Blog | Calco Commercial, Inc.

Jan

National Industrial CRE 2016 Outlook

Bigger Panama Canal, Increasing E-Commerce Expected to Drive Industrial Markets in 2016
Logistics/Distribution in a Period of Rapid Transition

Source: CoStar News
By: Mark Heschmeyer
Date Posted: December 29, 2015

There are two primary obsessions dominating the outlook for industrial markets in 2016: the much-anticipated spring opening of the $5.25 billion expansion of the Panama Canal (Panamax); and the impact e-commerce is having on logisitics networks.

The effects of both already have begun reshaping U.S. industrial markets, and those effects are expected to accelerate in 2016.

“Industrial distribution is in a period of transition,” said George Livingston, chairman emeritus of NAI Realvest in Orlando. “It will end with a mix of bigger buildings, like Amazon properties, and smaller more close-in, last mile properties. Design will change. Outmoded buildings will be redeveloped. Warehouses will become part of retail mixed-use developments.”

“Sales volume and price will continue to increase — as will rents. Some markets have to catch up,” added Livingston.

8 Years of Waiting Ends in Spring

The effects of the Panamax expansion, which will allow for the doubling of the size of the ship that can pass through the canal, have already impacted coastal U.S. markets. The average sale price of warehouse and distribution facilities along the U.S. coast has risen 50% in the last five years. Annual sales volume for those same properties has nearly tripled in that time, and they have added nearly 46 million square feet of new space in the last two years.

The downside to all of that new development is that net absorption has totaled a negative 40 million square feet in that time and the vacancy rate for warehouse distribution space has jumped to about 33%.

Still, the anticipated boost in international trade from Panamax here in the U.S. has sent average asking rents for industrial property up in coastal markets by 20% over the last five years.

The widening of the Panama Canal is now 96% complete and the opening of the new channel to large cargo vessels is scheduled this spring. Improved shipping times to East Coast markets as a result of the expanded canal is expected to chip away at the value advantage currently offered by cross-country rail shipments from West Coast markets, concluded a CoStar study of the expected impact of the canal expansion on seaport real estate completed in 2012.

panama_canal-forweb

Transportation costs by ship, train, or truck, are in constant flux and vary widely depending on the route and time of year. They can also be influenced by supply and demand, as well as factors like fuel costs.

However, whether the increased investment in coastal industrial property markets will pay off could begin to be seen this year. But they are in no ways sure bets.

Monmouth Real Estate Investment Corp. this month acquired a new 175,315-square-foot industrial building at 450 Northpointe Court in Covington, LA, for $18.4 million. The property is net-leased for 10 years to FedEx Ground Packaging System. Louisiana marks a new territory for Monmouth, which purchased the property for its proximity to the Port of New Orleans, the fifth-largest port in the U.S., and one largely expected to benefit from Panamax.

Monmouth’s chairman, Eugene Landy, has long sounded the benefits of the Panama Canal expansion. “We just think it’s going to be a game changer,” Landy said in his quarterly earnings conference call last month.

“If you double the size of the ship, you increase the cost of operations by only 50%. So you’re getting bigger and bigger ships that are going through an expanded canal, and they’re going to go to the Gulf Coast. They’re going to go to the East Coast,” Landy said. “Frankly when you take areas like New Jersey, I have no idea where they’re going to put all that merchandise. There’s going to be a tremendous shortage of warehouses when those ships start arriving.”

Denny Oklak, chairman and CEO of Duke Realty, isn’t quite as heady on the immediate prospects for industrial property owners.

“Clearly we think it’s going to be beneficial for the Eastern Seaboard markets, and I would also include the Gulf markets, like Houston,” Oklak said in his latest earnings conference call. “But we think the impact is going to be very slow to take place. I don’t think you’ll see really meaningful movement across the Eastern Seaboard for potentially upwards of 10 years.”

Because they involve the whole logistic supply chain network, Oklak said companies do not make changes overnight.

“You’re talking about changes in rail lines, trains and changing in trucking and distribution, new facilities being built,” Oklak said.

Executives at First Industrial Realty Trust also were of a mixed mind. On one hand, they said they felt like a lot the adjustments to industrial space demand have already happened. At the same time, the lowering of transportation costs to goods coming to the U.S. means consumers can buy more, which can only benefit industrial real estate space in the long run.

Consumer Shopping Behavior Changing Industrial Markets

The impact from consumer shopping behavior beginning to migrate online is reaching all inland and coastal industrial markets.

Although e-commerce as a percentage of total retail sales is still small, it continues to increase. Mobile commerce (M-commerce) is also still in its infacy, but it too is increasing. As a result, many retailers are reducing their store footprints and, in some cases, offering showrooms for customers to browse and order their products for shipment.

“This is a big part of the reason why industrial demand continues to outstrip supply in many regions,” said Matthew Dolly, director of research for Transwestern based in Northern New Jersey. “As a result, developers continue to seek land opportunities and where land is scarce or too high-priced, some builders will continue seek redevelopment opportunities in functionally obsolete properties of any type.”

