNDS INVESTING IN REAL ESTATE

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INVESTOR

LOCATION

ASSETS UNDER MANAGEMENT ($MN)

GEOGRAPHIC FOCUS

ROUTE(S) TO MARKET

Government Pension Fund Global

Norway

$817,957 Global

Direct

Abu Dhabi Investment Authority

United Arab Emirates

$773,000 Global

Direct

China Investment Corporation

China

$650,000 Global

Direct, Listed, Private Real Estate Funds

State Administration of Foreign Exchange China

$567,900 Global

Direct, Private Real Estate Funds

Kuwait Investment Authority

Kuwait

$548,000 Global

Direct, Listed, Private Real Estate Funds

Hong Kong Monetary Authority

Hong Kong

$414,661 Asia, Australia

Direct, Private Real Estate Funds

Hong Kong Monetary Authority

Singapore

$320,000 Global

Direct, Listed, Private Real Estate Funds

Qatar Investment Authority

Qatar

$304,000 Global

Direct, Private Real Estate Funds

National Social Security Fund – China

Qatar

$247,866 Greater China

Listed

Temasek Holdings

Singapore

160,674 Asia, North America Direct, Listed, Private Real Estate Funds

19

Trophy properties in San Francisco have been the target of sovereign funds in recent years.

REGIONAL PREFERENCES OF SOVEREIGN WEALTH FUNDS INVESTING IN REAL ESTATE

57% 45% 36%

32% 14%

0% LESS THAN 4.9%

5 - 9.9% CURRENT ALLOCATION

20

10 - 14% TARGET ALLOCATION

9%

7%

15% OR MORE

57%

55%

50% 41% 30%

NORTH AMERICA

GLOBAL

EUROPE

ASIA

OTHER

MENA

REGIONAL PREFERENCE

opportunity on the Silicon Valley’s most famous streets, and its sale price of about $1,800 a square foot set a near record for office space in the area.

The really attractive Bay Area investments for these funds, however, have been into tech companies, much more broadly than real estate. For example, Middle Eastern sovereign wealth fund Qatar Investment Authority recently participated in a $1.2 billion round of funding for the San Francisco ride-share startup Uber.

Meanwhile, Samruk-Kazyna, a strategic development sovereign wealth fund owned by the Central Asian country of Kazakhstan, announced plans in April to open a Silicon Valley office to invest in startup companies, joining other sovereign wealth funds already with a presence here.

The trend of sovereign wealth fund investments flowing into real estate is likely to continue, according to Preqin’s research.

About 85 percent of the sovereign funds invested in real estate are below their target allocation of 5 percent or more of their funds they would like to invest in real estate.

It remains to be seen if that could bode well more broadly for the regional real estate market. Silicon Valley real estate might attract more eager investments from sovereign wealth funds if it had more trophy properties on the market, brokers say.

According to Rob Hielscher, a San Francisco-based managing director of commercial real estate services firm Jones Lang LaSalle’s capital markets group, “sovereign wealth fund investment into San Francisco has been much more prevalent than into Silicon Valley.” Yet with deals in the city being more difficult to extract, the rest of the region may yet find itself of interest to foreign investors.

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2015 Preqin Sovereign Wealth Fund Review

BREAKDOWN OF SOVEREIGN WEALTH FUNDS’ CURRENT AND TARGET ALLOCATIONS TO REAL ESTATE BY PROPORTION OF TOTAL ASSETS

59%

DATA

Tenants include the law firm Orrick, Herrington & Sutcliffe LLP, Moody’s Analytics and BlackRock. The property is one block from the $4 billion Transbay Transit Center, which links eight Bay Area counties through 11 transit systems. TIAA-CREF partnered with the Norway fund on the transaction. These same partners also have invested in real estate in New York, Boston and Washington, D.C. Trophy properties in San Francisco have been the target of other sovereign funds in recent years, including 101 California St., the downtown skyscraper that was purchased in 2012 by an investment group led by Singapore's sovereign wealth fund.

Sovereign wealth funds also have shown interest in Silicon Valley real estate, though there have only been a few deals recently, said Russell Ingrum, managing director and vice chairman at commercial real estate firm CBRE Group, Inc. in San Francisco.

The Abu Dhabi Investment Authority, the sovereign wealth fund owned by Emirate of Abu Dhabi, invested in Menlo Parkbased Sand Hill Property Co.’s purchase of Cupertino's Vallco mall last fall, as part of an effort to redevelop the property.

A more notable Silicon Valley real estate transaction involving a sovereign wealth fund was the January deal involving Sand Hill Commons, a Class A 133,000-square-foot office complex in Menlo Park. An Asian sovereign wealth fund reportedly snapped up a 49 percent of the property.

The property houses an A-list of venture capital firms, including Draper Fisher Jurvetson, Charles River Ventures, Menlo Ventures and Battery Ventures. It was a rare investment

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A Campsyte Around the Corner A San Francisco startup with roots in engineering and architecture plans to take temporary office space mainstream WORDS

David Goll Laura Kudritzki

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ust as car sharing has changed the way people move around congested cities like San Francisco with greater economy, founders of Campsyte Inc. hope the emerging concept of land sharing will boost the economy of the City by the Bay, filling its vacant, unproductive lots with temporary buildings generating revenue for landowners, occupants and city officials alike.

Officials of San Francisco-based Campsyte, founded in January of this year, want to build small, temporary structures out of recycled shipping containers to place on open parcels or parking lots awaiting the construction of permanent buildings. The structures could provide more affordable space for startups, offices, creative businesses or retail shops struggling to gain a foothold in pricey San Francisco.

The use of former shipping containers—considered an affordable, environ-

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mentally friendly building material—is growing in popularity for both commercial and residential structures, especially in Europe, but increasingly in North America, as well. There are estimated to be about 17 million steel intermodal containers in use for shipping worldwide, ranging in size from eight to 56 feet in length, and eight to nearly 10 feet in height. Starbucks has built a handful of its coffee shops out of the containers.

"These spaces would be geared to startups and small businesses," said Alex Lee, one of Campsyte's co-founders and its vice president of sales. "Many times a small business can't afford to rent 20,000 square feet of space, but they can deal with a 1,000-square-foot space. It can be very hard for small companies to find small spaces."

Campsyte will build the modular and temporary structures at a local plant, then handle installation and property

Through this land-sharing type of platform, landowners will have new buildings on their property, enabling them to generate income.

Alex Lee Co-founder of Campsyte

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courtesy of Campsyte RENDERINGS

Campsyte is a temporary solution to a space awaiting permanence.

management duties. Lee said local neighborhoods will be revitalized when vacant lots are transformed into usable space for businesses. He said Campsyte is seeking sites where they will work within existing zoning designations to accommodate the temporary buildings.

“We are being choosy,” Lee said, adding that Campsyte officials hope to eventually expand operations outside San Francisco.

Campsyte’s first project will materialize in the fourth quarter of this year in San Francisco's Central South of Market district, when the company plans completion of a three-level, mixed-use temporary building housing offices, food vendors and ground-floor retail made of shipping containers, Campsyte officials said.

Lee was joined in establishing Campsyte by Dennis Wong, who serves as CEO, and Allen Wong, chief marketing officer. Thirty years ago, Allen Wong said the group pooled their resources to purchase a then-new San Francisco firm AGS Inc. Since then, they have expanded the company to provide geotechnical, environmental, civil and structural engineering services. Dennis Wong still serves as senior principal of AGS. Allen Wong said the group's familiarity with architecture and engineering, city planning procedures, planning the downsizing of their own office space at AGS and interest in sustainable building practices

led them to establish Campsyte.

"We plan to revitalize many infill lots in San Francisco, either those not in use or just being used for parking at the present time," Lee said. "Through this land-sharing type of platform, landowners will have new buildings on their property, enabling them to generate income."

Besides providing activity on unused spaces where permanent development is going through the planning process, temporary structures can increase the attractiveness of lots to potential buyers.

"It's a plus-plus for landowners," Lee said.

As evidence of their viability in San Francisco, Lee touted a local shipping container project already operating—The Yard, a $2.5 million assemblage of retail, dining and beverage venues including The North Face, a Peet's Coffee & Tea shop and a beer garden operated by Anchor Brewing Co. on a former parking lot at AT&T Park, home of the San Francisco Giants.

Open since March, The Yard is a temporary, sustainable placeholder for a larger, permanent development at Mission Rock, according to Staci Slaughter, vice president of communications for the San Francisco Giants, the owner of the development. The 28-acre Mission Rock development is planning to feature parks, housing, office, retail and serve as a community gathering spot for local residents. The Giants expect to place the project on the November ballot.

