commercial real estate san francisco news

Category: commercial real estate san francisco news (56)

Apr

San Francisco Commercial Real Estate News: Warehouses become highrises

Warehouses become highrises: Map of S.F.’s Central SoMa real estate boom
Source: San Francisco Business Times
Reporter: Cory Weinberg
Posted: April 6, 2015

When you look at the map of some of the most ambitious projects that developers are proposing in South of Market, they’re concentrated along the new Central Subway and near the current Caltrain station at 4th and Townsend Streets.

On Friday, the Business Times reported that a family trust called Solbrach Property Group filed plans to build a 350-foot residential highrise with 426 units at 4th and Brannan Streets. Around that block, huge office and residential projects by CIM Group and Tishman Speyer will transform the industrial area that is being rezoned.

The Board of Supervisors is expected to green light the rezoning by early next year. That will unlock huge value for landowners to build taller office or residential buildings, which would replace the existing — and less lucrative — production, distribution and repair buildings. That value has created pressure for the city to extract enough money from developers for affordable housing, which I detailed in a February cover story.

Even though the Solbrach residential development is in the very early stages, it could turn into a showdown over heights. The proposed tower will sit on a plot that’s only 16,000 square feet, so it’s not one of the largest in the neighborhood. The Planning Department only wants the building to be 250 feet high — at most — and neighborhood activist John Elberling echoes that sentiment.

“Jamming a luxury highrise into there really is too much. We want to focus development of that maximum scale — residential or commercial — on the large sites in SoMa that are at least one acre in size,” said Elberling, who runs the affordable housing advocacy group TODCO.

The Planning Department recently published guidelines for large development sites “that offer tremendous potential for transformative new development.” In its guidelines for how high developers can build, it reiterates that “the predominant character of SoMa as a mid-rise district should be retained,” instead of it becoming a slew of highrises.

Link to article: Warehouses become highrises

Mar

National Commercial Real Estate News: Too Much, Too Fast?

TOO MUCH, TOO FAST? Investment Markets Eyeing Free-Flowing Capital With Some Concern
Some Worry Rising Capital Flows into CRE Threatening To Overheat Some Markets
Source: CoStar
By Mark Heschmeyer
March 25, 2015

As the San Diego City Employees’ Retirement System’s (SDCERS) board this past month debated putting an additional $30 million into JP Morgan’s Strategic Property Fund, a 100% core fund in which it already had invested $60 million, it had a major concern.

JP Morgan’s Strategic Property Fund bought $3.45 billion in core properties last year and has a queue of investors lined up to pump in another $1.7 billion. Compared with its peers, the JPMorgan fund has been one of the most active in buying core commercial properties, and SDCERS officials raised concerns that the manager had “pushed out capital too quickly.”

In the end SDCERS approved the additional commitment, concluding that the fund had deployed its capital in a “prudent manner,” and with the understanding that its new commitment most likely would take four to five quarters to invest fully.

The sentiment in the SDCERS boardroom is shared among other major CRE investors who express increasing concern over the impact of the large amount of investment capital flowing into commercial real estate is having on prices and underwriting.

For now, the concerns appear to be limited to the market for large trophy assets in a handful of coastal core markets.

“There’s no doubt that capital flows into commercial real estate are rising and threaten to overheat some markets, but the real concerns are limited to relatively few trophy assets in select gateway markets,” said Andrew J. Nelson, chief economist | USA for Colliers International in San Francisco. “There is little evidence of excessive pricing on a broad scale.”

Nelson said there has been a lot of attention paid to a few transactions in which some foreign buyers have supposedly overpaid for trophy assets because they were purportedly more concerned with parking dollars in safe U.S. assets rather than achieving a market rate of return.

“Only time will tell whether these purchases ultimately earn a competitive return, but a review of the market data does not suggest that foreign buyers are driving prices to unsustainable levels,” Nelson said. “Rather, the high prices they pay on average reflects their preference for top markets and more expensive asset types.”

David Bahr, senior commercial appraiser with Standard Valuation Services in Mineola, New York, said that geopolitical instability has been a friend to U.S. sellers, particularly in the New York City area, where Russian, European and Chinese investors have been very active.

“All this (overseas) money only complements the institutional and high net worth private investors’ capital hitting the markets,” Bahr said. “Supply is great but demand is excessive.”

How Much Is Too Much?

The answer to the question of what constitutes too much money in the marketplace often depends on the role that person plays in the market. Real estate brokers and sellers generally believe the more money, the better. For lenders, a flood of capital can be a double-edged sword as more money means more competition to finance deals and the likelihood they have to adjust their underwriting criteria to compete. For large buyers, it drives up the price of core properties; and for smaller investors, it can create unrealistic price expectations from sellers.

“There is a ton of money out there chasing commercial real estate, but in my opinion, you can never have too much capital at least from a seller’s perspective,” said Paul Carr, senior managing director, spearheading the capital markets team at DTZ in Tampa. “Most buyers probably don’t enjoy having the additional competition, but we have seen what it is like to not have enough capital chasing deals, especially in challenging markets.”

Overaggressive investors are just creating more competition in the market place, which again, is not a bad thing if you are a seller, he added.

Mark Alexander product council chair for medical office properties for SVN in Chicago, also said the concept of ‘too much’ is relative to the times.

“I don’t think you can adequately measure ‘too much’ or ‘too little’ capital. The free market is always a pendulum swing, and now it is swinging towards growth,” Alexander said. “The extra capital out there is startling mostly because we are not used to it (after) coming off such a lousy downturn. It may be too much but it is unstoppable in the natural swing of the market. It makes life better for us brokers as more deals will get done.”

