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Category: San Francisco Commercial Real Estate Tips (103)

Feb
15

Yellen states reasons for another interest rate hike, but does not give definite date

On Tuesday, February 14, 2017, Federal Reserve Chair Janet Yellen testifed before the Senate regarding current economic trends, bank lending, and possible changes to Dodd-Frank. According to Bisnow, Yellen stated that due to “solid job growth, rising inflation, and healthy wages” that she may “recommend another rate hike” but did not provide specific timing of an increase. The Fed will be exploring the rate hike discussion at its upcoming meeting in March at which a clear timeline may emerge, however, as the article notes Yellen clarified that any future rate hikes would be steered by “economic trends alone” and not on “speculation on fiscal stimulus”.

In regards to bank lending, Yellen indicated that “commercial and industrial loans have surpassed” the number of loans made during the “2008 peak”. Although U.S. institutional lending had decreased, according to the article, capital for commercial projects has been buoyed by “foreign investment and rising interest from institutional investors.” Further, “commercial and industrial loans have been on the rise…increasing by an average rate of 10.6% a month over the last five years.”

Jan
31

National CRE News: Office Construction Slated to Increase in 2017

According to Dodge Data & Analytics, commercial real estate construction will witness a “6% increase on top of the 12% gain estimated for 2016”. The report also indicates increases in construction activity in the single-family, institutional, and manufacturing plant markets ranging from 6%-9%. Conversely, Dodge Data estimates that the multi-family and utility plant construction markets will decrease by 2% and 29%, respectively.

Dec
22

National CRE News: Fred’s Pharmacy Buys 865 Rite Aid Stores

Source: CoStar News
By: Mark Heschmeyer
Date Posted: December 20, 2016

Fred’s Inc. (NASDAQ: FRED) has signed an agreement with Walgreens Boots Alliance Inc. (NASDAQ: WBA) and Rite Aid Corp. (NYSE: RAD) to purchase 865 stores and certain assets related to store operations located across the eastern and western United States for $950 million in cash.

Closing of the transaction is expected to take several months after Walgreens Boots Alliance’s proposed acquisition of Rite Aid is completed. The deal is also subject to approval by the Federal Trade Commission as well as customary regulatory approvals and closing conditions.

The pending $17.2 billion merger between Walgreens and Rite Aid first proposed in the fall of last year has lingered while the FTC analyzed its competitive impact. This past October, Walgreens Boots Alliance and Rite Aid announced an extension of their end date for the merger agreement to Jan. 27, 2017.

Walgreens executives continue to signal their confidence in closing the merger and have always expected that they would have to sell from 500 to 1,000 stores to help seal federal approval.

Shareholder approval is not required.

The store divestiture to Fred’s Pharmacy, if approved, is targeted to close during the first half of 2017 and will position Fred’s as the third-largest drugstore chain in the U.S. and create a new national competitor. Memphis-based Fred’s Pharmacy currently operates 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern US.

In connection with this transaction, the company said it has received financing commitments from BofA Merrill Lynch and Regions Bank to fund the purchase price, transaction-related costs, ongoing business operations and anticipated capital investments.

“This will be a transformative event for Fred’s Pharmacy that will accelerate our health care growth strategy,” said Fred’s Pharmacy CEO Michael K. Bloom, “We have been working for several months on integration plans to ensure a seamless transition.”

Fred’s appointed Michael Bloom as its new CEO last summer. One of his first moves was to hire Chris McDonald as vice president for real estate. McDonald previously was senior category manager at CVS and has extensive real estate experience from her time at Chase Bank and Walgreens.

In aggregate, the 865 stores are generally representative of Rite Aid’s pre-divesture store performance with respect to both sales and EBITDA. Fred’s Pharmacy expects that the acquired stores would be accretive to earnings and generate substantial cash flow.

Fred’s Pharmacy said it expects to keep certain store and certain field and regional team members, contingent on consummation of the transaction. Post-acquisition, the company will operate the acquired stores and will retain the Rite Aid banner through a 24-month transition.

A.T. Kearney served as a strategic advisor to the CEO and board and provided financial and operational diligence related to the transaction.

Link to article: Walgreens Rite Aid Merger

Dec
15

How Soon is Now: Fed Follows Through on Rate Increase

Federal Reserve Chairwoman Janet Yellen indicated in November that a raise to the U.S. interest rate could be happening “relatively soon.” The “soon” came just a month later with the announcement by the Federal Reserve yesterday that the rate will increase by an initial 0.25%. However, as reported by the Wall Street Journal, the rate could increase by as much as 0.75% over “three quarter-point moves” in 2017.