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"We viewed this as an opportunity to create a mini-hub, an example of what is to come to local residents and our fans," Slaughter said. "It has been very popular.

It’s always packed."

Slaughter said The Yard's recycled shipping container construction was an appealing aspect of the project for the Giants. It also mirrored a similar temporary development constructed in the Hayes Valley district after the damaged Central Freeway was torn down following the 1989 Loma Prieta earthquake. Slaughter added she also saw a larger example of such temporary shipping container retail center construction on a recent visit to Christchurch, New Zealand, which suffered major damage from a 6.3 temblor that hit in 2011.

Jim Beeger, a senior vice president with real estate brokerage Colliers International in San Jose, said though shipping container construction does hold a trendy, cuttingedge appeal, he doubts it will become commonplace.

“The containers are small, not inexpensive, and you have to do a lot of construction to make them suitable for commercial use,” he said. Most containers are less than 400 square feet. “You’re taking what’s essentially a metal box and trying to turn it into a jewel box. The end result can be cool, attractive and fun, but I think they have limited application.”

The Yard is a temporary placeholder until Mission Rock's permanent development takes place.

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LANDMARK BUILDINGS

The Building C That’s Already There Landmark buildings’ unique features draw tech companies PHOTOGRAPHS

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reative office space with features such as exposed ceilings, brick walls and an open floor plan is common among technology firms. But some companies are making their office stand out even more by moving into historic landmark buildings with built-in unique architectural details like cornices, wood beams or arched windows.

“There is strong demand for creative office space, and historic buildings are even more sought after because the aesthetics of those buildings lend themselves to making the space feel creative and more collaborative,” said Tyler Hogan, a commercial real estate broker at Colliers International in San Francisco.

Tech companies signed 14 leases for office space in San Francisco landmark buildings in 2013 and 2014, according to a report by CBRE Group, Inc. Many of these leases were for space in the Phelan Building, built in 1908 at 760 Market St. The triangular-shaped property, located in the city’s Union Square district, features 52,000 square feet of ground-floor retail and 231,000 square feet of office space.

For most of its history, the Phelan Building housed dozens of smaller spaces occupied by jewelers. But New York-based Thor Equities purchased the 11-story property in 2008 and renovated and repositioned it with tech tenants in mind.

WORDS Nancy Amdur Roger Bensel, Laura Kudritzki, & Yi Sun

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TOP

Photograph by Roger Bensel

BOTTOM LEFT & RIGHT

Photographs by Laura Kudritzki

760 Market, the Phelan Building, houses several tech tenants seeking a historic feel.

The company updated the interior with open floor plans while maintaining the building’s historic exterior.

“With the explosion of Silicon Valley, many technology firms were looking for large open work spaces in San Francisco.

The Phelan Building represented great potential for these companies,” according to a case study about the project by Thor Equities, a real estate development and investment firm.

Thor Equities eliminated the small offices, and the building “began to gain the attention of corporate offices for retailers, designers and technology firms,” the case study said. The Phelan Building is now fully leased with tenants taking full floors.

Leasing space in a property designated as a historical landmark can make the office more desirable and help attract top talent—especially if it is an iconic building, Hogan said.

“The most important thing for tech companies is being able to hire the best people, so they want to have their space very nice and very attractive to win the best talent,” he said.

Social networking service Nextdoor, which occupies 25,000 square feet in the Phelan Building, finds that its space helps draw potential employees.

“Being able to say that you work in a San Francisco landmark building is pretty rare,” said Kelsey Grady, a Nextdoor spokeswoman. The building’s history “makes us feel intertwined in the fabric of San Francisco,” she said.

The company retained the office’s historical features such as exposed brick walls and green-and-white tiled hallways and modernized it with conference rooms, kitchens and showers. Nextdoor also likes the building’s many windows, atrium and location, which is convenient to public transportation and downtown amenities, including restaurants, Grady said.

“People’s space is super important to their happiness, their ability to innovate, [and] even how they can communicate with others given the space's architectural features,” said Eliot Buchanan, CEO of online payment provider Plastiq Inc., which leased 3,800 square feet in the

1475 Folsom boasts open space, brick & steel and high ceilings.

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55 New Montgomery, built in 1912, has ornate exterior details that makes this building a show stopper.

108-year-old landmark building at 1475 Folsom Street.

The company’s space features brick-and-timber construction, large windows and abundant natural light.

“It balances old and new,” Buchanan said. “It feels small and intimate and the natural light and brick makes it warm.” The building, located in the South of Market district, also offers unobstructed views from most directions, he added.

Plastiq chose its space in part because of the building’s historical significance.

“Having a space with meaning and value reflects how we also want our brand viewed,” Buchanan said.

Tech companies tend to cluster around each other, so once one tech company moves into a building, others might soon follow. “[If] you have one tech company in there, it raises the attention of others,” said Colin Yasukochi, director of research and analysis for CBRE in San Francisco.

Also among the Phelan Building’s tenants are The Obvious Corp., a collection of tech companies overseen by Twitter co-founders Evan Williams and Biz Stone; credit and financial management platform Credit Karma; software company Opower; and mobile application development company Crittercism, according to the report by commercial real estate brokerage CBRE.

With older buildings, companies have to do less, because a lot of those unique characteristics are already built into the space.

Exposed brick & natural light are office features toward which many gravitate.

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TOP RIGHT

Photograph by Yi Sun BOTTOM LEFT

Other landmark buildings also host tech tenants. For example, the eight-story 45,000-square-foot mixed-use property at 944 Market St., built in the city’s Mid-Market district in 1907, is home to programming bootcamp Hack Reactor and market intelligence provider InsideView. The Mills Building at 220 Montgomery St. in the city’s financial district hosts native advertising platform Vibrant Media, and mobile messaging service CoTap leased space in the historic property at 55 New Montgomery St. Although nearly every office building in the city now includes at least some creative office space, demand is so strong that it is leased “very quickly,” Hogan said.

“Tech companies or companies that want to foster a creative or collaborative environment want to be in historic buildings, but there is a much smaller supply of historic buildings, [and] the buildings themselves are smaller,” Hogan added.

Some tech firms adapt interiors of traditional high-rise properties to provide “their own creative environment,” Yasukochi said. But “with older buildings, [companies] have to do less, because a lot of those unique characteristics are already built into the space.”

Photograph by Laura Kudritzki

COLIN YASUKOCHI, DIRECTOR OF RESEARCH AND ANALYSIS FOR CBRE IN SAN FRANCISCO

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DOWNTOWN SAN JOSE

At a Crossroads Once Again San Jose draws line against residential rezoning, betting commercial development will drive economic base WORDS

Neil Gonzales Laura Kudritzki

PHOTOGRAPHS

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s if San Jose hasn’t been clear enough in recent years about the desire to preserve land for jobs while limiting new housing, it just emphatically put its foot down on the matter.

In May, a majority of the City Council shot down a proposal

by San Jose-based developer Republic Urban Properties to rezone a commercial site for residential, citing the need to retain and expand the city’s employment base.

“I wasn’t surprised by the vote because I think the city, particularly the mayor and the council, wanted to send a strong message to reinforce the jobs-first policy,” Republic Urban President and Managing Partner Michael Van Every said. “At least developers like us know where we stand.”

The no-conversion stance could place San Jose in danger of losing out on future residential projects amid an ongoing regional housing crisis exacerbated by skyrocketing home prices and apartment rents. Several other developers have already withdrawn proposals to rezone about 40 acres of land from commercial to residential in San Jose.

But city leaders argue that San Jose for its long-term fiscal

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health must solve a jobs imbalance relative to the housing base.

They also point out that San Jose is still making room for housing in areas such as downtown, where high-rise residential towers are helping transform the business district into a vibrant, walkable urban neighborhood.

Still, the city’s policy against conversions could discourage residential development at a time when it is most needed.

“Definitely, that’s going to happen,” Van Every said. “There’s opportunity to build [additional] housing in San Jose. The question is: Are we going to limit that supply even though the General Plan is intended to keep that supply moving?”

Like many Bay Area jurisdictions, San Jose has been struggling to address housing needs over the years, particularly affordable units. According to a report by the planning agency Association of Bay Area Governments, San Jose’s share of the housing responsibility in the region was determined to be 34,721 units for the period from 2007 to 2014. The city met 46 percent of that goal, issuing 16,029 housing permits during that time—compared to 65 percent for Santa Clara County and 50 percent for the Bay Area, overall.