With so much capital in the marketplace competing for borrowers, loan underwriting guidelines are easing almost on a daily basis, allowing lenders to put out more and more dollars to prospective borrowers.

Christian J. Johannsen, senior executive managing director of NAI Miami, said he believes buyers are “over investing,” paying huge prices for assets that don’t necessarily warrant the prices.

“This is facilitated by the easily available and very cheap money that they have already raised, have commitments for, or can borrow,” said Johannsen.

Albert M. Lindeman and Jeff Albee, co-chairs of SVN’s national office product council, said they see a definite ‘use it or lose it’ mentality among investors in the market.

“Most private equity funds and syndicators will acquire rather than return their money to investors. This can have an overall negative impact to the market by overheating it,” said Lindeman and Albee.

Smaller Investors Feeling the Heat Most

Bradley Djukich, chief operating officer of Gotham Corporate Group in Los Angeles, which focuses on sub $20 million to $50 million property acquisitions, said the influx of foreign capital has led to hyperinflation of asking prices on many assets.

“In my niche, this has been development sites and hotel assets,” said Djukich. “How can a domestic buyer with fiduciary obligations to his capital investors compete with a Chinese syndicate looking to get money out of China and into the U.S., regardless of returns?”

Hillock Land Co. in Newport Beach, California, pursues infill-urban development projects. It too finds challenges posed by the current glut of money in the market backing new development as sellers re-evaluate the market potential for existing assets based on their development potential.

“High (price) expectations among sellers is present in all assets of all sizes,” said Danny Kradjian, managing partner of Hillock Land. “Often, these assets are not attractive to institutional players, as they do not have the densities or size required to allocate existing capital in a fund, or meet targeted returns in the future. Thus, these assets are normally pursued by small-scale operators.”

But the sellers don’t necessarily understand that distinction.

“With sellers placing a premium on their assets due to the overall level of activity in the market, local operators are being priced out,” Kradjian said.

As a result, Kradjian said he sees two typical outcomes. Sellers with high expectations hold on too long to their existing assets and eventually lose prospective buyers. Or, out-of-market buyers pay a premium for assets on which they are unlikely to achieve necessary return.

Perhaps Mark S. Davis, senior appraiser of Meridian Appraisal Group in Winter Springs, FL, summed up the concerns among investors when he said, “When investors have access to cheap credit money, they transition from investors to speculators. The incentive in the current economic environment is to borrow and spend, not to save and invest. What’s easy to see is that everybody around you is paddling like hell to catch this big wave of credit money that must go somewhere.”

Link to Article: Too Much Too Fast

Mar

National Commercial Real Estate News: Suburban Office Attracting Investor Interest

Source: CoStar
Author: Randyl Drummer
Date: March 18, 2015

LONG OVERLOOKED, SUBURBAN OFFICE ATTRACTING INCREASED INVESTOR INTEREST
Buyers Swooping in to Pick Off Both Well-Leased and Increasingly Vacancy-Challenged Office Properties Outside CBDs

After taking its lumps well into the ongoing office market recovery, suburban office property is finally garnering increased investor interest. As recently as January 2013, after rounds of corporate downsizing during and after the recession sent suburban office vacancy rates as high as 50% in some markets, analysts were writing the latest obituary of suburban office parks, shopping centers and other far-flung properties as places where no one among the coming wave of millennials would want to work, shop or live.

But now, suburban office is where the action is, thanks to yield-starved real estate investors priced out of expensive CBD assets and continued job growth, especially for office-using industries.

In recent quarters, investors have responded to a spate of opportunistic and value-add plays, many involving vacancy risk that often goes hand in hand with suburban office investments. Buyers have been lured by the wide pricing spreads between well-leased properties north of 90% occupancy and challenged buildings between 50% and 75% occupancy, according to CoStar Portfolio Strategy. While that spread has compressed from 144% in 2011 to 97% in 2014, it is still double the 2006 level of 48%.

“By leasing up a property, investors can still achieve value-add, boosted returns. The icing on the cake for value-add investors is that 75% of metros will likely achieve occupancy gains over the next three years, which makes it easier to lease up vacant space,” said CoStar real estate economist Sam Tenenbaumin in a recent client note.

Increasingly overseas investors, usually focused on the safest core properties, are bidding on suburban office properties, according to Mary Sullivan Kelly, senior vice president and chief research officer for Colliers International.

“With the infusion of foreign capital seeking predominantly trophy CBD assets, other institutional equity will be forced to look towards B product and other value-add plays, driving up pricing in that sector,” Kelly said.

What has many investors swinging for the suburban ooffice fences is the recent homerun pulled off by Rubenstein Partners and Grubb Properties. In what The Wall Street Journal called “a casebook study of how to make money on suburban office property,” the pair of investors paid $26 million for an excess 67-acre office park in North Carolina’s Research Triangle Park from telecom company Ericsson. The Rubenstein-Grubb venture planned to upgrade the pair of vacant office buildings totaling 467,000 square feet and put the sapce up for lease, hoping to emulate the success they had in repositioning a former GlaxoSmithKline property nearby.

As it turns out, computer-maker Lenovo Group Ltd. was looking for a home in the Research Triangle area for the server business it had purchased from IBM and decided to lease the entire project from Rubenstein-Grubb in March 2014. With the Lenovo lease in hand, the investors hired Cushman & Wakfield to shop the property to prospective buyers. In February 2015, a joint venture between UK-based 90 North Real Estate Partners and Dubai-based Arzan Wealth bought the suburban campus for $127 million, just 15 months after Rubenstein and Grubb’s acquisition of the then-vacant property, and less than a year after Lenovo signed a long-term lease for the entire campus.