Port markets in the Northeast are expected to benefit from both Panamax because of increased shipping to the Eastern Seaboard and their proximity to major population centers and the retail demand that generates, with the Port of New York and New Jersey being an obviosu example. But even inland ports are benefitting, said Dolly.

Shipping traffic is slated to double at the Port of Albany after the Empire State Development Corp. awarded the port a $4 million grant to construct a heavy-lift cargo operations building that will allow for the movement of intermodal cargo.

The Rosenblum Cos. in Albany, NY, is pursuing approvals from the nearby Town of Bethlehem for a 120,000-square-foot industrial park that will feature three modern, high-bay warehouse buildings.

“Industrial vacancies in our market are at historic lows and much of the product reflected in the statistics is outmoded, so the market is hungry for modern warehouse and distribution facilities,” said Seth D. Rosenblum, CEO of The Rosenblum Cos. “We’ve been eyeing the area near the Port of Albany as an industrial expansion opportunity. Albany’s port is the northernmost inland port open to traffic year-round and serves as an alternative to the NYC-area ports.”

Evergreen Industrial Properties in Dallas is also seeing a significant increase in leasing velocity at industrial assets with infill locations.

“Today’s light industrial users, many with an existing e-commerce component to their business model, are focusing on proximity to the metro population core,” said Graydon L. Bouchillon, head of acquisitions for Evergreen. “As the revival of urban living across the U.S. strengthens, we’re seeing light industrial tenants place emphasis on locations that have the ability to meet consumer demand for same-day and next-day delivery. 2016 will be the year that the need for a viable ‘last mile’ solution moves to the forefront for many light industrial users.”

Dec

National CRE News: Fed Raises Rate After 7 Years–How Hikes will Affect Commercial Real Estate

Interest Rate Hikes Reflect Expected Strengthening of Economic, Employment Conditions

Source: CoStar
By: Mark Heschmeyer
Date Posted: December 16, 2015

After seven years of worrying over raising interest rates, discussing the best time to raise interest rates, and debating the impact of raising interest rates, money from the federal government is no longer free.

In a unanimous vote, the board of the Federal Reserve voted to raise interest rates a quarter of a percentage point.

The hike has been anticipated for nearly six months, thanks to a thorough communication strategy from the Fed that all but eliminated the element of surprise for a jittery stock market. The increase became a foregone conclusion following strong employment growth numbers last month.

Additional interest rate hikes are expected going forward, but will come slowly as the Fed continues to take an accommodative stance supporting further improvement in labor market conditions and a return to 2% inflation.

The impact from the decision could also take some time to surface.

“We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates,” said Spencer Levy, head of research, the Americas for CBRE. “That said, certain markets may be more susceptible than others to interest rate increases.”

The other wild cards Levy said could have a bigger impact than interest rates include the price of oil, an economic crash or ‘hard landing’ in China, which would lead to pull back in Chinese capital flows, or some other “black swan” event which would impair global growth.

Any such event could easily cause the Fed to reverse course, neutralizing any potential capital outflows, Levy said.

“The flow of international funds-combined with domestic pension funds’ large pools of capital allocated to commercial real estate but unspent-will outweigh any potential increase in the cost of capital,” he added.

Hans Nordby, managing director of CoStar Portfolio Strategy in Boston, agreed that today’s Fed rate hike should have little or no impact in the near term for private sector commercial real estate investors.

“First, while nominal cap rates are very low versus history, the spread between going-in cap rates and comparable investment vehicles, including bonds, stocks and treasuries, is very high,” said Nordby. “Therefore, rates can come up a bit before cap rates need to rise.

“Second, the Fed chose to increase rates because the ‘real’ economy, most notably job growth, is strong. Strong economies increase demand for real estate, and therefore rents. So, these increased rates are in tandem with higher incomes for the real estate, all else being equal,” he added.

“Finally, the fed is unlikely to push rates very hard in near future, given that growth outside the U.S. is very low, and the dollar is very high. Pushing up rates would make American exports even less competitive, just as foreign markets’ demand for U.S. goods is declining.”

Jeffrey Rinkov, CEO of Lee & Associates, said he also expects the rate hike will have minimal impact on commercial real estate.

“Based on a strengthening and stabilizing economy, I believe this was a logical move by the Fed,” Rinkov said. “While the Fed is driven by data, I think this signifies its belief that the economy can operate in an environment with a normalizing monitory policy. Relevant to real estate investment, long term interest rates should remain at historical low levels which will continue to incentivize investment.”

Housing Could See a Boost

One area that could see relief from a higher-rate environment is housing.

Steve A. Schwarzman, chairman and CEO of The Blackstone Group, took an informal show of hands survey last week at Goldman Sachs U.S. Financial Services Brokers Conference, asking the audience how many thought rising interest rates would hurt housing prices and then how many thought it would help.