Financial analysts are suggesting that the move to increase the rate is a signal by the Fed of its optimism about the strength of the economy and “pointed to a strengthening labor market nearing full employment and inflation moving more rapidly towards targeted levels,” according to the article. This latest increase by the Fed is only one of two in the last decade.

But what the increase to the interest mean for commercial real estate? According to Bisnow, rate hikes usually lead the way to “higher borrowing costs…impacting profitability and future acquisitions.” However, as the article points out, this particular increase was long in the making and investors, REITS and property owners have anticipated this increase and have planned/priced accordingly. Therefore, the impact of the first .25% jump “may not have as great an impact” on commercial real estate activities as the effect that “comes from long-term rates.”

Dec
01

SF Bio-Tech CRE News: Merck to Lease 294K SF in South City

Merck has signed at 15-year 294,000+/- square foot lease in South San Francisco’s West Coast R&D Center, as reported by The San Francisco Business Times. Merck could take occupancy as early as 2019, and paid what is estimated to be $57+/- per square foot for the building, according to the article.

Aerial Overview of 213 E. Grand Ave: Future site of Merck's 9-story R&D building

Aerial Overview of 213 E. Grand Ave: Future site of Merck’s 9-story R&D building

The South San Francisco’ location leased by Merck neighbors Rinat Neuroscience Corporation, Genentech, Alphabet Inc and Verily. AstraZeneca also recently leased a large swath of space in South San Francisco as reported by the Business Times. Both Merck and AstraZeneca are expected to employ a total of roughly 650 workers at their new locations. In following with other R&D and biotech firms in South San Francisco, Merck’s building will be “first class” including a “300-seat auditorium” to “host scientific conferences, fitness center, a cafe and upper-floor terrace with views of the bay to the east.”

Nov
17

National CRE News: Real Estate Lending to Small Businesses in 8-Year Decline

Source: CoStar News
By: Mark Heschmeyer
Date Posted: November 16, 2016

One group of business owners hasn’t benefitted from the rebound in property prices. Once a real estate mainstay, owner/user purchases of commercial properties by small businesses have declined over the first three quarters of this year, reversing four straight years of increasing sales, CoStar Comps data shows.

small_warehouse_business

Through the first three quarters of this year, owner/user purchases of office, industrial and retail properties ranged from $150,000 to $1.5 million and totaled $8.79 billion. That is down 11% for the same period last year.

By way of comparison, owner/user purchases of properties of more than $1.5 million are ahead of last year’s pace: $20.76 billion for the first three quarters of this year vs. $19.7 billion for the same period last year, which marked a post-recession high.

Higher property prices may be to blame. Property prices in the small business category have been skyrocketing from a low in 2012 of $51.46 per square foot. At the end of September 2016, the average price per square foot for this category had climbed 28% to $66.08 per square foot, fast approaching the 2009 average price peak of nearly $69 per square foot.

By property type, office properties sold in the $150,000 to $1.5 million price range bought by owner/users climbed from an average of $91.12 per square foot in 2012 to $98.61 per square foot at the end of the third quarter of 2016.

Retail prices for such properties bottomed in 2013 at $85.41 per square square foot and are now selling for more than office properties at an average of $99 per square foot.

Prices for industrial properties in the same price range have climbed from an average of $32 per square foot to $42 per square foot for the same period.

At the same time, banks have been cutting back on their real estate lending to small businesses.

Bank lending to small businesses secured by non-residential properties peaked in June 2008. Banks had more than 1.2 million such loans ranging from $100,000 to $1 million on their books at that time totaling $346.6 billion, according to data from the Federal Deposit Insurance Corp. That total had fallen 22% to $271.3 billion at the end of June 2016, the latest data available.

As an interesting side note though, banks make up five of the largest six sellers of properties to small business owner/users in the last two years. Wells Fargo accounted for about $37 million in such sales; PNC Financial Services, $26 million; Fifth Third Bank, $18.5 million; SunTrust Banks, $16.4 million; and Bank of America, $13.5 million, according to CoStar data.

Meanwhile, capital outlays by small businesses has been trending down, according to the National Federation of Independent Businesses, a small business trade group. The percentage of owners surveyed monthly making an outlay peaked for this recovery in July 2015 at 61% and held close to that through January 2016 but has faded since, according to NFIB’s October data.

The percent of owners planning capital outlays in the next three to six months was 27%, an historically weak number. Seasonally adjusted, the net percent expecting better business conditions fell 7 percentage points to a net negative 7%, which means that now, more owners expect that conditions will worsen. Only 9% of small business owners thought that now is a good time to expand.