That kind of success attracts a lot of interest and many property owners who managed to hold onto their suburban office assets through the recession are eager to test the market. Case in point is New York City fund DRA Advisors and its partner Brandywine Realty of Radnor, PA. According to industry newsletter Real Estate Alert, the pair have put a 1.6 million-square-foot portfolio of 29 suburban office properties in Pennsylvania back on the market seeking a reported $200 million, or $125 per square foot. Market observers are eager to see if the timing proves better this time after pulling the portfolio off the market after it was first offered last summer.

Meanwhile other investors are moving in to take advantage of the improving prospects for suburban office market, attracted by declining vacancy rates amid stepped up leasing volume and historically low levels of new construction.

The most noteworthy being Duke Realty Corp.’s deal to sell a major portion of its suburban U.S. office portfolio for $1.12 billion to a joint venture of Starwood Capital Group, Vanderbilt Partners and Trinity Capital Advisors. The deal involves 62 office buildings with 6.9 million square feet of combined space and 57 acres of undeveloped land and includes all of Duke’s wholly owned suburban office properties in Nashville, Raleigh, South Florida and St. Louis.

Just this week, a partnership of New York-based Angelo, Gordon & Co. and Atlantic Realty Cos. acquired four suburban office buildings totaling 499,696 square feet in Reston, VA for approximately $82 million. The portfolio, located near the Dulles Access Road and the new Silver Line Metro station, is only half-leased, which investors increasingly view as hlf-full rather than half-empty.

Chicago: Ground Zero for Suburban Office

There may be no better place to gauge the current condition of the U.S. suburban office market than communities on the outskirts of Chicago such as Libertyville or Hoffman Estates, once the home of such corporate mainstays as Sears Holdings Corp., Motorola and AT&T.

After Motorola Mobility was purchased by Google in 2012 and resold to Lenovo last year, the company relocated 3,000 employees from its Libertyville, IL office campus between 2012 and 2014, leaving an empty shell at the 84-acre property built in 1994 that’s typical of the heyday of 1970s through ’90s era suburban corporate office properties.

Philadelphia-based Binswanger marketed the property, one of the largest suburban office campuses in the Chicago market, starting in January 2013. The Motorola listing in the Lake County office submarket — which suffered from a vacancy rate of more than 30% at mid-year 2014, highest among all suburban Chicago submarkets — lingered on the market for 18 months, similar to the vacancy drag at numerous office parks across the country from Northern New Jersey to the outer suburban rings of Los Angeles, Orange County and San Diego in Southern California.

Last year, Rockville, MD-based BECO Management Inc. scooped up the five-building, 1.1 million-square-foot former Motorola Mobility campus for $9.5 million, a mere $8.50 per square foot. BECO has embarked on a major renovation and the property will be ready for occupancy later this year.

More recently, a partnership of Itasca, IL-based Hamilton Partners and Accesso Partners jointly acquired The Esplanade at Locust Point, consisting of four Class A office and R&D buildings totaling 1.05 million square feet in Downers Grove within Chicago’s East-West corridor submarket. The buildings are 89% occupied, with tenants including Coca Cola Co., Prudential Insurance, Hewlett-Packard, Caterpillar Logistics, Siemens, American General Life, General Services Administration and Hillshire Brands/Tyson Foods.

“I can say with great confidence that this is the premier portfolio of suburban office buildings in the entire Chicago marketplace,” states Ariel Bentata, managing director investments and co-founder of Hallandale Beach, FL-based Accesso Partners.

Investors hope the risks pay-off as the increased transaction velocity is still a work in progress. Despite the strong finish, the huge corporate departures earlier in the year left the overall suburban Chicago vacancy rate at 21.1%, a bit higher than the 21% posted at year-end 2013.

Article Link: Suburban Office

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Mar

Commercial Real Estate News: Central SOMA’s Coming Boom

Source: San Francisco Business Times:
Reporter: Cory Weinberg
Posted: February 27, 2015
Link to Article: Central SOMA’s Coming Boom

John Elberling has been in the middle of preservation and development fights South of Market for more than 40 years. Now he’s thrown his considerable influence behind the Central SoMa rezoning process — an effort to transform 250 acres of remaining industrial heartland into San Francisco’s next development frontier. It’s seen as an area where billion-dollar technology companies, affordable housing and warehouses can work and live together.

“We can’t take the neighborhood back,” said Elberling, head of the nonprofit housing group Tenants and Owners Development Corp. “We have to create the next one.”

What form that creation could take will be clearer – and probably more contentious – by later this year, when the Central SoMa rezoning process started in 2011 should be mostly complete. With San Francisco squeezed tight, Central SoMa will be designated as one of the only places left to build new, tall office buildings.

Some of the country’s most deep-pocketed real estate investors aren’t waiting for the plan to be completed. Developers such as Tishman Speyer, Boston Properties, Kilroy Realty Corp., SKS Investments and the CIM Group have already locked up sites that together would hold millions of square feet of new office space in anticipation.

If Central SoMa rezoning represents a huge opportunity for developers, it’s also one for the city. Officials, and activists like Elberling, want to leverage the impending development bonanza to confront the affordability crisis, tying development to thousands of units of affordable housing and preserving some of the neighborhood’s industrial heritage.

In November, the Planning Department announced that it wants Central SoMa developers to provide or pay for a much higher proportion of affordable housing units – 33 percent – than they would have to in other parts of the city. The department may also require developers to set aside space for nonprofits and production, distribution and repair (PDR) businesses that once ruled the area.