Hardly anybody raised their hands when asked whether housing prices go down. And about a third of the room put up their hands very slowly when asked whether housing prices go up.

“Well,25 over the last 26 times in history when interest rates went up the value of houses went up,” Schwarzman said. “Because when you have inflation or you have people making more money with the economy growing, that tends to push up the value of houses.”

The more interesting question about interest rates, Schwarzman said is how slowly prices go up.

“But if the markets want to be down on real estate values, that’s okay,” Schwarzman said, “because then we’ll just take out some huge companies, put out huge amount of money at very good prices and what happens at the underlying assets are always worth way more than the stock market is willing to value at the stage and a cycle.”

Martha Peyton, managing director of TIAA-CREF Global Real Estate Strategy & Research, acknowledged that there are fears rooted in the perception that rising interest rates will weaken property values and commercial real estate (CRE) investment performance.

“But, historical data show that higher interest rates have not necessarily derailed CRE total returns, Peyton said. “In fact, property performance has often remained resilient in the face of rising rates. Furthermore, there are a number of factors that may provide protection to overall property performance in a rising interest rate environment.”

The most important protective factor, she said is that rate hikes in the current environment reflect expected strengthening of economic and employment conditions.

Link to Article: Fed Raises Interest Rate

Dec

San Francisco CRE News: Potrero Hill industrial site to become new “maker” hub

Source: San Francisco Business Times
By: Cory Weinberg
Dated Posted: December 10, 2015

An acre of warehouses, sheds and gravel bunkers near the base of Potrero Hill could become home to San Francisco’s next hub of “maker” and tech office space, according to city filings.

The San Francisco Gravel Co. is in early talks with the Planning Department about whether its sprawling South of Market property at 552 Berry St. would qualify for the city’s 2014 legislation incentivizing the new construction of manufacturing space by allowing more lucrative offices on underutilized land.

It would be the second project to take advantage of the legislation now that Kilroy Realty Corp. is starting to develop 100 Hooper nearby with two-thirds slated for office use and one-third for “production, distribution and repair.” That’s a zoning designation reserved in part for manufacturing and light industrial companies that typically can’t afford high rents.

The Berry Street property is zoned for PDR and could not see offices rise on the site without the 2014 legislation.

552 Berry Street

“Based on an investigation of the property’s permit history and informal interpretation by the Planning Department staff, this property does indeed qualify under the criteria for the legislation. Further, it meets the purposes of the legislation in that SF Gravel Company had a very low employment density,” according to a letter to the city penned by consultant Badiner Urban Planning.

The gravel company, which has inhabited the property for nearly a century, also has tapped developer SKS Investments to study the site, according to the “zoning determination” letter sent to the Planning Department. It’s unclear how large the development would be if proposed.

SKS is accustomed to turning former industrial spaces into tech office beacons. The San Francisco-based company recently redeveloped the historic McClintock building – formerly used to manufacture dresses – and leased it up to biotech firm Invitae for laboratory use. It also transformed the former jewelry at 888 Brannan St. into office space for Airbnb.

Dan Kingsley, a managing partner for SKS, said “our plans are not firm” and declined to comment further.

San Francisco’s South of Market area could begin to see several office developments attached to new manufacturing spaces. Not only is Kilroy building a major property, but the city is planning to require some PDR in new large office developments under next year’s Central SoMa rezoning plan.

Until now, new PDR space has typically been economically infeasible to develop because of the law rents it generates. However, the 2014 legislation permitting office development to help fund PDR space is starting to change that.

In addition, the city has seen the rise of manufacturing companies with venture capital backing – creating a class divide with more typical ‘makers.’ That trend has concerned the like of SF Made, the influential advocacy group that will develop ‘maker’ space at 100 Hooper.

Link to article: Maker Hub coming to Potrero Hill

Dec

San Francisco CRE Tech News: Rents & Wages still Soaring in Bay Area

Source: San Francisco Chronicle
By: Kathleen Pender
Date Posted: December 3, 2015

Fierce demand for tech workers and office space in the Bay Area continues to push wages and rents into the stratosphere.

In San Francisco, the average annual wage for tech company workers rose to $176,275 in 2014, up 12.8 percent from the year before. That was the biggest increase among 36 markets nationwide, according to JLL, a commercial real estate services firm.

The wage might sound high, because it includes salary, bonuses, income from stock options, severance pay, cash value of meals, tips and certain other types of compensation.

shutterstock_290712998

San Mateo County had the nation’s highest average tech company wage last year, $240,663. That was actually down 23 percent from 2013, when the county’s average was probably distorted by a $3.3 billion stock option gain reaped by Facebook CEO Mark Zuckerberg. It was also skewed in 2012, when the Menlo Park company went public and Zuckerberg made a $2.1 billion profit exercising options, said JLL Vice President Amber Schiada.