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This site was declined by San Jose for residential rezoning.

San Jose was at 23 percent for very low-income, 20 percent for low-income, 2 percent for moderate and 85 percent for abovemoderate units, according to ABAG’s Regional Housing Need Allocation Performance Report.

Rising costs for home buyers and renters alike only make the housing landscape even tougher to navigate. The median price for a single-family home in the San Jose metropolitan area reached $900,000 during the first few months of 2015, up 11.4 percent year-over-year, according to a quarterly report by the trade group National Association of Realtors.

According to an apartment market report by commercial real estate services firm Marcus & Millichap, effective rents in the San Jose area are expected to climb 8.5 percent to $2,486 a month by year-end 2015.

San Jose’s General Plan does take into account housing, projecting 120,000 new units and more than 400,000 additional residents through 2040. But Van Every’s concern is “where can we develop housing and how” given the city’s position on land conversions, he said.

The council-rejected Republic Urban proposal called for rezoning a 4.6-acre Midtown commercial property—the site of Mel Cotton's Sporting Goods and the O.C. McDonald contracting company—for housing.

Meridian at Midtown, 218 residential units, was completed last year.

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Leading up to the council’s decision, other developers had dropped their rezoning request, including Arizona-based The Wolff Company’s proposal for 7 acres at 2829 Monterey Road and a San Francisco-based City Ventures project for 10 acres at 641 North Capitol Ave. Residential developers contend that smart housing growth can enhance the city’s tax base and lead to a population increase, spurring business. As it is, high housing costs is the top challenge to doing business in the San Jose area, according to an annual CEO survey by the public-policy organization Silicon Valley Leadership Group.

“Of course, the Bay Area needs a lot more housing, and being an economic center of the region, everyone wants to be in Silicon Valley,” said Leah Toeniskoetter, San Jose director for the Bay Area-based nonprofit civic planning organization SPUR. “Every city has a responsibility to address housing.”

But San Jose has good reasons to hold off on residential conversions and hold on to commercial and industrial land, she said. “We have housing but not enough jobs. Let’s figure out where housing development will not be fiscally negative” such as areas in which police, fire and other public programs already exist.

A city staff report for a council study session in April found that only 15 percent of San Jose land is for employment purposes

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Laura Kudritzki

Michael Van Every Republic Urban President and Managing Partner

while 57 percent is residential. Other Silicon Valley cities use up to nearly 30 percent of their land for employment.

The report also noted that there are only 87 jobs for every 100 employed residents in San Jose, compared to Sunnyvale’s 122 and Palo Alto’s 289 employment positions.

Whereas residential development creates the need for expensive public services for new households, San Jose officials say, jobproducing land generates sales tax and other corporate-related revenue for the city.

“San Jose’s jobs/housing imbalance indisputably has caused the city to provide services at less than satisfactory levels for many years,” the city’s Mayor Sam Liccardo and other council members said in a memo in advance of the study session. “The preservation of employment lands must continue to be a priority if we intend to be serious about the restoration of city services.”

At the same time, the memo said, “San Jose continues to be one of the largest generators of housing in the Bay Area.”

For instance, the memo said, San Jose had 2,700 permitted units a year on average from 2010 to 2013—just under San Francisco’s pace of 2,800.

San Jose has also encouraged residential towers in downtown, where zoning is less stringent. Among the latest high-rise projects in the city center is the 643-unit Silvery Towers, being built by San Francisco-based Full Power Properties LLC in partnership with Cupertino’s KT Urban.

But even in downtown, Toeniskoetter believes San Jose should reserve space for offices. Right now, downtown sorely lacks Class A commercial buildings, she said, but demand for high-quality offices will only increase because of the strong interest in urban living, especially from young professionals, among other factors.

“In a hot residential market, the city has incentivized high-rise development, which is fantastic,” she said. “But the second part of the equation is that empty parcels will be key for jobs.”

Although Van Every is not thrilled with the city’s focus on commercial development at the expense of housing, he said he hopes he’s proven wrong because “they’re betting a lot of San Jose’s future on this ideology.”

PHOTOGRAPH

There’s opportunity to build [additional] housing in San Jose.

The question is: Are we going to limit that supply even though the General Plan is intended to keep that supply moving?”

Michael Van Every, Republic Urban Properties, photographed in Midtown San Jose.

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MOVING THINGS IN & OUT

A

Bay Area industrial space hits high demand WORDS

David Goll

ssuming their accustomed spot as trailblazers, Bay Area companies are leading a nationwide surge claiming industrial space.

Prologis' rending of its industrial warehouse complex in Fremont.

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What’s unique is that the Bay Area is a shrinking market because of the trend toward ‘higher and better use’ of converting R&D facilities, for example, into high-tech manufacturing or office facilities.

RENDERING

courtesy of Prologis

CHRIS CATON, VICE PRESIDENT AND HEAD OF RESEARCH AT PROLOGIS INC.

Scarce warehouse and distribution space is coveted not only by businesses engaged in e-commerce, but also by more traditional brick-and-mortar companies like furniture retailers and industrial piping manufacturers rising with the swelling economic tide.

That includes Coaster Co., a furniture importer and distributor; Ferguson Enterprises Inc., a wholesale plumbing goods supplier; Williams-Sonoma Inc., purveyor of upscale food, kitchen merchandise and table top items; and Tesla Motors, manufacturer of high-end electric vehicles.

E-commerce activity in industrial space is on the rise locally and nationally, now comprising 10 to 15 percent of all leasing activity in the U.S., compared to less than five percent in 2011, according to Chris Caton, vice president and head of research at Prologis Inc., a San Francisco-based developer and manager of logistics and distribution industrial space.

Because of burgeoning demand, vacancy rates are shrinking while rents escalate for the dwindling amount of suitable industrial space in the region. Developers are scrambling to build new buildings, focusing mainly on the lower-cost East Bay and Central Valley. The eastward push is encouraged by the conversion of former industrial space into high-tech office and R&D facilities in the Silicon Valley corridor of northern Santa Clara and San Mateo counties.

"And this is not just happening in the Bay Area, it's all over the nation and globally," Caton said. Prologis manages a property portfolio valued at more than $29 billion worldwide. He said nationwide, the net absorption of industrial space this year will be 225 million square feet, with about 170 million square feet of new space being built.

"The Bay Area is one of the top markets globally. What's unique is that the Bay Area is a shrinking market because of the trend

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toward 'higher and better use' of converting R&D facilities, for example, into high-tech manufacturing or office facilities. That’s happening all over, but especially in the Bay Area," said Caton.

Elizabeth Kauchak, Prologis vice president and market officer, said local industrial rents have increased more than 26 percent during the past year. Her company's monthly Industrial Business Indicator for May said that nationally, demand is up and vacancy rates down. But the trend is more pronounced in certain areas.

"High-quality space in Los Angeles, the San Francisco Bay Area and New York-New Jersey is particularly scarce," the report said.

"Within these markets, we've seen a recent and notable tightening in infill submarkets. We expect growth to spill over into regional markets and activity to rise in small spaces as owners of small businesses, in particular, gain greater access to credit and in turn become increasingly active participants in the economic expansion."

Local industrial real estate specialists are very busy these days.

"The market across the board is doing great, we see demand in all sectors, but the warehouse distribution segment is super hot right now," said Craig Hagglund, managing partner in the Oakland office of Lee & Associates, a Newport Beach-based real estate services firm. "We see a lot of demand in Hayward, Union City, Fremont and Newark. There’s also a big upturn in Oakland and Richmond. Especially a big demand for Class A space."

Class A is newly built or well-appointed existing industrial space less than 30 years old that comes with lavish room for trucks and employee parking, high ceilings and the latest in high-tech features.

Hagglund said there hasn’t been so much industrial construction locally since the 1980s. But it’s barely keeping up with demand. Kauchak of Prologis said the region recorded a net

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crunch. The company started construction on the Prologis International Park of Commerce earlier this year in Tracy, planned for an eventual 19 million square feet. Its tenant list includes FedEx Corp. and Medline Industries Inc. Prologis is building a separate 1 million-square-foot distribution center for Amazon.com Inc. nearby. Also, the company broke ground in May on two speculative distribution facilities totaling 623,00 square feet in Fremont.