In all, the city stands to gain about $600 million from the new development in Central SoMa, according to a 2013 Planning Department draft plan.
The big dollars mean big stakes. This process has also rewritten the script for development battles in San Francisco, which typically pit developers with aggressive plans against resistant neighborhood activists, with city planners trying to chart a course between them. Not this time.
“For the first time in my experience as a planner, there are members of the community pushing for more development,” said Planning Department veteran Steve Wertheim, who is steering the Central SoMa plan. “We would make a big mistake if we didn’t use this economic engine for civic benefits. …The profit is there to be made, and I’m trying to turn that into public value.”

How much the city and neighbors can demand before developers balk remains to be seen. Developers think the city is already asking for too much, which will backfire when an inevitable economic downswing hits.

“There are lot of problems when you say you want to have everything,” said Amy Neches, a partner at TMG Partners, which is proposing a 200,000-square-foot office building at 5th and Brannan streets. “There really is a limit. You need a plan to not only work when (the economy) is perfect.”

In demand: Why so many developers want a piece

Affordable housing advocates — and potentially the city — are asking so much of developers because of how hot the area will soon become. The zoning changes won’t drastically change the skyline because the potential 400-foot height limit means buildings will be significantly shorter than their peers in the Financial District or Transbay redevelopment district. Instead, the large parcels are prime targets for developers to build the kinds of buildings that tech companies want: ones with large floor plates, tall windows, open-office layouts and a grittier feel.
“The most exciting thing about Central SoMa is it is finally a large area where the city is looking to entitle offices that actually meet the needs of tenants. It’s not a bunch of skinny highrises,” said Mike Sanford, Kilroy Realty’s executive vice president for Northern California. “The modern workers want bigger floor plates, more creative space. It’s not just about view space.”

Kilroy has already had to try to navigate plenty of hurdles to provide that space. There’s a ballot threat looming to block the tech towers that Kilroy wants to build on top of the historic Flower Mart site.

The area is already a magnet for tech companies. Twitter’s first major office presence was on Folsom Street before it moved most operations to Mid-Market. LinkedIn will park its San Francisco hub at 222 Second St. next year.

Once the rezoning is done – adding the potential for 50,000 new jobs and 9 million square feet of new office space over the next few decades — one of the city’s new tech centers will sit on the corner of Brannan and 5th streets. That’s where four major development sites each span more than an acre.

“That will become a very desirable address,” Sanford said.

Jobs matter too: Why the city’s priority is office space, not housing

The Central SoMa rezoning area includes wildly different environments. The commercial district next to Market Street’s Powell BART station is directly north of it. The zoning area spans south nearly to AT&T Park on the waterfront, stopping at Townsend Street on top of the Caltrain station. To the east, luxury condo towers have sprouted on Rincon Hill. On the area’s western border on 6th Street, some of the city’s poorest residents crowd into residential hotels.

The northern part of Central SoMa is mostly built out. What will change dramatically is the southern portion, where several large development sites that are zoned for light industrial uses will get new zoning for offices and some housing. The area’s development will get a boost from the $1.59 billion subway line now under construction that will run 1.7 miles from SoMa to Chinatown. The new transit line was part of the impetus for the Planning Department to push for a rezoning that would prioritize office space over housing.

That priority may seem surprising at a time where everyone from neighborhood activists to the mayor’s office have committed to addressing the housing crisis, but Planning Director John Rahaim points to the numbers.

If housing fills out over over the next few decades in areas like recently rezoned eastern neighborhoods, Mission Bay, Hunters Point Shipyard and Parkmerced, the city will have enough housing to accommodate residents, according to Association of Bay Area Government projections. The same isn’t true for jobs, where the city would fall well short of meeting expectations even after incentivizing new skyscrapers like the Salesforce Tower.
Rahaim gestured to a map in his Mission Street office, pointing out that office zoning is restricted mostly to the Financial District and Mission Bay. “We’re going to have an issue on the job side if we don’t do something to grow the capacity,” Rahaim said.
Of course, the city still faces an office space cap because of the 1986 ballot measure Prop. M. None of the sites acquired in Central SoMa have a Prop. M allocation, so developers may have to wait a while to build projects even after the rezoning.

How to save SoMa’s soul

Affordable housing advocates are concerned about different numbers. For one, there’s the fact that median earners could afford only about a quarter of recently available rental units in the city of San Francisco in 2013 – the second-lowest rate in the country after New York – according to a study this month by the New York University Furman Center for Real Estate & Urban Policy.

As such, TODCO and Elberling are proposing that four large sites on Fifth and Brannan Streets be zoned as special-use districts that would put tech offices side-by-side with affordable housing buildings, student housing, public open space and PDR space.”The number one civic priority is affordable housing in City Hall and everywhere. It’s not that new space for tech offices isn’t a priority, but it’s not number one,” Elberling said.
Here’s what the city has to do to get new 2,400 housing units in the area, with 35 percent as affordable, according to TODCO’s plan: Push up inclusionary housing requirements to 20 percent and 33 percent for on-site and off-site, respectively; build hundreds of affordable housing units on public sites in the area; and get four majors office developers to set aside land for affordable housing. “TODCO is planning a June 2016 ballot initiative that will add to the final Central SOMA rezoning whatever it takes to achieve this,” according to the plan.

The Planning Department would be wary that the affordable housing goals in Central SoMa are too ambitious. If it asks for too much, and it won’t get the office development the city needs and that companies are pining for. Fees that the city demands aren’t metered to respond to economic nosedives and upswings.

Wertheim, the Central SoMa chief planner, sees a way to make it all work, although he admits the three-decades-long plan will have low periods where it doesn’t seem to click. “We’re in the honeymoon period right now,” he said.

