Category: commercial real estate news (108)

Source: CoStar News
By: Lou Hirsh
February 11, 2020

A new list of the federal government’s surplus properties targeted for disposal includes what brokers say is real estate that’s expected to be in high demand by developers of offices and housing in some posh West Coast locales where land is tight.

What’s more, the decades-old properties — most of them underused offices — could be revamped for new uses, ranging from distribution centers to high-end apartments, retail and other mixed-use combinations that could bring new life to the areas, brokers and analysts say.

On the list, which contains 12 underutilized properties nationwide that could bring in more than $750 million, is real estate in areas where development and business have been growing from Seattle to Silicon Valley. It includes an entire city block just three miles from Facebook’s headquarters in Menlo Park, California, that could soon be for sale.

“The Menlo Park property is located in one of the country’s strongest markets for tenant demand,” said Jesse Gundersheim, CoStar Group’s director of market analytics in the San Francisco Bay Area. “Sales activity in Silicon Valley and San Francisco is robust, and cap rates remain at historic lows which is indicative of strong investment interest.”

The surplus property list put forward last month by a federal advisory panel stems from a bipartisan 2016 law requiring the Office of Management and Budget and General Services Administration to identify opportunities for the federal government to reduce its inventory of nonmilitary properties. The list is just the first round of potential sell-offs, with more rounds of recommendations expected in coming months, as the government looks to consolidate locations, maximize property values and revenue and trim down a real estate portfolio that includes roughly 77,000 underutilized properties.

Some that aren’t in their city’s downtown or prime office district could face the bulldozer, as developers put the land underneath them to more suitable uses demanded by the market, such as apartments and single-family homes — provided their projects get the blessing of local governments.

Take for instance the property at 1352 Lighthouse Ave. in coastal Pacific Grove, on the northern tip of central California’s Monterey Peninsula. The property, that CoStar data says was built in 1952 and spans 11,220 square feet on 4.4 acres, is a Department of Commerce fisheries science center.

Located just 5 miles north of the famed Pebble Beach Golf Course overlooking the Pacific Ocean, that federal facility sits in a city where the median home value is $902,528 and the median monthly apartment rent is $3,300, according to data firm Zillow.

“That location could be very sought-after for high-end housing,” said Cale Miller, senior vice president in the San Francisco office of commercial brokerage Hughes Marino, noting the neighborhood currently hosting the fisheries center is generally not known for offices or other heavy commercial uses.

The same generally goes for the 1 million-square-foot Chet Holifield Federal Building, built in 1971 at 24000 Avila Rd., about 8 miles from the Pacific Ocean in coastal Laguna Niguel. That city, in Southern California’s Orange County, has a median home value of $844,539 and median rent of $3,300, both well above regional averages.

Miller said housing or other mixed-use elements serving that neighborhood — rather than offices — would probably see the most practical demand going forward.

Coveted Silicon Valley

At the other end of the spectrum, brokers are expecting the listed property in Silicon Valley’s Menlo Park to see the greatest future demand on the office side. Washington, D.C., attorney David Winstead, who serves on the federal building advisory board, recently told CoStar News that the city block surrounding the Menlo Park Complex at 345 Middlefield Road “could be worth hundreds of millions of dollars.”

With multiple major tech firms expanding their office footprints in the supply-constrained region, the location is a major draw. The Menlo Park federal complex, housing the operations of the U.S. Geological Survey among other tenants and spanning just more than 140,000 square feet, is 3 miles south of Facebook’s global headquarters and even closer to local office strongholds of companies such as Apple and Hewlett Packard.

“Menlo Park has been ground zero for tech expansion,” said Eric Luhrs, regional president in the San Jose office of brokerage Kidder Mathews. “That’s still a very strong market, and that’s a great location as well.”

Luhrs said he’s expecting the Menlo Park location to garner serious interest from multiple developers and future tenants, including the venture and financial firms that have thrived in Silicon Valley. It could also attract smaller nontechnology firms that have found it tough to find new space as the major tech giants, including Facebook and Google, have expanded throughout the region.

Gundersheim noted that, based on its size, more than a million square feet on a 100-acre lot, the Laguna Nigel property could prove more valuable on a pure sales-price basis than the Menlo Park site. However, the Menlo location could represent a rare investment opportunity slightly east of that city’s most active section, the downtown area where most developers are now focused on revitalization.