In April, the San Francisco-based industrial developer and owner announced that it was buying competitor KTR Capital Partners for nearly $6 billion. The 60 million-square-foot operating portfolio that KTR owned comprises 322 properties and aligns with Prologis’ investment strategy with approximately 95 percent overlap with its existing U.S. portfolio, Prologis said in a statement after the purchase was completed. KTR was an active developer and owner in the Bay Area, as well. As the field of opportunities narrows, it seems so too will the field of participants.

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PHOTOGRAPH

absorption rate of 3.4 million square feet of industrial space in 2014, with another 1.6 million square feet set for construction this year.

"We've just had an explosion of new product," Hagglund said.

"This couldn't have happened in 2009 or 2010. We just got to the point where the [speculative] products penciled out."

Hagglund said industry vacancy rates have plunged to low single digits in most of the region—as low as three percent in some places. He said average asking lease rates have soared 20 percent in just the past year. The deal to bring Nippon Express USA to a 112,000-square-foot space in Hayward brought a near all-time high lease rate of 54 cents per square foot triple net, Hagglund said.

Among the biggest deals during the first quarter for Hagglund's office were in Hayward: the sale of 548,179 square feet of industrial space on Hathaway Avenue for $31.5 million to DCT Holdings Corp., and a $46 million purchase by BART of 446,000 square feet on Whipple Road.

"The DCT deal is an example of a product that was a tough sell four years ago," Hagglund said. "DCT sees these two buildings as a redevelopment opportunity. They will lease out space to another company. They’re bullish on the market."

Echoing Hagglund's views is Greig Lagomarsino, executive vice president and corporate director for logistics and transportation solutions for commercial real estate brokerage Colliers International. He said the East Bay—with spillover into the North Bay and Central Valley—has become a highly competitive industrial market.

"The demand is strong throughout the region," Lagomarsino said. "Every market is experiencing well-above-average demand and supply is not keeping up. Multiple parties are interested in many properties, so it has become very competitive."

For Lagomarsino's office in Oakland, some of the top deals on existing space this year include the 266,825-square-foot Greenville Business Center in Livermore bought by IPT Acquisitions, a subsidiary of Industrial Property Trust Inc., and the 300,584-squarefoot Central Pacific property in Union City purchased by Terreno Realty Corp. Public records indicate that IPT purchased the Greenville Business Center for nearly $25.9 million, or almost $97 per square foot.

Not surprisingly, competition is stiff for Class A space, Lagomarsino said. Rents in that category are increasing, he said, with new Class A space ranging from 55 to 65 cents per square foot, while high-quality existing space is in the 50to 55-cent range.

Though new industrial space is rising throughout the market, Lagomarsino said the biggest challenge in the Bay Area is finding sufficient land to build. Caton of Prologis said there also are other factors complicating construction.

"It's just harder to put up buildings these days," Caton said.

"Projects are bigger and more complex. The whole process takes more time than it did a few years ago."

Prologis has been busy trying to ease the industrial space

courtesy of Big D Construction and Colliers International

Industrial space under construction at Pinole Point in Richmond, Calif.

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CONSTRUCTION

Role Reversal in Contractor-Client Relationships The success of today’s market created an inverted relationship between those providing and those purchasing services WORDS

Adam Felson courtesy of RLB

PHOTOGRAPH

"L

et me discuss with my team and we'll get back to you," he said, to my surprise. I knew things were busy, but I never imagined a contractor turning down the chance to bid on my seven-figure project. In my career as a construction project manager, I’m used to contractors being quite grateful when I call asking for a bid. This call had felt like I was asking for a favor. I felt like I had to convince the contractor that the project was going to be worth his time, quite the role reversal from what I have been accustomed to hearing.

I recently got contacted by an old client of mine who was trying to make some modifications in his office suite. "Nobody is calling me back. I can't seem to get any contractors' attention to take a look at what we're trying to do," complained the office manager.

In today’s roaring economy, contractors, consultants and other vendors in the construction industry have the luxury to be selective with which projects they select. Instead of jumping to every new opportunity, service providers ask more questions

38

that may include finding out more detail about their competition or the financial backing of the client before committing to spending time on a bid. You can tell the economy is roaring when if feels like the vendors are doing more of the qualifications and interviewing than the clients.

Scott Reay, owner of Principal Builders based in San Francisco and San Jose, says his firm thinks strategically before agreeing to bid on a project. “We ask ourselves,” Reay explains, "is this someone we have worked with in the past or got through a referral?” The firm is careful not to take on opportunities that might pull their attention from performing their best from their long-standing clients—which represent about 70 percent of their workload today.

With the market being as hot as it is, how can you get the attention of contractors and other construction-related consultants without paying a fortune?

“Who else is bidding on the project?” a contractor recently

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"Nobody is calling me back. I can't seem to get any contractors' attention to take a look at what we're trying to do," complained the office manager. asked me when I reached out about a new job I had. Reconsider that long list of bidders. While intuition tells us that the more bidders we get, the better price we will get, a strong market allows bidders with a deep pipeline to be in control. When asked to compete on projects with too many bidders, vendors often will spend less time to get a handle on the project and will pad their number because they know their chances are slim. Alternatively, a vendor may "respectfully decline" a project altogether because she didn't want to spend her resources winning business if she can get enough other work from repeat clients who want to work just with her. In today’s environment, negotiating an agreement with one trusted vendor may be more financially beneficial and can allow for the customer service you are looking for.

It’s also critical to be careful not to waste people’s time with unclear project requirements or ask for contractors to give budgets on projects with small chances of actually happening. When vendors have a deep pipeline they can afford to have a choice of people with whom they work for, and indecisiveness can lead to frustration, a lack of vendor responsiveness and potentially

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inflated pricing. Contractors and consultants prefer working with clients who know what they want.

Most importantly, as a client, keep your relationships to service providers strong. Not only should your contractors, consultants and vendors be trying to stay in front of you to win future business, but you as the client need to keep in touch with people you will need to call upon as service providers in the future if you expect them to be responsive. It doesn’t hurt for you to take out your contractors and vendors for lunch every now and then.

A raging economy should not necessarily result in a loss in service and inflation of pricing to clients in the construction industry as long as they approach their vendor relationships more openly as project partners.

ADAM FELSON is the Director of Project Management for Colton Commercial & Partners, a full-service, San Francisco-based boutique real estate firm. Mr. Felson can be reached at afelson@coltoncommercialsf.com.

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Real estate lawyers as state-of-the-art as they are practical and efficient.

AT WORK / MSR TEAM ATTORNEYS / MICHAEL DiGERONIMO, KATIE JONES, PAUL MOSLEY, HANS LAPPING

The intricate, delicate nature of today’s real estate markets requires advocacy both powerful and efficient. Precisely the kind you’ll find at Miller Starr Regalia. Utilizing an inclusive and collaborative approach, our transactional attorneys are able to fashion truly creative, complete solutions. All in a timely manner that reduces complexity and increases efficiency. It’s a breadth of expertise and experience that assures our clients the most effective representation available. Because being ahead of the game isn’t an advantage. It’s a necessity. Discover how our leadership can benefit you at msrlegal.com.

Haworth’s office in LA.

San Francisco Walnut Creek Newport Beach msrlegal.com

HOUSING

PERFECTING THE

RENTAL HOUSING ALGORITHM Oakland-based Starwood Waypoint is among national star players in the emerging single-family home rental markets WORDS

Robert Celaschi Nicholas Douman

PHOTOGRAPH

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Oakland, the home base of Starwood Waypoint.

D

oug Brien knows a thing or two about performing at the highest level. He played for the 1994 Super Bowl champion San Francisco 49ers and other teams in the National Football League as a kicker for a dozen years.

That experience in the NFL has translated well to his second career in the equally high-stakes, pressure-filled corporate world.

“I was around great players, coaches and teams,” he said, “and I learned how to pursue excellence. So in business, I had a clear sense of how to bring people together for a common goal and to pursue excellence.”

These days, Brien is the quarterback of a major contender in the real estate arena, serving as CEO of Oakland-based Starwood Waypoint Residential Trust.

Starwood Waypoint has quickly emerged as a key player in the burgeoning single-family home rental market. The real estate investment trust—which acquires, renovates, leases and manages homes—is among just a handful of publicly traded REITs nationwide focused on single-family rentals. But more companies are expected to enter this space as renter demand remains strong, rental rates continue to climb and evolving technology makes it easier to scale business than ever before.

“It’s the best leasing environment I’ve ever seen in terms of single-family rentals,” said Brien, also co-founder of Starwood Waypoint. “The question is if the business can be scalable, and I think we and others are proving that.”