He said the plan area could make use of an infrastructure finance district that would allow it to keep property tax increments in Central SoMa for public improvements and affordable housing. It could also try to channel the office buildings’ jobs-housing linkage fee to neighborhood projects instead of sending it to the city’s general fund.

Feb

Commercial Real Estate News: Warehouse Owners Enjoy Accelerating Rents

With Little Available Modern Space, Investors Scrambling for Bulk Warehouses in Second-Tier Markets, Ramping Up New Development

Source: CoStar
Reporter: Randyl Drummer
Date: February 5, 2015
Article Link: Warehouse Owners

Package shipper UPS isn’t the only one who loves logistics.

Property owners and investors are singing the praises of the unattractive but highly functional and in-demand property type after another quarter of strong rent growth and increasing demand for modern, bulk warehouse space in key distribution markets.

So much so in fact, that investor demand for warehouse and logistics properties is limited only by the current shortage of modern new buildings available to buy, according to CoStar analysts presenting their findings at the Fourth Quarter Industrial Real Estate Review and Outlook last week.

With rental rates on the rise, especially for new, high quality logistics space, “You can build and lease a building potentially for the next 10 years with a good credit tenant,” said Rene Circ, director of research, industrial for CoStar Portfolio Strategy. “This is as good a time in industrial real estate as you could possibly imagine, and we are seeing that in terms of questions from our clients and people wanting to get into the market.”

Co-presenter and senior real estate economist Shaw Lupton also noted that, despite the dearth of property available in the market, sales of institutional grade properties have never been stronger in terms of sales volume and square footage traded.

Capitalization rates are at a record low of below 6% for institutional properties, with reports of much lower cap rates for sales of big box warehouse leased to triple-net credit tenants in the best markets, Lupton said.

“It’s a great time to own industrial real estate, and it’s increasingly competitive to get into it,” Lupton said. Investment sales were up a solid 8% in the industrial sector in 2014 to $60 billion.

Despite the robust investor interest, industrial property sales still lagged multifamily, office and retail property sales, largely because there simply wasn’t enough buildings available to buy. Construction on new bulk warehouse space is ramping up, but it has yet to catch up with investor demand for the new modern facilities favored in tenants for their increasingly sophisticated and high-tech logistics supply chains.

CoStar analyzed the inventory of newer logistics buildings five years old or less compared with all existing logistics buildings and found that both the supply of newer buildings and the ratio of sales has dwindled significantly since 2002, when 32% of all trades were of buildings less than five years old. Today, the number is closer to 10%.

“New supply will be needed to raise the overall level of transaction value,” Circ said. “You can make the argument that lack of new construction is holding back sales by as much as 10 percentage points. Building (prices) are being bid up because there are just not enough sellers.”

While industrial real estate rarely outperforms other more glamorous property sectors, rents for industrial space, led by demand for newer, high-functioning properties, grew an average 4.5% for all industrial properties in 2014 over the previous year. That rate of increase outstripped the healthy 3.7% rental rate increase logged by the office market, 3.2% in the apartment sector, and the 3% rent growth in retail real estate.

The amount of available space on the market is tightening. The 8.7% vacancy rate for logistics space in the fourth quarter compares with a reading of 9.9% at the height of the last real estate cycle in 2007. Absorption totaled 167 million square feet in 2014, slightly lighter than the year before only because of the lack of usable vacant space, Lupton said.

“There just isn’t enough space out there to allow for [larger] numbers,” he said. “We’re not lagging much below the absorption peak, but to get beyond that, we absolutely need more new construction.”

While logistics construction was up 14% in 2014 to 136 million square feet, it’s still about 44 million square feet below the early 2000s peak of 180 million square feet.

While the recovery in rents and property values for high quality logistics space is nearly complete, Circ and Lupton noted that the light industrial property segment is still in the early expansion phase, with very little new construction, which is expected to change over the next few quarters.

“There’s still a lot of runway for growth in light industrial,” Circ said, adding that the improvement in this sector of the industrial real estate market is a very promising sign for the recovery of numerous local markets.

“These are not the big multinational companies, the Amazons, these are local businesses. We’re seeing the light industrial segment doing really well, which gives me a lot of comfort in the strength of local economies,” Circ said.

“When you see these local manufacturing and housing-oriented businesses taking space and making lease commitments, it means they have a lot more visibility into their business growing again, and that supports the guts of the local economy.”

Jan

Tech Users Race for More Space

Source: San Francisco Business Journal
Reporter: Cory Weinberg
Date: January 20, 2015

Social media companies Twitter and Pinterest and mobile payments startup Stripe are hunting for hundreds of thousands of feet of office space each, multiple real estate sources said.

Their eventual decisions have the potential to drive the leasing market this year and next. As it is, tech companies leased 91 percent of the 3.6 million square feet of office space taken in San Francisco last year, according to CBRE.

The companies could head to Oakland to anchor the refurbished 400,000-square-foot Sears Building when it opens by 2018, giving the East Bay city a techie jolt. More likely, they’ll have their eyes on spaces like Kilroy’s 1800 Owens St. (known as the Exchange on 16th) in Mission Bay, set to deliver 650,000 square feet next year, or 510 Townsend St.

If companies need hundreds of thousands of square feet, they could also look toward Transbay buildings such as the Salesforce Tower (opening in 2017), 181 Fremont (2016), 199 Fremont (2016) or 303 Second St. (2015).

“I don’t think you’ll see a large number of those kinds of users go to Oakland. Having said that, I do think there are some indications that (the Sears Building) could snatch some sort of user from San Francisco who decides that San Francisco doesn’t have enough space,” Mike Sample, a broker who specializes in tech companies for Newmark Cornish & Carey, said at a SPUR event last week.