“It’s crazy how just one company can move the needle, but San Mateo’s tech-job base is small” compared with neighboring counties, Schiada said. Last year, with no Zuckerberg options in the picture, San Mateo County’s average tech wage looked a little more like its neighbors’.

In Santa Clara County, the average tech company wage was $211,874, up 8.4 percent from 2013. In Alameda and Contra Costa counties, it rose to $121,747, up 6 percent.

These numbers, derived from federal and state labor market data, reflect average wages in eight industries selected by JLL: computer/electronic product manufacturing, electrical equipment manufacturing, e-retailers, online auctions, computer systems design, data processing and hosting, software publishers, and other information services.

By comparison, the average wage in all industries nationwide last year was $51,364 in 2014, up 3.1 percent, according to the U.S. Bureau of Labor Statistics.

The growing disparity between tech workers and everyone else is putting pressure on cities to raise their minimum wage and even helped win a pay raise for tech bus drivers, said Steven Levy, director of the Center for Continuing Study of the California Economy. But these gains at the bottom of the income scale “are swamped by increases in housing prices, mostly rent.”

Office rents soar: The same bidding wars driving up tech wages and housing are also driving up the cost of office space. The average asking rent in the third quarter was $66.80 per square foot per year in San Francisco, up 12.6 percent over the previous 12 months. It was $53.49 in San Mateo County, up 16.4 percent, and $41.68 in Santa Clara County, up 3 percent. That compares with a U.S. average of $30.59 per square foot.

Tech companies hoping to avoid the Bay Area’s high cost of labor, housing and office space are considering locating in secondary and tertiary tech hubs. In a report, JLL analyzed 37 markets based on their costs (wages, office space and housing) and startup opportunity (measured by employment and wage growth, Millennial workforce and education levels, patent activity, access to venture capital and proximity to a tech cluster or giant).

Based on these factors, San Francisco offered the highest startup opportunity but also the highest cost. Markets that offered high opportunity and more reasonable costs included Austin, Seattle-Bellevue, Denver, Chicago and Washington. Places with high startup opportunity and low costs include Las Vegas, Orlando and Nashville.

“If you are a young tech company, especially one that is sensitive to cost,” those markets look more attractive, Schiada said.

The report pointed out that only 59 percent of unicorns — private companies valued at $1 billion or more — are now based in San Francisco and Silicon Valley, down from 76 percent in 2014.

That said, Silicon Valley “is still the center of the tech universe” and will be for the foreseeable future, Schiada said.

Santa Clara County was by far the largest center of leasing activity over the past year, measured by leases of 20,000 square feet or greater signed by tech companies. Such leases accounted for 5.4 million square feet, more than twice as much as in the No. 2 market for tech leasing, San Francisco.

Which companies leased the most new space? In Santa Clara County it was Google, which signed up for 2.1 million square feet in Mountain View. In San Francisco it was Uber, which took on 310,000 additional square feet. In San Mateo County it was Survey Monkey, which leased 210,000 square feet at Bay Meadows. In the East Bay, it was Workday, which rented 151,000 square feet in Pleasanton, Schiada said.

These numbers exclude companies that purchased major new office space, including Uber in Oakland and Salesforce.com in San Francisco.

Rents are soaring …

Average asking rents for office space in the nation’s 10 most expensive tech submarkets:

Downtown Palo Alto: $98.68

Downtown Mountain View: $87.53

Mission Bay/China Basin, S.F.: $81.50

Hudson Square, N.Y.: $81.50

Soho, N.Y.: $79.80

Gramercy Park, N.Y.: $76.58

Menlo Park**: $73.44

South Financial District, S.F.: $68.61

North Financial District, S.F.: $68.53

East Cambridge, Boston: $67.21

*Per square foot, per year for full-service leases in the third quarter of 2015

**Excludes Sand Hill Road

Source: JLL

… And so are wages

Top 10 markets for tech company wages

Market

Annual wage, 2014*; Change from 2013

San Mateo County: $240,663; -23.5%

Santa Clara County: $211,874; 8.4%

San Francisco: $176,275; 12.8%

Seattle-Bellevue; $154,390; 7.4%

New York City-Brooklyn: $135,339; 7.8%

Boston: $131,278; 3.9%

Alameda & Contra Costa counties: $121,747; 6.0%

Northern Virginia: $119,901; 2.6%

Portland: $112,185; 7.8%

Suburban Maryland: $109,027: 5.4%

*Includes salary, bonuses, income from stock options, severance pay, cash value of meals, tips and certain other types of compensation.

Sources: JLL, Bureau of Labor Statistics, California Employment Development Department

Link to Article: Wages, Rents Up

Nov

Bio Tech News: 800,000 Square Foot Development Coming to South San Francisco

New Owner of high-profile Peninsula Tower aims to take biotech to new heights

Source: San Francisco Business Times
By: Ron Leuty
Date Posted: November 19, 2015

Emerging biotech companies are fighting a losing battle for space against deep-pocketed, aggressive tech companies. But Neil Fox expects to deliver a new life sciences option by this time next year.