The company formed in early 2014 through a spinoff stock transaction involving Starwood Property Trust, a commercial mortgage REIT managed by Connecticut-based private

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It’s the best leasing environment I’ve ever seen in terms of single-family rentals Doug Brien Co-founder and CEO of Starwood Waypoint

investment firm Starwood Capital Group. The deal also acquired home-rental pioneer Waypoint Real Estate Group, which Brien co-founded in 2009.

Today, Starwood Waypoint boasts $3 billion in assets and manages 16,000 homes across the country, Brien said.

Its biggest competitors include other public REITs such as Agoura Hills-based American Homes 4 Rent and American Residential Properties in Arizona. Several other major institutional investors, including New York-based asset management and financial services company Blackstone, have poured more than $25 billion into the space since 2012, according to an October industry report by New York-based investment banking firm Keefe, Bruyette & Woods Inc. In its report, Keefe, Bruyette & Woods singled out Starwood Waypoint and American Homes 4 Rent as “scaled, high-quality

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distressed properties has declined. Thus, the market has fewer bargains for investors compared to past years.

Still, DeSanctis said, investors are expected to remain active on an “above average” level partly because of the demand coming from young professionals looking to rent as well as those who are still saving up for a home down payment.

According to a 2012 Fannie Mae report, single-family units as a share of the country’s renter-occupied stock grew from 30.8 percent to 33.5 percent from 2005 to 2010—the largest increase among all rental property types.

Moreover, home-rental rates are rising. The national average monthly rent for three-bedroom single-family dwellings reached $1,286 in the first quarter of 2015, a year-over-year increase of 5.4 percent, according to research by home-rental services firms Real Property Management and RentRange.

The market is “still a great opportunity for investor returns,” DeSanctis said.

Plus, it has plenty of growth potential. Of the 15.3 million single-family rentals in the U.S., Brien noted, only about 200,000 homes, or 1.3 percent, are owned by institutional investors such as Starwood Waypoint.

“We think the market is compelling,” Brien said.

Doug Brien photographed at his headquarters.

operators in the sector [that] will eventually generate attractive levered returns. We believe the major [single-family rental] companies have an opportunity to put forth a rigorous long-term [capital expenditure] framework focused on optimizing return on investment supported by actuarial and insurance company data.”

Among the factors setting Starwood Waypoint apart in the market is its proximity to Silicon Valley. Being close to the world’s tech hub, Brien said, the company is able to hire top talent found aplenty in the region.

Another competitive advantage comes from the company’s cutting-edge technology, he said.

That technology centers around a cloud-based operating platform called Compass, which enables the company to efficiently handle a geographically dispersed portfolio of single-family homes.

This platform also provides real-time access to various aspects in the life cycle of a rental home, from acquiring and renovating to leasing and managing the property, thus helping the company continually make informed decisions about its operations.

Another part of the company’s technology involves an algorithm used for choosing where to invest. The algorithm takes into account a neighborhood’s characteristics such as educational quality and crime. It can also project the investment yield of prospective properties in an area.

The market, however, has its investment challenges. Adam DeSanctis, economic-issues media manager for the Chicago-based trade organization National Association of Realtors, pointed out that home prices continue to skyrocket while the number of

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%

COMMON ARE A MAINTENANCE

BA SE YE AR

ACCUM UL ATED COST RECOVERY

ABSORPTION R ATE

FULL SERVICE RENT

FLE X SPACE

USAB LE SQUARE FO OTAGE

C APITALIZ ATION R ATE

GROSS LE A SE

ZONING ORDINANCE

ANNUAL C A SH FLOW

GROSS MU LTIPLIER

NE T OPER ATING INCOME

INTERNAL R ATE OF RE TURN

SPECU L ATIVE SPACE

OPEN

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E ARNEST MONE Y

ESC AL ATION CL AUSE

TENANT IMPROVEMENTS

GROSS RENTAL INCOME

SHELL SPACE

NE T LE A SE

CONTIGU OUS SPACE

PARKING INDE X

NON - COMPE TE CL AUSE

NE T SQUARE FO OTAGE

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LEASING

Speaking in Tongues with McNellis Real estate jargon demystified WORDS

John E. McNellis Ramy Wafaa

ILLUSTRATION

W

hether a lawyer, architect, engineer or broker, a young professional in real estate often hears expressions— some slang, others simply arcane—that neither the finest education nor thickest dictionary is likely to illuminate. And the professional must solemnly nod, as if understanding came with sunlight, when his client invokes acronyms and mathematical formulas to brag about the deal she just made. A combination of years, deducing meaning from context and gradual insight serve to answer most gnawing questions, but some have to be asked. And asking questions one fears to be stunningly basic can prove rather awkward while billing several hundred an hour.

Especially where the client has already expressed amusement or worse, patient understanding, over her young professional’s lack of experience.

This informal lexicon of economic terms and concepts is intended to answer a few of these questions and to spare a little of the beginner's inevitable anxiety and grief.

Capitalization rate or cap rate or simply cap (as in, "The property capped out at an 8."): A capitalization rate is a shorthand way of stating the yield a buyer would receive by purchasing a certain property. Or, to turn it around, the cap rate expresses the initial return on investment a buyer requires before buying.

EXAMPLE: if you have $1,000,000 to invest and wish to earn a 6 percent return on your investment, then you would have to buy at a 6 cap or higher. If a property is selling at a 7 cap, its buyer would

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receive a 7 percent return on his money, if it is selling at a 5 cap, the buyer would receive a 5 percent return and so on.

Cap rates vary because of many factors, ranging from the attributes of the property itself (its location, vacancy rate, the creditworthiness of its tenants, the age of its roof and so on) —to the economy as a whole—interest rates, Treasury bill rates and what product types are in favor at the moment with the buying crowd.

The mathematical formula is simple, but easy to trip over because the relationship between the purchase price and the cap rate is inverted. The price rises when the cap rate is lowered and falls when the cap rate is raised. The formula is: Purchase price equals net operating income (NOI) divided by cap rate (expressed as decimal); example: assume NOI is $200,000; if the cap rate is 8, then the purchase price equals $2,500,000 ($200,000/.08); if the cap rate is 12, then the purchase price equals $1,666,666. Extreme examples underscore the inverse relationship between cap rate and price: if the cap rate is 1 and the NOI is still $200,000, the purchase price would be $20,000,000; conversely, if cap rate is 25, the purchase price would be $800,000.

NOTE: Historically, this concept was a bit more confusing to beginners because at a once-standard cap rate of 10 percent (unheard-of in the modern era), the relationship between price and cap appears to be direct: a property with $1,000,000 in NOI sells for $10,000,000, a property with $100,000 in NOI sells for

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The fallacy behind every IRR analysis ever prepared is obvious; it requires one to predict the unpredictable.

FLE X SPACE

GROSS MU LTIPLIER

NE T OPER ATING INCOME

$1,000,000 and so on. This is the case only because 10 is the number—and only number—at which the teeter-totter of rising price and falling cap is exactly balanced.

Gross multiplier: another, far simpler method for arriving at price used in the sale of small apartment buildings. One takes the property's annual gross income and multiplies it by the agreedupon gross multiplier. If the apartments gross $90,000 a year and the gross multiplier is 12, the price will be $1,080,000 ($90,000 x 12 = $1,080,000).

Internal rate of return or IRR: the IRR is in—a perfect world—a method to determine an investor’s total return from a property during his period of ownership, including both its annual cash flow and its ultimate sales proceeds. The calculation is neither simple nor without breathtaking guesswork: One takes the projected annual cash flow an investor hopes to receive from a property for a given holding period—usually 10 years—and adds to that the property’s estimated sale value in the 10th year. The IRR is the percentage required to discount this combined sum back to zero on the date the property is purchased.

EXAMPLE: if a property produces 5 percent in annual cash flow over 10 years and then sells at the end of that 10th year for twice what the investor originally paid for it, the IRR would be—trust me—10.98 percent; that is, in order to get all that cash dribbling in over the next 10 years to have a net present value of zero today, you would have to discount it at 10.98 percent. Framed positively, this means you would have received a total return on your investment of 10.98 percent. Since this highly speculative 10.98 percent sounds so much better than the 5 percent return you know you’re getting from day one, the IRR is wildly popular.

The fallacy behind every IRR analysis ever prepared is obvious; it requires one to predict the unpredictable—cash flows years into the future and the selling price of a property 10 years from now.