In Menlo and other office locations, Luhrs said changeovers to commercial uses will depend on how the government chooses to transition out of them — for instance, whether the GSA sells buildings and immediately clears out the agencies that occupy them or chooses to stay in them for a period under leaseback arrangements with the buyer.

In the Seattle area, where older federal buildings on the list are not located in what are currently deemed the hot office markets, other types of nonresidential buyers and tenants could still find strategic uses for the properties.

That includes the property currently known as the Federal Archives and Records Center, operated by the National Archives and Records Administration at 6125 Sand Point Way NE. The warehouse and office building was completed in 1945, spanning 184,251 square feet on 10 acres.

Owen Rice, executive vice president in Hughes Marino’s Seattle office, noted the area that grew up around that Seattle facility over the decades is primarily a residential neighborhood, known as Hawthorne Hills.

“That area has not really been a big hub for commercial offices in terms of demand,” Rice said. “It’s also a very constrained market in terms of supply.”

Alternate Seattle Scenarios

He said possible future nonresidential users of that government complex could include those in the fast-expanding healthcare industry. For instance, Seattle Children’s Hospital has existing operations next door to the Sand Point Way property and is known locally to be scouting sites for future expansion.

Rice said another vintage property on the federal list in Washington state, a government complex at 400 15th St. SW in Auburn, is located in an area just north of Tacoma that has become a popular regional hub for mostly small to mid-size industrial developers and tenants.

He said the 119,000-square-foot property, built in 1950 and last renovated in 2006, has good access to area ports and freeways but is in an area of the Kent Valley that has so far not become a hotbed for office expansion by major tech giants such as Amazon. The e-commerce giant has been expanding its corporate hometown operations primarily in and near downtown Seattle.

It could take several office tenants to fill up the space at the Auburn facility, based on the size of companies that are currently predominant in that area, leaving the possibility for industrial and other uses of the property if it is sold off by the government.

“It really depends on what the zoning would allow and what the developer would want to do with it,” Rice said. “It’s hard to imagine that someone would want to tear down a building that was just renovated in 2006, but that’s a possibility.”

Miller said other factors to watch include how fast the properties get sold off by the government and whether officials decide to sell them as one or two large portfolios, or instead choose to shed some individually in one-off deals.

In several locations, the government could get more for the properties by selling them separately, but finalizing several separate deals could also take longer to dispose of the assets and garner the revenue that the government is seeking.

“They’re going to be incentivized to sell these in a relatively short time frame, if they’re looking to capitalize while the market is still at its current peak,” Miller said.

Because some of the federal properties are older and not in neighborhoods deemed the hottest for offices, brokers said their future owners will probably require substantial financial resources to weather long transition periods in which the properties are being approved for significant renovations or repurposing.

That’s a potentially time-consuming prospect in states such as California, where projects must clear numerous environmental and other hurdles, especially in coastal locations.

“It’s going to take patient money, from experienced developers who are able to afford the carrying costs for a project that might take five years to approve,” Miller said.

These are the Western U.S. properties on the national list of locations recently targeted for potential sell-off by the GSA:

Sacramento Job Corps Center, excess land sale only, 3100 Meadowview Road, Sacramento, California, Department of Labor.
Southwest Fisheries Science Center, 1352 Lighthouse Ave., Pacific Grove, California, Department of Commerce.
Veterans Affairs Denver Medical Center, partial sale, 1055 Clermont St., Denver
Auburn Complex, 400 15th St. SW, Auburn, Washington, GSA.
Menlo Park Complex, 345 Middlefield Road, Menlo Park, California, GSA.
Chet Holifield Federal Building, 24000 Avila Road, Laguna Niguel, California, GSA.
WestEd Office Building, 4665 Lampson Ave., Los Alamitos, California, Department of Education.
Federal Archives and Records Center, 6125 Sand Point Way NE, Seattle, National Archives and Records Administration.

Link to article: Government Surplus Properties

Source: CoStar
By: Jesse Gundersheim

While some investors are exploring secondary and even tertiary markets throughout the country in search for higher yields, coastal gateway cities continue to take home the lion’s share of capital investment.

As typical, New York outpaces all other U.S. markets by far. Next up is Boston, then Los Angeles, Washington D.C. and Seattle. And while San Francisco and San Jose in California rank sixth and seventh, respectively, and the state’s East Bay rounds out the nation’s top 15, if all the Bay Area markets were combined they would outpace all but New York.