Fox’s Phase 3 Properties Inc. closed Tuesday on its acquisition of the high-profile Centennial Towers project, nestled between San Bruno Mountain and Highway 101 in South San Francisco.

The developer plans to immediately convert part of the existing 12-story tower for biotech companies by the third quarter of 2016, then start construction of a 21-story, 400,000-square-foot biotech-centric structure to the immediate north that would come online in the second half of 2017.

The overall 800,000-square-foot development’s sale price wasn’t disclosed.

In a tight market for biotech labs/offices, Fox believes Phase 3’s focus on ready-to-occupy highrise space will be a winner. The vacancy rate for new biotech space in South San Francisco is in the low single digits, not counting a half-million square feet of sublease space held by Amgen Inc. (NASDAQ: AMGN).

If nothing else, Phase 3’s timing is impeccable: Space in the two-building, 253,000-square-foot first phase of HCP Inc.’s (NYSE: HCP) The Cove at Oyster Point already is booked for its third-quarter 2016 opening.

By the time, Phase 3’s 150,000-square-foot south tower upgrades for biotech will be ready, Fox said, and construction will be under way on the north tower.

Two other South San Francisco biotech projects entitled for roughly 3 million square feet — BioMed Realty Trust’s (NYSE: BMR) Gateway of Pacific and Shorenstein/SKS Properties’ bayside project — haven’t yet broken ground.

Centennial Towers developer Jack Myers earlier this year considered building the planned north tower as condominiums. But Fox, whose San Diego company focuses exclusively on life sciences, said the future is in biotech.

“Our research says there’s a need across the board. That’s why QB3’s incubators (in San Francisco and Berkeley) are so full,” Fox said. “There’s no real second-generation space on the market right now.”

Indeed, a number of young and emerging life sciences companies — as well as larger, growing companies — are in a critical search for space.

Buoyed by a renewed interest by venture capital firms in early-stage drugs, those companies are bringing on more staff to push experimental treatments into studies in humans, but they often lose the space race to larger, established tech or drug-development companies that can lease floors at a time.

“We need the space last month, not a year from now,” said Ken Horne, CEO of Symic Biomedical Inc., a 17-person, two-year-old company with one potential treatment in an early-stage clinical treatment and another set to start in the first half of next year. “A year is hard for a high-growth, high-momentum startup.”

Symic is housed in the University of California-related QB3@953 life sciences incubator in San Francisco’s Dogpatch neighborhood.

But Fox’s excitement about Centennial Towers isn’t based on timing alone: The development will offer biotech companies a high-rise option they don’t otherwise have in the Bay Area, he said, as well as space that needs a minimum of work for a quick move-in.

The Cove from HCP and the Gateway of Pacific project from BioMed, which is being acquired by Blackstone Group, have played up their tech-like campuses and amenities such as a bocce ball court and walking trails. But Fox said Phase 3’s differentiator with Centennial Towers is the high rise option that rarely is offered biotech companies outside of high-cost, high-density markets such as New York and Boston.

Working with San Diego’s McFarlane Architects, Phase 3 has floor plans that Fox said work for 95 percent of biotech companies. The space is a mix of 60 percent office and 40 percent general biology and chemistry labs — all with natural light.

Skidmore, Owings & Merrill LLP, the architect for Centennial Towers’ unique glass-facade south structure, also is designing the north tower.

“There’s no buried space in our buildings,” Fox said. “The quality of the project, the detail that went into it (by Myers), was something that was very attractive to us.”

Link to article: Peninsula Biotech

Nov

12

San Francisco Tech News: Dropbox to Consolidate Workers & Sublease 185 Berry St. HQ

The San Francisco Business times is reporting that Dropbox is slated to release 200,000 square feet of its current 500,000 square feet of office located at 185 Berry Street in China Basin (Dropbox looks to Shed China Basin HQ Space) at $75 a square foot. However, the article suggests that the shedding of space by Dropbox may be more about not wanting to “stay around one location” rather than a sign of a market slowdown.

As other large tech establishments and unicorns (Salesforce, Rocketfuel, Twitter, Lyft, etc.) have either put space up for sublease or plan to shift operations to other locations, market analysts are keeping watch, and some venture capitalists are growing worried (Winder is Coming). But as the Business Times’ article also points out, the availability of sublease space helps other companies who are going the ability to break into the market, or allow “…the likes of Apple to dive into San Francisco in a spaced leased by CNET” In a related article on SF Curbed (Dropbox Sheds), Mary Jo Bowling reports that “real estate pros are still reporting a healthy demand for SF commercial space, albeit with some caution.”