The IRR calculation assumes one can predict highly complex and interrelated financial conditions—interest rates, capitalization rates, tenant demand, new competition, population growth,

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INTERNAL R ATE OF RE TURN

C APITALIZ ATION R ATE

personal income shifts, etc. long into the future. Predicting what a given property will sell for 10 years hence is likely to be as accurate as predicting today how much rainfall the city in which the property is located will receive a decade from now.

Net operating income or NOI: NOI has a widely held general meaning, but because it is the cornerstone of a property's value, its definition is subject to arm wrestling. Simply put, NOI is a property's annual gross rental income minus the property’s—not the owner's—expenses attributable to the same period.

The definition of "gross rental income" has relatively few pitfalls—whether to include one-time payments (a lease termination fee) or bank interest on deposits or a tenant's repayment of overstandard tenant improvements; sellers invariably consider tenant improvement repayments to be rent, while buyers view them as loan payments and thus not part of gross income.

The definition of "expenses" can be more problematic. For purposes of defining NOI, expenses never include the owner's debt service or depreciation; i.e. the property is viewed as being free and clear of mortgages and the tax situation is put aside. The debate begins after that: what the management fee and vacancy factor should be, whether and how much to include for reserves for future tenant improvements and leasing commissions, structural maintenance reserves, roof replacement reserves, how to handle capital repairs or improvements and so on.

NOTE TO YOUNG LAWYERS: If possible, avoid a purchase contract where your buyer is paying a floating price dependent on a NOI formula (this usually occurs where the sale is agreed upon before the property is fully leased). The contract has yet to be drawn that can save a buyer from being screwed by a desperate developer whose new building is failing to meet his rosy pro forma.

This column is an excerpt of a longer article that, in addition to economic terms, sheds light on arcane terms from the worlds of architecture, construction, leasing and financing. The full article will appear online at theregistrysf.com website in August.

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LEASING

MODERNIZING SILICON VALLEY Washington Holdings starts rejuvenating a Santa Clara business park for the 21st century

W

WORDS

Robert Carlsen

RENDERINGS

courtesy of Washington Holdings

hen business parks sprung up on the outskirts of urban centers during the post-World War II economic boom, the initial plan was to keep employees fully concentrated on work without outside distractions. But business parks are now evolving into something quite different—as Washington Holdings’ new plans for an upgraded, modern business park in Santa Clara demonstrates.

The Seattle-based real estate investment firm took over the 46-acre Mission Park business campus, located off Montague Expressway near Highway 101, in October 2013 and established in-house management last year. The park was built in the late 1970s and early 1980s and includes 19 buildings comprising 700,000 square feet. Tenants include Internap, Tektronix, Green Charge Networks and Silego Technology.

Mission Park features three segments, including six industrial buildings at the business center; a two-story office building at the executive center; and 12 research and development buildings.

The property’s three-phase renovation project involves seven buildings that will receive façade improvements, interior market-

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ready work, exterior landscape renovations and new outdoor amenity areas designed by Studio G Architects of Campbell and Boulder, Colorado-based HMH Architecture + Interiors.

The campus master plan calls for converting the traditional business campus into a more park-like setting. Renovations will include pedestrian walkway improvements, park entry and streetscape upgrades and development site design for a multibuilding retail area and hotel designed by San Francisco firms BCV Architects and Smith + Smith Landscape Architects.

Any buildings not receiving major façade improvements will be tied into the overall modernization by receiving exterior paint and new landscaping and monument signage, said Rosanna Davidson-

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One of the more interesting dynamics of this type of product is that more than 20 million square feet of it has been demolished in Silicon Valley.

ROSANNA DAVIDSON-MCMAHON, AN ASSISTANT VICE PRESIDENT OF WASHINGTON HOLDINGS IN SANTA CLARA

Vision of the revamped Mission Park campus in Santa Clara, which will be updated in three phases.

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Exterior and interior renderings of 2051 Mission College, which was recently leased by Bandai Namco.

McMahon, an assistant vice president of Washington Holdings, who is based in the Santa Clara business park.

"We are very fortunate to have a campus-like setting with mature trees and a graciousness of space that exists as our blank canvas," Davidson-McMahon said. "The plan is to layer in updated architecture, walkways, landscape, more trees and an amenity-rich environment that is walkable for our tenants."

Brent Lower, an executive vice president based in Washington Holdings’ Seattle office, said that the firm sees a place for older, one-story R&D product, such as the Mission Park buildings, if they are renovated and repositioned to a level that "meets current market demand."

"Of course, a desirable location with respect to transportation, access and exposure are critical," Lower said. "With these improvements, these properties can not only continue to attract R&D users but are also attractive to Web 2.0 users that are typically more of a pure office user. “One of the more interesting dynamics of this type of product is that more than 20 million square feet of it has been demolished in Silicon Valley in the past five years to make way for the development of higher-density Class A office and apartment projects. As such, the supply has decreased substantially while the demand has increased," Lower said.

Washington Holdings has recently closed on a four-building R&D complex in North San Jose for which it paid $24.5 million. It will keep looking for more similar opportunities.

He said that though these projects are the firm's first equity plays in the Bay Area, the company has been active as a lender in the region, including providing funding for some of Jay Paul Company's Moffett Park projects.

According to Davidson-McMahon, phase one of building renovations and walkway and landscape improvements will be completed in June, phase two building

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The Bay Area’s premier real estate development firm

PHOTOGRAPH

Grant Zhao

Newly remodeled 4101 & 4151 Burton Drive.

and landscape improvements are scheduled for year-end, and a “phase two-A” project involving one building on the northeast corner of the park will be completed in June 2016. If all goes as planned with the entitlement process, phase three's hotel and retail construction also will break ground in June 2016.

Green elements of the renovation project include droughttolerant landscaping and drip irrigation that are replacing turf in several areas, LED lighting, recycled finishes and low-flow plumbing fixtures.

"We are also using as much clear glass as possible, versus heavily tinted, in order to allow as much natural light as possible in the spaces without compromising energy efficiency," DavidsonMcMahon said.

The seven private outdoor amenity areas range in size from 2,000 square feet to 4,000 square feet and feature tables and chairs, lawns, new trees and landscaping.

When the renovations and development are complete, Davidson-McMahon said Mission Park will be able to "offer what tenants in today's market are looking for—functional interiors, walkable amenities, outdoor recreation areas and an extended walkable campus that allows one to get up and walk, run or bike to reduce stress and rejuvenate the thought process throughout the day."

Residential Development Commercial Development Property Management Investments

srgnc.com I 650-378-2800

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Word on the Street Now that the economy in the Bay Area is doing well, again, what worries you the most?

ILLUSTRATION

Oleg Beresnev

1

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3

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RIM ARCHITECTS

SWINERTON BUILDERS

TMG PARTNERS

Jamie Saunders Managing Principal

Michelle M. Jones Sr. Vice President Managing Principal

Steve Johnson Senior Vice President & General Manager

Tom Stubbs Partner

The largest concern we have in the professional services industry is finding and retaining talent. Now that everyone is busy, there is a fine balance between handling the workload and keeping your employees happy and satisfied.

Everyone is hiring, and the market is competitive. Keeping your people motivated, inspired and eager to come to work is equally as important as finding new work.

With the economy thriving, construction work is at its peak, our greatest asset is and will always be our people. Retaining our staff while growing to successfully service our clients is always a concern. With growing demand for services, construction costs are increasing and reducing the return on investments for our clients.

So, client decisions are delayed, making the coordination of project labor, materials and equipment even more challenging. Client attempts to avoid price increases by accelerating the pace of the design and construction often create additional strains on everyone.

The biggest fear we have with a strong economy is that tenants will forget that economies are cyclical, and by choosing to have a short memory may not be mindful of the fact that long-term planning is still important. This means they need to focus on flexible solutions for their businesses.

2

CRESA

What worries me most is 107 Unicorns and their valuations.

The very notion is oxymoronic, for obvious reasons. These are startups with a market cap of $1 billion or greater and used to be a rarity.

Very few of them are profitable and at some point the VC’s who are funding them may well turn off the spigot. If they do that at the same time, the employees and founders of these companies could be looking for work.

Other contenders for what worries me most are statements such as these: “It’s different this time…”

“We are only in the 5th inning…”

“This is not a bubble…”

“We are headed for a soft landing…”

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Port Imperial, 20,000 square feet Greensulate installation built over a parking structure. The site is in New Jersey and looks into Manhattan.