Stripe, which has received $200 million of capital from the likes of Sequoia Capital, Peter Thiel, and Elon Musk, now leases about 27,000 square feet at 3180 18th St. in the Mission. It also scored a big coup by landing a spot as an Apple Pay partner earlier this year, fueling growth.
One source who spoke on the condition of anonymity said Stripe has looked at the 300,000 square feet available at the 500 block of Townsend Street, just west of the I-280 off-ramp near 6th Street.

Twitter has 760,000 square feet leased in Mid-Market. One broker who works with tech companies – and also declined to speak on the record – said Twitter is in the market for a few hundred thousand square feet and has its eye on Mission Bay now that Uber has decided to park its headquarters there.

“There’s a lot of energy going in that direction. I wouldn’t be surprised if they did something similar,” he said.

Pinterest has about 225,000 square feet across two buildings south of Market. One source said the company’s space need isn’t urgent because they just inked a new lease last fall. Pinterest, Stripe and Twitter did not return requests for comment.

Even if those companies don’t start expanding their offices this year or next, they’re increasingly thinking about future growth because of Prop. M. The city’s office space cap is likely to start squeezing the market later this year and possibly causing the current city average of $65 a square feet to increase at a faster rate.

“It seems like tenants are thinking five years out, especially the bigger ones who want to stay vested in San Francisco and think about how they will keep their headquarters in San Francisco,” Alexa Arena, vice president of Forest City’s San Francisco office, said at a Bisnow forum on Tuesday. “That’s clearly difficult for them because there’s not a lot of swaths of space where you have a single location to get the critical mass they need.”

Office complexes under construction or renovation south of San Francisco in Daly City and San Mateo will also hope to attract tech tenants this year. (It should be said that Reddit’s CEO was ousted over his proposed move to Daly City.) About 70,000 square feet at the Ferry Building in San Francisco will also likely fetch top dollar later this year.

Article Link: Tech Giants Race for More Space

Jan

San Francisco’s Vacancy Decreases to 3.9%

The San Francisco Industrial market ended the fourth quarter 2014 with a vacancy rate of 3.9%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 278,485 square feet in the fourth quarter. Vacant sublease space decreased in the quarter, end- ing the quarter at 285,144 square feet. Rental rates ended the fourth quarter at $15.94, an increase over the previous quarter. There was 108,080 square feet still under construction at the end of the quarter.

ABSORPTION
Net absorption for the overall San Francisco Industrial market was positive 278,485 square feet in the fourth quarter2014. That compares to negative (98,393) square feet in the third quarter 2014, positive 979,226 square feet in the second quarter 2014, and positive 106,799 square feet in the first quarter 2014.

Tenants moving out of large blocks of space in 2014 include: FedEx moving out of (60,100) square feet at 200 Littlefield Ave, Vitasoy moving out of (52,500) square feet at 584 Eccles Ave, and KaloBios Pharmaceuticals moving out of(49,351) square feet at 260 E Grand Ave.

The Flex building market recorded net absorption of positive 131,243 square feet in the fourth quarter 2014, compared to positive 38,309 square feet in the third quarter 2014, positive 299,408 in the second quarter 2014, and negative (33,399) in the first quarter 2014.

The Warehouse building market recorded net absorption of positive 147,242 square feet in the fourth quarter 2014 com- pared to negative (136,702) square feet in the third quarter 2014, positive 679,818 in the second quarter 2014, and positive 140,198 in the first quarter 2014.

VACANCY
The Industrial vacancy rate in the San Francisco market area decreased to 3.9% at the end of the fourth quarter 2014. The vacancy rate was 4.2% at the end of the third quarter 2014, 4.1% at the end of the second quarter 2014, and 5.7% at the end of the first quarter 2014.

Flex projects reported a vacancy rate of 5.3% at the end of the fourth quarter 2014, 5.8% at the end of the third quarter 2014, 6.0% at the end of the second quarter 2014, and 9.3% at the end of the first quarter 2014.

Warehouse projects reported a vacancy rate of 3.4% at the end of the fourth quarter 2014, 3.7% at the end of third quarter 2014, 3.5% at the end of the second quarter 2014, and 4.5% at the end of the first quarter 2014.

RENTAL RATES
The average quoted asking rental rate for available Industrial space was $15.94 per square foot per year at the end of the fourth quarter 2014 in the San Francisco market area. This represented a 4.4% increase in quoted rental rates from the end of the third quarter 2014, when rents were reported at $15.27 per square foot.

The average quoted rate within the Flex sector was $25.58 per square foot at the end of the fourth quarter 2014, while Warehouse rates stood at $12.05. At the end of the third quarter 2014, Flex rates were $24.68 per square foot, and Warehouse rates were $11.65.

DELIVERIES AND CONSTRUCTION
During the fourth quarter 2014, no new space was completed in the San Francisco market area. This compares to 0 buildings completed in the previous three quarters. There were 108,080 square feet of Industrial space under construction at the end of the fourth quarter 2014. The largest projects underway at the end of fourth quarter 2014 were 901 Rankin St, an 82,480-square-foot building with 100% of its space pre-leased by Goodeggs and Mollie Stone’s Markets, and 1 Kelly Ct, a 25,600-square-foot facility that CS Bio Company, Inc. expanded.