(185 Berry Street)

Oct

29

San Francisco 3rd Quarter Industrial Market Report

San Francisco’s Vacancy Increases to 3.6%
Net Absorption Negative (517,362) SF in the Quarter

Source: CoStar

The San Francisco Industrial market ended the third quar- ter 2015 with a vacancy rate of 3.6%. The vacancy rate was up over the previous quarter, with net absorption totaling negative (517,362) square feet in the third quarter. Vacant sublease space decreased in the quarter, ending the quarter at 337,738 square feet. Rental rates ended the third quarter at $17.82, an increase over the previous quarter. There was 293,100 square feet still under construction at the end of the quarter.

ABSORPTION

Net absorption for the overall San Francisco Industrial market was negative (517,362) square feet in the third quar- ter 2015. That compares to positive 89,907 square feet in the second quarter 2015, positive 111,275 square feet in the first quarter 2015, and positive 255,214 square feet in the fourth quarter 2014.

Tenants moving out of large blocks of space in 2015 include: Nippon Express U.S.A. moving out of (188,000) square feet at 250 Utah Ave, Tyco Electronics moving out of (184,462) square feet at 300 Constitution Dr, and Hajoca Corporation moving out of (40,000) square feet at 1111 Connecticut St.

Tenants moving into large blocks of space in 2015 include: Green Leaf moving into 105,600 square feet at 455 Valley Dr, Invitae Corporation moving into 103,213 square feet at 1400 16th St, and Flying Food Group moving into 69,500 square feet at 240 Littlefield Ave.

The Flex building market recorded net absorption of posi- tive 26,642 square feet in the third quarter 2015, compared to positive 203,145 square feet in the second quarter 2015, positive 104,924 in the first quarter 2015, and positive 114,780 in the fourth quarter 2014.

The Warehouse building market recorded net absorption of negative (544,004) square feet in the third quarter 2015 compared to negative (113,238) square feet in the second quarter 2015, positive 6,351 in the first quarter 2015, and posi- tive 140,434 in the fourth quarter 2014.

VACANCY

The Industrial vacancy rate in the San Francisco market area increased to 3.6% at the end of the third quarter 2015. The vacancy rate was 3.2% at the end of the second quarter 2015, and remained at 3.7% at the end of the first quarter 2015 compared to the previous quarter.

Flex projects reported a vacancy rate of 3.9% at the end of the third quarter 2015, 4.0% at the end of the second quarter 2015, 5.0% at the end of the first quarter 2015, and 5.4% at the end of the fourth quarter 2014.

Warehouse projects reported a vacancy rate of 3.5% at the end of the third quarter 2015, 3.0% at the end of second quarter 2015, 3.3% at the end of the first quarter 2015, and 3.1% at the end of the fourth quarter 2014.

SUBLEASE VACANCY

The amount of vacant sublease space in the San Francisco market decreased to 337,738 square feet by the end of the third quarter 2015, from 339,249 square feet at the end of the second quarter 2015. There was 333,754 square feet vacant at the end of the first quarter 2015 and 285,144 square feet at the end of the fourth quarter 2014.

San Francisco’s Flex projects reported vacant sublease space of 159,239 square feet at the end of third quarter 2015, down from the 164,850 square feet reported at the end of the second quarter 2015. There were 186,108 square feet of sub- lease space vacant at the end of the first quarter 2015, and208,699 square feet at the end of the fourth quarter 2014.

Warehouse projects reported increased vacant sublease space from the second quarter 2015 to the third quarter 2015. Sublease vacancy went from 174,399 square feet to 178,499 square feet during that time. There was 147,646 square feet at the end of the first quarter 2015, and 76,445 square feet at the end of the fourth quarter 2014.

RENTAL RATES
The average quoted asking rental rate for available Industrial space was $17.82 per square foot per year at the end of the third quarter 2015 in the San Francisco market area. This represented a 1.7% increase in quoted rental rates from the end of the second quarter 2015, when rents were reported at $17.52 per square foot.

The average quoted rate within the Flex sector was $28.42 per square foot at the end of the third quarter 2015, while Warehouse rates stood at $13.76. At the end of the sec- ond quarter 2015, Flex rates were $28.53 per square foot, and Warehouse rates were $13.03.

DELIVERIES AND CONSTRUCTION

During the third quarter 2015, no new space was completed in the San Francisco market area. This compares to 0 buildings completed in the second quarter 2015, three buildings totaling 118,080 square feet completed in the first quarter 2015, and nothing completed in the fourth quarter 2014.

There were 293,100 square feet of Industrial space under construction at the end of the third quarter 2015.

Some of the notable 2015 deliveries include: 901 Rankin St, an 82,480-square-foot facility that delivered in first quarter 2015 and is now 100% occupied, and 1 Kelly Ct, a 25,600- square-foot building that delivered in first quarter 2015 and is now 100% occupied.

The largest projects underway at the end of third quarter 2015 were The Cove – Building 3, a 153,047-square-foot building with 0% of its space pre-leased, and The Cove – Building 4, a 140,053-square-foot facility that is 0% pre-leased.