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SUSTAINABILITY

Covered Assets Green roofs trending to new heights WORDS

Amy Norquist Sargent Photography

PHOTOGRAPHS

G

reen building seems to be making its way (thankfully) into every new development and plan in the Bay Area with innovative solutions in energy management, materials, design, windows and more. But green roofs historically have been seen as an interesting element of green infrastructure—more of a cherry on top—with some of the most visible green roofs historically being viewed as a dramatic design element, bordering on esoteric. This, however, is changing.

Green roofs in the Bay Area are growing (pardon the pun) and overall adoption is accelerating. The California Academy of Sciences green roof in San Francisco is a green roof darling, has become an oft-referenced iconic view shed. It is valuable for the green roof industry since it is highly visible and comes with helpful educational placards, explaining the many benefits of green roofs. More recently, Facebook’s new campus unveiled this spring with its 9-acre green roof has also captured the imagination of many, and raised awareness of the tremendous benefits of green roofs on employee productivity, the environment and a building’s bottom line.

As the number of green roofs expands across the Bay Area (San Francisco currently has nearly 50 in the pipeline, and the city is eager to support more), the role of green roofs is changing. The Academy roof, which opened in 2008, is not exactly replicable or accessible to the average residential or commercial client. (Few projects will include Renzo Piano and few will include a dramatic

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undulating design that models the seven hills of San Francisco.)

Similarly, few Bay Area companies can afford a Frank Gehrydesigned 9-acre park on their rooftop, as Facebook did. However, over the past few years, green roofs have indeed moved from the esoteric to the mainstream, with increased adoption reflected in an overall projected green roof market size growing by $2 billion in the next 2 years—the bulk coming from the U.S.—to $7.7 billion by 2017. Commercial buildings have been identified as a major piece of this market growth.

The visible trends for green infrastructure (which include both green roofs and green walls) sailed over the Atlantic to the East Coast, and are now hitting the West Coast, and include green roof projects on a much larger scale in commercial construction and retrofitting. (We do everything bigger in the U.S., don’t we?)

And it’s worth noting that in Europe, where green roofs sprouted, there are four countries that now mandate green roofs on all new construction and roof membrane replacement over 5,000 square feet. France is the latest to put this requirement on the books,

Though we already intuitively know that seeing or accessing nature during our workday makes us healthier, happier and more productive people, we now have quantifiable evidence. doing so in late March of this year.

Though we already intuitively know that seeing or accessing nature during our workday makes us healthier, happier and more productive people, we now have quantifiable evidence. A study released last month from the University of Melbourne showed that employee productivity increases significantly when employees looked out onto a green, living roof vs. a concrete roof.

Facebook’s 9-acre green roof is shown to mirror their workplace culture, aiming to create a space where everyone can easily recharge with nature, connect with each other and thrive.

There are a number of timely factors that are driving this current growth that span across regulatory, environmental, economic and aesthetic arenas.

1. REGULATORY Incentives and regulations supporting green roofs have skyrocketed. In 2007 there were three such incentives, regulations, or tax rebates in the U.S. Today that number exceeds 40, and more are coming online every month. Many of these incentives come in the form of stormwater management or energy policy, but many also come in the form of building incentives and fast-track permitting. Companies like Restoration Hardware are incorporating park space on their roofs to receive floor-to-area ratio bonuses.

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2. ENVIRONMENTAL Green roofs absorb and store large amounts of heat, which reduces temperature fluctuations and reduces Urban Heat Island and reduces ground level ozone. Researchers estimate that a 1,000 square-foot green roof can remove about 40 pounds of particulate pollution from the air in a year, while also producing oxygen and removing carbon dioxide (CO2) from the atmosphere. It’s estimated that there is a half ton less of CO2 emitted every year for every 1,000 square feet of green roofs installed. Stormwater runoff is reduced by as much as 90 percent, and oh, by the way, green roofs use 7 percent of the water needed for a traditional lawn, and in many cases with drought-resistant plants, a green roof does not use any additional water. In addition, green roofs also create biodiversity and habitats for animals, reduce noise and save energy.

3. ECONOMIC It’s been proven that green roofs enhance building value, even when there is no direct roof interaction with building occupants. A recent Natural Resource Defense Council study focused on the commercial value of green points to a 16 percent increase in lease rates and higher occupancy when green roofs are included in design. Green roofs decrease HVAC footprints, AC loads and vertical heat gain through improved insulation and cooling effects. The cooling effect also increases efficiency of solar panels, when placed on green roofs. Roof life is doubled or tripled, thus reducing the need for roof replacement 15 years after installation, and saving hundreds and thousands of dollars.

And when the building is designed for a green roof that is viewaccessible or used, the economic benefits climb even higher, and move from nice-to-have to want/need-to-have.

In addition, there is increasing use of PACE (Property Assessed Clean Energy) funds for this energy-saving strategy, which allow building owners to fund the upfront investment through a PACE loan, and which is attached to the property tax bill and paid back over a period up to 20 years.

4. AESTHETIC The aesthetic driver of green roofs is clear and simple. People like green space and will pay more to have visual or real access. Large companies like Facebook and Google are including biomimicry and biophilia in their campus design. These strategies improve the health and well-being of employees and of the building itself. It turns out that visual connection with nature is quite valuable. Biophilic design reduces stress, enhances creativity and clarity of thought, improves our well-being and expedites healing. As the world population continues to urbanize, these qualities are ever more important.

Cost analysis has proven that including green roofs in new and existing building design is a sound decision and a profitable long-term investment. As we see an increased number of highly visible green roofs throughout the Bay Area, we will not only have happier, more productive employees and tenants, but also more importantly, we can begin to offset the impact of climate change one roof at a time.

AMY NORQUIST is founder and CEO of Greensulate. Greensulate is based

in New York City and has installed hundreds of thousands of square feet of green roofs since it was founded in 2007. Amy can be reached at anorquist@greensulate.com.

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DESIGN

XACTLY ON TARGET Tech firm’s office design provides ‘wow’ factor, encourages collaboration

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WORDS

Nancy Amdur Laura Kudritzki

PHOTOGRAPHS

W

hile Xactly Corp. officials worked on designing the company’s new office space in downtown San Jose, details were kept secret from most employees.

“We shrouded the whole thing in secrecy,” said Christopher Cabrera, Xactly’s founder and CEO. “I wanted them to have this ‘wow’ factor right out of the gate.”

The company, which provides cloud-based incentive solutions and serves customers worldwide, more than doubled the size of its headquarters in April when it moved to River Park 2 Tower at 300 Park Avenue, where it occupies the top three floors of the 17-story building.

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Utilizing every inch of their space, Xactly has reinvigorated the interiors of a former law office.

It is the fast-growing company’s fourth San Jose location since its founding 10 years ago. This most recent move took it from 28,000 square feet to 60,000 square feet. It now occupies two floors and the third will be finished as the company expands. The space will hold about 230 employees.

“This move was to give us enough space that we wouldn’t outgrow it in three years,” Cabrera said, adding that the company, which recently announced plans to go public, started with an 8,000-square-foot office in San Jose. It has stayed in the city in part because it is “easy to get into and out of, has lots of parking and lots of freeway access.” Also, it allows the company to draw talent from many parts of the Bay Area, he said.

This is the first time Xactly designed its space from scratch, said Lorri Kershner of Santa Cruz-based L. Kershner Design, who was the principal designer on the project.

A law firm was the prior tenant in Xactly’s last space at 225 W. Santa Clara St., and although the company reconfigured that space to better suit its needs, it still carried more conventional features such as enclosed perimeter offices and cubicles, Kershner said.

“What was lacking in the last space was the ability to have some of these areas where people could collaborate,” Cabrera said. “[Employees] wanted places to huddle and have impromptu meetings.”

“In the new space, they opted for a complete open landscape,” Kershner said.

At Xactly, interactivity, connectivity and collaboration are important, so many office walls—provided by Calgary-based

For a visitor, it’s a great introductory experience, but for the employees who enter through that lobby every single day, it’s a great reinforcement of where they work and what they’re doing.”

Lorri Kershner of Santa Cruz-based L. Kershner Design, who was the principal designer on the project

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Xactly’s new space was created to mirror the company’s culture of openness and transparency.

DIRTT Environmental Solutions—are writable and feature technology allowing for embedded flat-screen televisions, which helps create spontaneous meeting space, Kershner said. DIRTT, which stands for Doing It Right This Time, uses 3D software to design, manufacture and install sustainable customized products that can easily be reconfigured or removed.

“Every surface can be put to work,” Kershner said.

Additionally, perimeter conference rooms are all glass to enhance “the sense of accessibility and transparency,” she said.