INVENTORY
Total Industrial inventory in the San Francisco market area amounted to 94,659,417 square feet in 4,843 buildings as of the end of the fourth quarter 2014. The Flex sector consisted of 23,849,302 square feet in 789 projects. The Warehouse sector consisted of 70,810,115 square feet in 4,054 buildings. Within the Industrial market there were 511 owner-occupied buildings accounting for 12,380,944 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 third quarter 2014 in terms of dollar volume compared to the second quarter of 2014. In the third quarter, nine industrial transactions closed with a total volume of $83,684,000. The nine buildings totaled 377,408 square feet and the average price per square foot equated to $221.73 per square foot. That compares to 20 trans- actions totaling $109,016,000 in the second quarter. The total square footage was 558,793 for an average price per square foot of $195.09.

Total year-to-date industrial building sales activity in 2014 is up compared to the previous year. In the first nine months of 2014, the market saw 36 industrial sales transactions with a total volume of $346,298,100. The price per square foot has averaged $215.98 this year. In the first nine months of 2013, the market posted 19 transactions with a total volume of $107,082,100. The price per square foot averaged $166.89.

Cap rates have been higher in 2014, averaging 6.70%, compared to the first nine months of last year when they averaged 6.10%.

Source: CoStar Year End 2014 Industrial Report

Dec

Lenders Ease Tight Underwriting Standards for Commercial Real Estate Loans

It may be easier for Ben Bernanke to get a loan to buy an apartment building than to refinance his home mortgage.

While addressing a conference of the National Investment Center for Seniors Housing and Care in Chicago this fall, the former chairman of the Federal Reserve mentioned that he and his wife had recently been turned down by their lender after seeking to refinance their mortgage.

“The housing area is one area where regulation has not yet got it right,” Bernanke said. “I think the tightness of mortgage credit, lending is still probably excessive.”

Meanwhile, it certainly appears that commercial lenders have gotten it right, judging by the flood of capital available for commercial real estate borrowers.

However, after commercial real estate underwriting standards eased for the third consecutive year in a row according to the Office of the Comptroller of the Currency’s 20th Annual Survey of Credit Underwriting, some are beginning to sound a note of caution that perhaps lending standards are becoming too accommodating.

Surveyed banks noted that they have continued to ease underwriting standards and take on increased levels of credit risk in response to abundant liquidity for commercial property and competitive pressures in the current low interest-rate environment. Large banks, as a group, reported the highest share of eased underwriting standards among those surveyed.

Ratings agencies are particularly sensitive over underwriting standards after taking heat from Congress and investors for failing to adequately account for risks and when rating securities backed by residential and commercial mortgages before the recession.

Slippage in underwriting standards should remain a key credit concern for investors, particularly in certain segments such as construction where lending conditions have been relatively frothy, Standard and Poor’s said in its 2015 banking outlook issued this week.

“In some loan classes (e.g., construction and development loans), ultra-low net charge-offs are prompting a rebound in construction lending among some banks. We remain cautious that some U.S. banks with below-average exposure to this category may be easing credit standards somewhat and pricing loans more aggressively to generate growth, which could eventually lead to deceleration in asset quality,” S&P analysts noted in their report. “While we do not expect widespread degradation in U.S. banks’ asset quality in 2015, we do expect a gradual build-up of provisions for the banking industry as reserve levels bottom out and loan growth increases more consistently.”

In the recent OCC survey, one-third of bank respondents reported an easing in commercial construction lending. This is the highest level of responses in this category this century. Only 2% reported tightening standards for commercial construction loans, the lowest level this century.

In addition to acknowledging the relaxed credit standards, bank respondents also noted that the level of credit risk in their construction loan portfolios has increased, excluding residential development. Twenty-one percent reported that credit risk has increased somewhat – more than double the number of respondents who indicated this trend last year. In addition, 44% expected this risk to rise next year.

When it came to CRE lending for residential construction including multifamily, 13% of bank respondents noted that credit standards had eased. This is the first time in six years that any bank has noted that trend.

Thirteen percent of bankers also noted that this has raised the credit risk somewhat for their residential construction loan portfolios – none did last year. In addition, 25% expected this risk to rise next year.

Thirty-seven percent of banks said underwriting standards had eased in their other commercial real estate loan portfolios – up from 24% in 2013. Just 4% said underwriting had tightened. That is the lowest level this century and compares to the 76% who said they tightened standards during the Great Recession years.

Twenty-seven percent of bankers this year said the easing has raised the credit risk in their other commercial real estate loan portfolios. And 44% expected that risk to increase next year.

Jennifer Kelly, senior deputy comptroller for bank supervision policy and chief national bank examiner, sounded a reassuring note in the OCC survey: “As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, [OCC] supervisors will focus on banks’ efforts to maintain prudent underwriting standards, monitor portfolio credit risk, and reduce exceptions to policy,” she said.

Source: CoStar
Reporter: Mark Heschmeyer
Date: December 17, 2014

Link to Article: CRE Loans

Dec

SF’s Prop M Puts Development Under the Gun

With demand for office space in San Francisco at its highest level in 15 years, anxious developers are waiting for the city to determine how it will approve projects under Proposition M’s construction constraints.

The San Francisco Planning Commission most likely won’t implement a selection process until midway through 2015 at the earliest, but in mid-November an industry discussion panel provided an update on the city’s Prop. M policy formation and state of the office market.
The event was closed to the media, but presentations and attendees indicate that city planners continue to debate whether to institute a “competitive pool” policy, in which a group of projects compete for approval, or to continue evaluations on a project-by-project basis.

“What you can gather is that there are a lot of options about how to do this right now—there are procedural questions, substantive questions about criteria and questions about implementation,” said David Blackwell, who moderated the panel and leads the land use practice group for the Allen Matkins law firm in San Francisco. “There are a lot of variables that haven’t crystallized yet.”