INVENTORY

Total Industrial inventory in the San Francisco market area amounted to 94,065,666 square feet in 4,812 buildings as of the end of the third quarter 2015. The Flex sector consisted of 23,919,746 square feet in 791 projects. The Warehouse sector consisted of 70,145,920 square feet in 4,021 buildings. Within the Industrial market there were 520 owner-occupied buildings accounting for 12,959,398 square feet of Industrial space.

SALES ACTIVITY

Tallying industrial building sales of 15,000 square feet or larger, San Francisco industrial sales figures fell during the sec- ond quarter 2015 in terms of dollar volume compared to the first quarter of 2015.

In the second quarter, 11 industrial transactions closed with a total volume of $88,245,000. The 11 buildings totaled 423,420 square feet and the average price per square foot equated to $208.41 per square foot. That compares to 17 transactions totaling $180,790,000 in the first quarter. The total square footage was 870,221 for an average price per square foot of $207.75.

Total year-to-date industrial building sales activity in 2015 is down compared to the previous year. In the first six months of 2015, the market saw 28 industrial sales transac- tions with a total volume of $269,035,000. The price per square foot has averaged $207.97 this year. In the first six months of 2014, the market posted 30 transactions with a total volume of $275,279,100. The price per square foot averaged $211.04.

Cap rates have been lower in 2015, averaging 4.34%, compared to the first six months of last year when they aver- aged 6.58%.

Full Report: 3rdQTR_Industrial

Oct

22

National CRE News: Office Demand Reaches Pre-Recession Peak

Vacancy Rate Dips for Top Quality Space as Office Absorption Remains Well Ahead of New Construction

Source: CoStar
By: Randyl Drummer
Dated Posted: October 21, 2015

The U.S. office market logged 29 million square feet of net absorption in the third quarter, the second-highest quarterly total since 2006, with demand for office space from expanding companies roughly doubling the amount of new office supply added by developers.

The 68 million square feet of net office absorption in the first three quarters of 2015 compares with an average of just 30 million square feet during the same periods in 2005 through 2007, considered to be the height of the last office boom. Meanwhile, the national office vacancy rate continued its slow and steady decline, dipping to 11% for the third quarter of 2015, down another 20 basis points from midyear and a 60 basis point decline from third-quarter 2014.

A large majority of U.S. office submarkets, 65%, saw declining office vacancy in the third quarter, while 52% of U.S. submarkets now have lower office vacancy than during the 2006-07 peak, with most metros posting solid rent growth.

Those were among the key findings in CoStar’s State of the U.S. Office Market Third Quarter 2015 Review and Forecast presentation this week, which aslo noted one major difference from previous office market cycles: the average vacancy rate for high-quality 4- and 5-Star office space built since 2008 has remained flat, even though the 42 million square feet of new supply delivered in the first three quarters is nearly 40% above the same period in 2005-2007, said Walter Page, CoStar Group, Inc. director of U.S. research, office.

“We’re at a rare point. Vacancy in new space has flat-lined since about 2013. What’s interesting about that is the supply pipeline has not caused the rate to spike up nationally, unlike other market cycles,” said Page, who was joined by Aaron Jodka, senior manager, market analytics and Managing Director Hans Nordby for the the office market analysis.

“Office tenants clearly want this new space and are willing to pay for it because obviously, they’re leasing it up,” Page added.

Jodka added that demand for 4-and 5-Star space grew at 2.5% between third-quarter 2014 and the most recent three-month period, compared with 1.4% in the overall office market and nearly three times the demand growth rate achieved for 1-, 2- and 3-Star properties.

Nordby noted that despite a rise in rental rates, total occupancy costs as a percentage of company profits remain at an all-time low as companies continue to put more workers into fewer square feet, which is allowing firms to continue leasing high-quality space.

Among individual markets, Dallas stood out by posting the strongest year-over-year net absorption, while Houston — plagued by space-givebacks among energy focused companies — saw the weakest demand among large U.S. metros. Perhaps due to a more diversified business base, Dallas-Fort Worth and Denver are thriving despite their exposure to the economic repercussions from the falling price of oil.

Nordby pointed out that Dallas and Atlanta are classic big-tenant markets that do well late in the economic cycle, with corporate relocations of companies that require large blocks of space driving their markets.

Link to article: US Office Demand

Oct

15

National CRE News: Net Leased Sector ‘Red Hot’; Developers Race to Meet Tenant Demand

Institutional Buyers Scooping Up Newly Built Triple-Net Office, Retail Projects Faster Than Developers Can Bring Them On Line

Source: CoStar
By: Randyl Drummer
Date Posted: October 14, 2015

Investor demand for net-lease properties, those single-tenant assets often perceived as boring but safe alternatives to riskier real estate investments, is spiking to record levels as more confident investors continue to snap up convenience and drug stores, restaurants and other single-tenant retail establishments.