A focal point in the new office is the cafeteria, which features polished concrete floors, booths and enough room to hold the company’s “all-hands” staff meetings. The cafeteria also includes televisions, built-in microwaves and a butcher-block island on wheels. Lunch is delivered daily, and a range of espresso drinks are available along with spa water, infused with ingredients such as fruit.

“It’s a very active, animated space,” Kershner said.

Other special features in the new space include desks that can be height adjusted just by pressing a button, Cabrera said.

The high-rise location also provides “breathtaking” 360-degree views of downtown San Jose, said Mary Jo Rose, the company’s senior director of buzz and brand.

Creating space to mirror the company’s culture was important, Cabrera said.

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“One of the things [Xactly] wanted was an environment that reflected their mission and their sense of community,” Kershner said.

Upon entering Xactly’s new office, employees and visitors see a large media wall featuring a screen that details the company’s story and goals.

“For a visitor, it’s a great introductory experience,” Kershner said, “but for the employees who enter through that lobby every single day, it’s a great reinforcement of where they work and what they’re doing.”

“Our company is so focused on our culture and core values and our philanthropic [ventures], and having that messaging in a cool-looking professional way on these glass walls keeps it in their minds,” Cabrera said.

The office overall feels “inviting and easy,” Kershner said, and the company’s “playful culture” is reflected in splashes of vibrant lime green, orange and yellow accents throughout the space.

“Everything about where we work is amazing,” Rose said. The design “is cutting edge and encourages collaboration” and “gives you a sense of pride in your space,” she said.

“It feels comfortable and there’s a lot of interaction between employees,” Cabrera said. “People are happy. They are enjoying [it].”

“We had a great place before,” he added, “but now when people walk in, they’re just blown away.”

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San Francisco Skyline While these 10 buildings do not represent the entire San Francisco downtown market, the vacancy in these tallest towers is indicative of the broader market conditions.

SALESFORCE TOWER

NUMBER OF FLOORS YEAR BUILT/RENOVATED SUBMARKET CLASS

101 CALIFORNIA STREET 101 California Street

61

48

52

48

48

2017

1972

1969/1971

1986

1982

South Financial District

North Financial District

North Financial District

North Financial District

North Financial District

Trophy

Trophy

Trophy

Trophy

Trophy

1,420,081 SF

499,215 SF

1,497,000 SF

600,000 SF

1,237,631 SF

AVERAGE FLOOR PLATE

23,280 Total

10,400 Total

28,627 Total

17,143 Total

25,064 Total

706,354 SF

75,613 SF

65,000 SF

14,231 SF

108,220 SF

50.3%

84.9%

95.7%

97.6%

91.3%

706,354 SF

68,261 SF

45,000 SF

14,231 SF

108,220 SF

50.3%

86.3%

97.0%

97.6%

91.3%

$105.00 FS

$65.00 FS

$75.00 FS

$65.00 FS

$87.00 FS

Boston Properties

Transamerica

Vornado

Hugo Mann Ent

GIC Real Estate/ HKMA

OCCUPIED DIRECT VACANT LEASED DIRECT RENT OWNER

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555 California Street

345 CALIFORNIA STREET 345 California Street

RBA

VACANT

BANK OF AMERICA

415 Mission Street

TRANSAMERICA PYRAMID 600 Montgomery Street

LEED

No

Yes

Yes

Yes

Yes

LEED CERTIFICATION

N/A

Platinum

Certified

Gold

Platinum

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COMMERICAL

OCCUPIED

DIRECT VACANT

SPEAR TOWER

1 SANSOME STREET

1 Market Street

43

SUBLEASE

FUTURE AVAILABLES

DATA

44 MONTGOMERY STREET 44 Montgomery Street

333 BUSH STREET

1 Sansome Street

1 EMBARCADERO CENTER 1 Embarcadero Center

41

45

42

43

333 Bush Street

1976

1984

1971

1966/1996

1986

South Financial District

North Financial District

North Financial District

North Financial District

North Financial District

Trophy

Class A

Trophy

Class A

Trophy

829,435 SF

611,000 SF

735,905 SF

654,350 SF

542,743 SF

21,000 Total

16,000 Total

16,353 Total

15,579 Total

17,500 Total

152,274 SF

36,134 SF

45,294 SF

19,539 SF

125,593 SF

81.6%

94.1%

93.8%

97.0%

76.9%

147,947 SF

36,134 SF

37,794 SF

19,197 SF

102,972 SF

82.2%

94.1%

94.9%

97.1%

81.0%

$70.00 FS

$68.00 FS

$68.00 FS

$64.00 FS

$66.00 FS

Paramount/ Blackstone

Prudential

Boston Properties

Seagate Properties

DivcoWest / PRIM Board

Yes

Yes

Yes

Yes

Yes

Gold

Gold

Gold

Gold

Gold

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JLL

NUMBER OF FLOORS YEAR BUILT/RENOVATED SUBMARKET CLASS RBA AVERAGE FLOOR PLATE VACANT OCCUPIED DIRECT VACANT LEASED DIRECT RENT OWNER LEED LEED CERTIFICATION

63

Jeremy

FINAL OFFER

Helsby Group Chief Executive of Savills

O

n May 1st of last year, London-based Savills announced that it was merging with Studley, a New York-based firm, one with strong roots in the Bay Area market, as well. Studley’s differentiation among brokerage firms is that its focus is entirely on representing the interests of tenants, and as such acting as a strong voice for things that matter to the end users of commercial real estate.

The new firm in the U.S. will now be called Savills Studley, and it will provide a platform for the global consultancy to scale its services not only across the Bay Area, but globally, as well.

Jeremy Helsby, the group chief executive of Savills who is based in London has been with the firm for 35 years, visited Silicon Valley recently and took account of the group’s presence here. We caught up with him upon his return to the U.K. and found out that he liked the Bay Area, after all!

Why is it important for a company like Savills, which has a presence across the globe in all real estate sectors, to be in the United States?

HELSBY: By merging with Studley, Savills has acquired a strong

platform in the U.S. from which we can continue to grow our business. Savills Studley is uniquely positioned to develop new business from around the world, while continuing to deliver exceptional service to existing clients. With the addition of strategic locations, many of them hubs for the expanding technology sector, including the recent acquisition and expansion in Silicon Valley, we are now positioned to provide exceptional services to clients in the world’s key locations, leveraging a truly global platform. The U.S. is a key priority and investment focus for Savills, and we are delighted with the progress to date.

With so many players in the U.S. and competition being so tight, how will you compete, and what differentiation will you be offering your clients?

HELSBY: First and foremost, Savills Studley remains committed to the tenant representation business model and will continue to work alongside tenants, conflict-free, as trusted advisors. In addition to advising tenants on transactions, we are providing clients with a host of occupier services that reflect how critical the workplace has become in attracting and retaining talent. We are engaged with our clients across the full lifecycle of their real

64

estate needs, offering strategic consulting, lease administration and account and project management.

Within our capital markets business, our differentiator is our strong Asian business from which we can access Asian investors who are active across the US and on the West Coast; this is crucial for those clients wishing to sell assets and maximize returns.

In addition, Savills Studley gives us further penetration into US investors who are currently the second largest investor group in London and a leading group of buyers in Europe.

Studley was entirely focused on tenant representation, yet the larger, global organization that you lead has many more services that it offers. Will that change the way Savills Studley operates in the U.S.? If so, how?

HELSBY: Savills Studley will continue to have the same business model and focus on tenant representation. The combination of two well-known, highly respected firms provides a broader foundation for future success. We have expanded our capital markets business, which has proven to have reciprocal benefits for our tenant clients.

Are there certain regions in the U.S. where you will focus your attention more in the beginning? Why? HELSBY: The entire Bay Area saw explosive growth in 2014, driven primarily by the tech sector, and demand continues to rise. The market is fast-paced and dynamic in that it is home to many startup companies looking to grow both nationally and internationally, and is also a core market for global firms looking to begin or expand their footprint in the U.S. Our global platform is imperative to providing these companies integrated, strategic real estate solutions around the world.

Our strategy moving forward will be to further build upon our existing Savills Studley U.S. business to create the best—not the biggest—real estate firm.

During your recent visit to the Bay Area, what surprised you the most about the industry here?

HELSBY: The impact of the technology industry in Silicon Valley and San Francisco is so dynamic and dramatic that it influences every Bay Area business sector from accounting and law firms to venture capital companies. The region’s innovation explosion has created a heightened level of intensity and energy and being successful here requires being focused, driven, entrepreneurial, creative and nimble.

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