It’s further evidence of enduring demand generated by buyers attracted to the Bay Area’s expanding tech industry, along with several owner-user acquisitions, which has maintained downward pressure on capitalization rates, or the expected rate of return on investment, at premium asset pricing.

Combined, the three major Bay Area markets have seen $12.5 billion of office assets sell over the past 12 months, behind only New York’s $19.6 billion.

Sales volume in San Francisco alone, at $5.2 billion year to date, has already eclipsed the previous two year’s annual totals.

Boston, Los Angeles and Washington, D.C., have each seen about $8 billion in office assets trade over the past year.

Source: CoStar News
By: Molly Armbrister

Life Science Industry Elbows Its Way Into Tight Bay Area Property Market
Rock-Bottom Vacancy Rates Pervade the San Francisco Peninsula

Like the organisms it studies, the life science industry in the San Francisco Bay is adapting to its changing surroundings.

Stiff competition from well-heeled tech giants such as Salesforce and Uber in areas such as downtown San Francisco is preventing the life sciences industry, which has had a foothold in the region for decades, from elbowing its way into commercial real estate around the city. So the life science industry has begun looking south, where developers are planning unprecedented ways to accommodate the industry, one of the fastest-growing in the United States, with the area’s first high-rise for science firms.

“There’s a confluence of industries that are booming all at the same time,” said Marc Pope, executive director at commercial real estate firm Cushman & Wakefield. “Life science, technology, automotive technology. In some ways, they’re competing for space. Elsewhere, traditional office is being bought and converted to lab space.”

The life science industry combines health care and technology into a field that seems in some ways recession-proof and requires large amounts of specialized real estate. Life science employment grew nationwide by 4.5% between 2010 and 2018, compared with total employment growth of 1.7%, according to the U.S. Bureau of Labor Statistics. Since 2000, the life science sector has grown nearly five times as fast as the rest of the economy, adding 85,000 jobs, according to a Cushman report.

Organic growth stemming from an aging population that wants and needs new treatments for ailments, and expansion enabled by technological advances in the field, resulted in a growing share of life science space needed in several of the country’s biggest markets. The way different south Bay Area cities are dealing with the region’s industry growth could provide a window into how other top industry cities such as Boston and San Diego deal with the space crunch in coming years.

While San Francisco and the city of South San Francisco are both almost fully occupied, the cities are each handling the sector’s growth differently. Life science companies aren’t receiving much assistance in their competition with the major tech companies in San Francisco, but they are being welcomed with open arms by the adjacent city of South San Francisco and others eager to capture the spillover demand with new development, which could spur even more expansion in the future.

According to CoStar data, San Francisco’s Mission Bay neighborhood property market, for example, is about as tight as it can get: The overall office vacancy rate in that neighborhood is 0.3%.

Mission Bay is part of an area in San Francisco that was targeted for life science companies by a 2008 plan passed by the City and County of San Francisco that created a life sciences and medical special use district.

But that overlay didn’t exclude other uses, and 10 years after it was put in place, the development capacity there is largely maxed out by the tech giants that have given the city its reputation, Pope said.

Among the biggest new tenants in Mission Bay is ride-hailing app maker Uber, which is planning to take up 1 million square feet of new development adjacent to Chase Center Arena, the $1.4 billion multi-purpose stadium and future home of the NBA’s Golden State Warriors that is scheduled to open before the 2019-2020 season.

It reflects the way new development in San Francisco is getting scooped up by these major tech companies, who offer a cache — and sometimes a rental rate — that many life science companies don’t have, forcing the firms to look elsewhere if they want to expand.

Going Vertical

Contrast that with the city of South San Francisco, which in 1976 was dubbed the “Birthplace of Biotechnology” by Genentech, the bioscience company that was acquired by Roche Pharmaceuticals in 2009. There, developers are doing something unprecedented to find a home for life science companies: They’re going vertical.

A 20-story development called Genesis Towers has been taken over by life science companies looking for space. The two-building property was originally designed as office space and was supposed to be completed during the recession, but the economy got in the way, Pope said.

Now, it has been developed into two life science towers with a third planned. Shortly after the conversion was finished, the space was fully leased, according to Cole Speers, research analyst for Cushman & Wakefield in the Bay Area.