“The net lease market has been on fire,” says JLL Managing Director Guy Ponticiello, who leads the company’s corporate finance and net lease national practice group. “Net lease sales activity is expected to be north of $55 billion this year compared with $40 billion in 2007. There’s a tremendous amount of capital earmarked for the sector.”

Reports by The Boulder Group and Marcus & Millichap pointed to strong sales volume in both the office and retail net lease office and retail categories in the third quarter.

In the most recent example of the frothy market, particularly for dining portfolios, Rochester, NY-based Broadstone Net Lease (BNL), a private REIT managed by Broadstone Real Estate, LLC, announced recent closings of $123.4 million in triple-net properties, bringing its year-to-date total to about $350 million.

In its largest acquisition to date, Broadstone this month acquired a portfolio of 36 Jack’s Family Restaurants in Alabama, Georgia, and Tennessee.for $83 million. Other third-quarter transactions included the purchase of Kinston, NC property tenanted by Pactiv, LLC, the world’s largest manufacturer and distributor of food service packaging; the purchase of four Buffalo Wild Wings properties in Alabama, Mississippi and Arkansas; and the purchase of two properties in Texas tenanted by Federal Heath Sign Co., a producer of digital, illuminated and non-illuminated signs.

Both NNN Office, Retail See Solid Demand

Demand is spread across all types of single-tenant assets. Asking capitalization rates fell to historic lows for both net-leased office (7.25%) and retail (6.25%) in the third quarter, according to a new report by The Boulder Group. Tightening supply caused cap rates for newly delivered property occupied by 7-Eleven, Bank of America and Family Dollar compressed by between 25 and 65 basis points, compared to 15 basis points on sales of all net-lease assets, noted Boulder Group President Randy Blankstein.

“Properties in the greatest demand continue to be new construction with long term leases with investment grade tenants,” Blankstein said. “Despite a slight rise, there is a lack of new construction properties with long-term leases as the development pipeline has slowed compared to the first half of 2015.”

Despite investor demand, some retailers have remained cautious in their expansion plans, especially in jurisdictions taking steps to raise the minimum wage, which can dramatically drive up tenant labor costs, according to the Third-Quarter Net Lease Outlook from Marcus & Millichap.

While the potential effect of the wage hikes on the bottom lines of retailers’ bottom line is still unknown, as a whole, retailer demand is expected to remain well ahead of supply increases this year, Marcus & Millichap said. Net absorption will nearly double planned completions, causing asking rents to climb in the low single digits.

While there’s a huge spread between cap rates of high- and lower-quality properties, institutional investors, pension funds and both publicly traded and Nontraded REITs have moved into the space with a vengeance, Ponticiello said.

“Where you do have assets with longevity of lease terms, cash flow security and rent escalation to comfortably hedge against future interest rate movements or inflation, those deals are experiencing unbelievably low cap rates,” he said. “We still see 15-year deals with decent bone structures, with newer buildings in prime markets trading in the low 5% range.”

Link to Article: Net Leased Investments Red Hot

Oct

15

National CRE News: Commercial Property Price Growth Continues

Robust CRE Space Absorption Bolstered Recent Price Gains

Source: CoStar
By: Mark Heschmeyer
Date Posted: October 14, 2015

While construction has been rising in many markets, aggregate demand across the major property types continues to outstrip supply, resulting in lower vacancy rates and rent growth. This, in turn, continues to drive strong investor interest in commercial real estate, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI).

In August 2015, the two broadest measures of aggregate pricing for commercial properties within the CCRSI-the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index-increased by 1.3% and 1%, respectively, and 12.6% and 11.4%, respectively, in the 12 months ended August 2015.

Click here for the full CCRSI October release and supporting materials: Commercial Repeat Sale Indices

Recent stronger growth in the General Commercial segment, which is influenced by smaller, lower-value properties, confirms a broad-based pricing recovery. Within the equal-weighted U.S. Composite Index, the General Commercial segment posted a monthly increase of 1% in August 2015 and 11.9% for the 12 months ended August 2015, propelling the index to within 7% of its pre-recession high.

Robust CRE Space Absorption Bodes Well for Continued Favorable Property Sales Conditions

For the four quarters ended as of the third quarter of 2015, net absorption across the three major property types-office, retail, and industrial-totaled 611.4 million square feet. That is 20% more than in the four quarters ended as of the third quarter of 2014. It is also the second-highest annualized absorption total on record since 2008.

The office and industrial sectors turned in particularly strong performances during this 12-month period, averaging net absorption of 0.3% and 0.4% of inventory, respectively. The the retail sector averaged a more modest 0.2% in the trailing four quarters ended as of the third quarter of 2015.

The CCRSI’s U.S. composite pair volume of $79.5 billion year-to-date through August 2015 was a 32% increase compared with the same period in 2014. This suggests that 2015 could be another record year for commercial real estate acquisitions.

Both the high and low end of the market are attracting increased capital flows, with volume up by nearly 32% in both the Investment-Grade and General Commercial segments.

Link to Article: CRE Property Price Growth Heats Up

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