Link to full article: CoStar-Small Business Lending Decline

Oct
31

Calco Q3 2016 Industrial Report

Vacancy Remains under 3%; Rents up 3.85%

The San Francisco industrial market ended Q3 2016 with vacancies increasing slightly to 2.8% from Q2 vacancies of 2.7%. Although the vacancy rate reflects a net negative absorption of 16,706 square feet, vacancies remain south of 3% . Reported rents for the same time period have increased by nearly 4%. Sublease vacancy also decreased modestly in Q3 2016 to 200,217 square feet from 173,183 square feet reported in Q2. Conversely, industrial sales activity is up in Q2 2016 with total sale revenues equalling $131,278,489, and averaging $215.42 per square foot, compared to $100,718,100 in revenue, and $204.17 average per square foot in Q1 2016. Year-over-year sales are lower than 2015, but investors are seeing higher CAP rates averaging 5.62% in 2016 compared to 4.47% during the first half of 2015.

San Francisco's Industrial Bayshore Corridor Area

San Francisco’s Industrial Bayshore Corridor Area

The San Francisco industrial leasing activity, as reported by CoStar, for Q3 2016 decreased slightly, however other firms, including Calco Commercial, have reported steady leasing activity with positive absorption rates. Calco Commercial leased several notable industrial properties in Q3 including: 2045 McKinnon Avenue (25,251+/- sf), 650 Potrero Avenue (21,650+/- sf) and 201 Toland (32,580+/- sf land). Calco Commercial leased 61,680+/- square feet in Q2 compared to 125,253+/- square feet in Q3. Due to the continued lack of quality product coupled with no new construction, and the redevelopment of industrial properties into other uses (i.e. residential & office) demand for industrial space persists. For these reasons, now is the time to consider leasing, subleasing, selling or re-positioning your asset.

Calco Commercial is a leading industrial & commercial real estate firm. We have completed more transactions in the industrial market than any other firm in San Francisco. We have decades of experience in Landlord /Owner representation, and repositioning assets into net leased properties with in-place income streams. Calco Commercial is a full service firm that can help make the most of your real estate properties and investments.

Click here to download the full report: Calco Q3 2016 Industrial Report

Oct
25

Tech CRE News: R&D office vacancy rates hit all-time lows on Peninsula

The Silicon Valley Business Journal has reported that office vacancy rates of 7.5% on the Peninsula are at the “lowest since the turn of the century.” The article notes that the low vacancy rates have been aided by Facebook leasing “135,000 square feet at 162 Jefferson Drive in Menlo Park,” and the 101,000 square foot lease renewal by Shutterstock in Redwood Shores.

Facebook-Menlo Park Office

Facebook-Menlo Park Office

With decreasing vacancies, comes higher costs, and the Peninsula Area does not fall short on expensive rents. According to the article, R&D space averages $4.67 per square foot per month, a .9 increase from Q2,” with Menlo Park demanding the highest rents in the county averaging “$7.65” per square foot for R&D & office space.

Oct
20

Bay Area CRE News: 10/17/16 Week In Review

San Francisco CRE News:

California’s site-wide ballot measures could have reaching effects on the Bay Area

California voters will be facing a bevy of propositions this November ranging from legalizing recreational marijuana use to affordable housing measures. The San Francisco Chronicle has reported on a list of state-wide ballot initiatives that could potentially affect the real estate market and values in the Bay Area. Specifically, rent control measures Q & R in San Mateo and Burlingame, respectively, “could have a dramatic effect on the (Bay) area’s economy” by placing further restrictions on Property Owner rights and creating an “unaccountable” commission that would cost taxpayers “millions annually.”

voting_web

Another tower to join the San Francisco skyline

The Transbay Terminal project boasts new transit connectivity, public parks, new retail, but is now also becoming a hub for new office tower development. BisNow reported on October 18, 2016, that a new “806 foot tall tower at 546 Howard Street” will join the ranks of the planned tower at 181 Freemont Street and the “Salesforce Tower.” The new tower at 546 Howard Street is slated to have ground floor retail, a 250-room hotel, condos and office space. According to the article, 546 Howard will be the “second tallest residential tower in the city.”

Transbay Terminal Rendering with transparent rendering indicating the Howard Street siteRegistry

Transbay Terminal rendering showing the Howard Street site (transparent building) Registry

12,000 Jobs Coming to Silicon Valley

The Silicon Valley Business Journal, has reported the Beijing tech company LeEco, is slated to bring 12,000 jobs to the Bay Area. LeEco’s employees will operate from their “48-acre office complex in Santa Clara purchased from Yahoo earlier this year for $250 million.”

According to the tech firm’s website LeEco is “a leading global company born from the internet, (LeEco) seamlessly blends devices, content, applications and distribution in a first-of-it kind ecosystem.” LeEco believes in creating an “Eco Lifestyle” as referenced by its “vision to sell smartphones and TVS in the US bundled with easy subscriptions to its premium content.” LeEco was founded in 2004 by YT Jia.