Going vertical on life science space is rare, as the properties have historically been low-slung, sprawling developments akin to industrial space.

Life science real estate, though, can include more than just office space, sometimes branching out into flex industrial and converted office spaces. Cushman’s numbers for Mission Bay life science property specifically show there is no vacancy in that neighborhood for life science real estate.

And because of its connection to the health care industry, which is largely viewed as a mostly recession-proof field because people will always need health care regardless of the economic outlook, life science is seen as a safe place to invest capital, whether that’s in new businesses or in real estate to house them.

Boston remains the U.S. life science capital, with companies there attracting $15.5 billion worth of venture capital funding from 2010 to 2018, but San Francisco and the peninsula are right behind, with $15 billion, according to venture capital tracking website PitchBook.

And while Boston has the lowest vacancy rate for life science of any market in the country at 0.7%, the biggest drop off in vacancy rate occurred in San Francisco, falling to 6.2% fourth quarter last year from 18.3% in the same quarter of 2008, according to data from Cushman.

The development activity and need for space is not expected to recede any time soon, either. And with the percentage of people aged 65 and older projected to rise to more than 20% by 2030, the industry is expected to grow even more, further increasing the need for real estate.

Link to article: Life Science Industry Elbows Its Way Into Tight Bay Area Property Market

Source: CoStar
By: John Doherty
Link: Amazon HQ2

After Amazon gave his county a painful snub in January, David Iannucci is stuck exactly where 19 communities may find themselves in coming months: trying to market sites that online retailer Amazon rejected for its new $5 billion second headquarters.

Iannucci, head of economic development for Maryland’s Prince George’s County, said he’s been in talks with “several dozen” companies since the world’s largest retailer rejected the county’s bid for its second headquarters, known as HQ2. Many of those companies are looking to move from nearby Washington, D.C., including tech and cybersecurity firms. Those companies aren’t promising to bring 50,000 jobs, like Amazon, though. More like 300 to 400 apiece. And here’s the real peril for other losing cities: After eight months, Iannucci still has no takers, just talkers.

Even so, he said the process has improved the county’s pitch in those talks: “This process reinforced our knowledge of our strengths. We see that there are things we could focus on and promote. That won’t stop.”

For cities from Boston to Atlanta, the effort to woo Amazon has led officials to come up with development plans for long-fallow areas they can quickly turn around and pitch as facility sites for other companies if they meet the same fate. In Newark and Denver, officials say they are positioned to attract other companies should Amazon reject them, Atlanta’s mayor is urging steps that could position the city to find other companies after a rejection, and Boston already has an alternative in place.

To a greater and lesser extent, the 20 finalist cities are beginning to grapple with an irrefutable truth: All but one will lose this commercial real estate beauty pageant. Most of the sites proposed as HQ2 homes are too large to quickly market to another company other than Seattle-based Amazon because the list of U.S. corporations needing that kind of space can be counted on one hand.

In some cases, the process of applying itself was edifying: Officials in finalist cities Newark and Denver both say the process raised their profile as legitimate hosts for corporate headquarters. They hope that could pay off down the line, even if Amazon passes them over.

“There is a lot of excitement in the development world about the possibilities for Amazon,” said Richard Dunn. He’s vice president of operations at Paramount Assets, an investment firm that owns about 40 properties in downtown Newark.

“Even making that list of the 20 basically tells the tale about the resurgence of Newark,” he says. “Now if Newark wasn’t in a resurgence stage, if it wasn’t for its renaissance, obviously Amazon wouldn’t be looking at Newark.”

Whether or not Amazon picks it, the proposal process has elevated the city’s profile not only nationally but internationally in a tangible way, local officials said, and they intend to build on that momentum.

“We’ve seen a huge uptick in the number of inquiries that are coming into our office,” said Aisha Glover, president and chief executive of the Newark Community Economic Development Council. “And then, just kind of anecdotally speaking to brokers around the city, they’ve been saying how the quality of the inquiries has changed. For them, the uptick in inquiries hasn’t been so dramatic, but the types of firms that been inquiring with them.”

The same goes for Denver. Sam Bailey, who, as vice president of the Metro Denver Economic Development Corp., is managing the state’s bid for Amazon’s second headquarters. He said there’s now a burgeoning pipeline of 31 active prospects for space that represents more than 12,000 jobs and about $1.5 billion in capital expenditures from entrepreneurs to Fortune 500 companies. Denver winning a spot on Amazon’s short list has been noted about 30 percent to 40 percent of the time in those discussions, Bailey said.

“We always looked at this as if we don’t win HQ2, we’re going to make the most of this opportunity to showcase to the world everything that is going on in our region,” Bailey said. It will put Denver on the minds of future executives looking for new corporate digs, he said. “The experience, the notoriety, the visibility – we could’ve spent millions of dollars and never have gotten the exposure we’ve had,” Bailey added.

Other finalists aren’t so sure. Austin, Texas, another member of the 20-region shortlist, has endured a long local debate about what inviting the corporate giant into their city might do to it: raise rents, increase traffic, mess up the balance of the artsy city’s culture.

“I don’t know that we want to be” Amazon’s second home, Austin Mayor Steve Adler admitted this past March.

A poll conducted by Elon University and American City Business Journals found 13 percent of Austin locals don’t want their city to host Amazon’s second headquarters, second only to Denver, at a whopping 17 percent.

The full details of what Austin has offered to Amazon are between the city and the online retail giant, but if the mayor’s comments are any indication, Amazon was left wanting. On the day of Amazon’s shortlist announcement, Austin Mayor Steve Adler reiterated the reluctance of city leaders to extend tax breaks and other incentives in order to lure Amazon HQ2.

In other cases, the competition itself sparked questions about economic development. How far was a city willing to go to land a whale like Amazon: Would it offer free land, reduced taxes or no taxes?

Atlanta Mayor Keisha Lance Bottoms last month urged the City Council to support proposed incentives to make a site leaders see as critical to downtown Atlanta more appealing to developers.

Known as the Gulch, the site is a former railyard that covers 30 football fields worth of land near CNN Center and Mercedes-Benz Stadium, and has lain fallow for decades. While the city hasn’t officially confirmed it is the site for its bid for Amazon’s headquarters, several council members said they believe the incentives push is designed to help in the city’s bid to land HQ2.

With or without Amazon, Bottoms said the city has a “once in a lifetime” opportunity to redevelop the Gulch and stressed that developer CIM would assume all financial risks of the $3.5 billion development. She added that the redevelopment of the Gulch “will ultimately generate tens of millions of dollars a year in tax revenues” and create thousands of jobs. The mayor’s push for incentives so late in the Amazon selection process would leave the city in a stronger position to find alternative companies to occupy the site should it not be selected as home to HQ2, city leaders said.

Other cities are also not making the HQ2 battle their only priority.

In Boston, the primary site for a possible new headquarters is at Suffolk Downs, a 161-acre former horse-racing track that straddles Boston and the northern suburb of Revere. Long under-used, the site has been the subject of several redevelopment efforts over the years.

In 2017, Boston investment firm HYM Investments paid $155 million for the site. It was offered up as an HQ2 contender, but some preliminary plans have also called for a massive mixed-use project with apartments, for-sale homes and office and retail space.

Whatever happens, according to HYM, the firm will keep shopping the site.

That day-after thinking is starting to pervade most planners in HQ2 finalist cities. And Iannucci, of Prince George’s County, thinks that’s the right attitude.

His bid didn’t make it, but bids in nearby Washington, D.C., Montgomery County, Maryland and Northern Virginia did. Any of those sites, if picked, could have a spill-over effect – jobs, housing demand – for Prince George’s.

“We stand by ready to help [those finalists] any way we can,” he says.

Still, as 19 other cities will discover it hurts to be told no.

“Amazon was wrong about their conclusion about our workforce,” said Iannucci, a former Maryland state Secretary of Commerce. “We have feelings about that to this day.”

Contributing to this article are CoStar News Reporters Kyle Hagerty, Linda Moss, Jennifer Waters and Tony Wilbert.

The boom of e-commerce, fueled by Amazon, as created a demand for industrial warehouse space across the nation. But how long can the industrial boom be sustained–can other companies follow the “same day delivery” demands sparked by Amazon, and how will increasing construction costs affect the market? At Bisnow’s National Industrial event in New York, such questions were discussed.

Click here to read the responses including how a lack of truck drivers, old ports, and lack of space may impact the industrial marketplace: Industrial Boom

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.”

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.

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.”

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.