Approved in 1986, Prop. M caps the amount of large new office projects at 875,000 square feet annually. Unused allocations are rolled forward, and the current cap is at a little more than 3 million square feet. But about 3.2 million square feet in applications are pending, and nearly 8 million square feet are in the pre-application process, according to a presentation that John Rahaim, the planning director for San Francisco, gave at the event. That amounts to a pipeline deficit of about 8 million square feet.

Meanwhile, office rents have skyrocketed amid a demand for space that parallels the height of the dot-com boom in 2000, a trend that shows no signs of slowing down absent an economic downturn.

Average asking rents since 2010 have doubled to $61.69 per square foot, while the average vacancy rate has dropped 150 basis points to 6.7 percent over the last year, according to a presentation made at the event by Phil Tippett, an executive vice president of CBRE in San Francisco. Users have absorbed 4.3 million square feet in the last three years, and tenants looking for an aggregate of about 6 million square feet are in the market.

History suggests that the planning commission will institute a competitive pool. The commission used the process the last time developers butted against Prop. M in 2000 and 2001 and then reverted to the project-by-project review during years of lower demand.

But the commission still must decide what criteria to use in such a process. In 2000 and 2001, for example, competitive pool principles focused on public views, shadows, housing displacement and a handful of other elements. By comparison, in the late 1980s, broader standards concentrated on design, location and consistency with the city’s general plan.

A planning department staff memo in September suggested that a competitive pool for this round of development include criteria such as green building design, proximity to transit and the impact on production, distribution and repair space.

According to Rahaim’s presentation, if the commission decides to implement a competitive pool process, it also needs to determine how to score or weigh different elements, when to officially begin the competition, how long review periods should be, and whether to approve proposed projects that are ready to move forward before launching the policy.

Overall, office supply constraints have put existing landlords in enviable positions. During their most recent earnings calls, executives with large publicly traded office real estate investment trusts discussed Prop. M amid concerns that the current level of demand is unsustainable.

Officials with Boston Properties, Inc., for example, suggested that their 61-story Salesforce Tower in the South of Market neighborhood, which is expected to be completed in 2017, is further along than most projects and that the views from the top 30 floors generally available for lease provided a competitive advantage. (The firm is asking for more than $95 per square foot, according to CBRE.)

Additionally, Hudson Pacific Properties Inc. earlier this year finished leasing up the 1 million-square-foot 1455 Market St., a property it repositioned to appeal to technology tenants after buying it from Bank of America in 2010.

“From our standpoint [Prop. M] is a non-existent issue because we don’t have ground-up development—everything we have and everything we’ve looked at is on a renovation basis,” Hudson Pacific CEO Victor Coleman told analysts in response to a question about Prop. M’s influence. “If you’re a landlord in San Francisco and you like your portfolio, I don’t think it hurts you.”

Source: The Registry
Reporter: Jose Gose
Date: December 16, 2014

Article Link: PROP M

Dec

Two Mixed-Use Projects Proposed Near Millbrae BART Station

Two transit-oriented development projects proposed for the area surrounding Millbrae’s BART station would bring new retail, housing and office space to the Peninsula city.

San Jose-based Republic Urban Properties LLC is planning an approximately $200 million mixed-use development that would replace surface parking on the east side of the BART station.

Gateway at Millbrae Station, which would sit on about nine acres of BART-owned land, is expected to include 150,000 square feet of office space, up to 45,000 square feet of retail space and as many as 350 market-rate apartments along with a 110-room extended-stay hotel, likely under a Hilton or Marriott flag, said Michael R. Van Every, president and CEO of Republic Urban. The company is working with BART on a replacement parking strategy based on a transit study that is under way.

“We want to make it a destination for BART riders, for residents, for employees and then, of course, for the greater surrounding communities,” Van Every said. “We’d like to take the next step and say how can we not just serve commuters, but how can we serve the greater region and Millbrae itself by redefining what we consider a gateway location.”

City approvals are pending, but Republic Urban, which is part of the Republic Family of Companies with offices in Washington, D.C. and Reston, Va., looks to break ground on the project by late 2015. The build-out should take five to seven years, Van Every said.

The project would be part of BART’s overall plan to create more transit-oriented developments around its stations to increase ridership and boost revenue, said Ellen Smith, a project manager at BART.

“The goal is to have higher ridership as a result of having uses surrounding the station that would bring more riders to us than the parking spaces do,” Smith said.

Because the Millbrae station also is a Caltrain station and includes a SamTrans bus pickup and drop-off area, the three agencies are coordinating to ensure “all access modes are supported” by the new development, Smith said. The station also is slated to be a stop on the planned high-speed rail line.

Additionally, Serra Station Properties is proposing a mixed-use project on 3.5 acres west of the BART station. That development would include approximately 270,000 square feet of office space, 32,000 square feet of retail space and 500 residential units, according to a report from the City of Millbrae. Serra Station is led by Vincent Muzzi, who did not return a call for comment.

The Serra Station project would occupy land the company already owns, which now holds a closed convalescent hospital, said Bill Kelly, a Fullerton, Calif.-based economic development consultant for the City of Millbrae.

Both projects are being analyzed by the city as it works to update its Millbrae Station Area Specific Plan and supporting environmental impact report. The specific plan, adopted in 1998, aims to redefine a vision for an approximately 116-acre area around the Millbrae BART/Caltrain Station and was adopted to encourage sustainable smart growth around the transit station. Republic Urban’s and Serra Station’s projects fall within the specific plan area. The updates will include changes such as land-use density and height requirements, Kelly said. Hearings about the plans with the planning commission and city council are expected during the first quarter of 2015.

Source: The Registry
Reporter: Nancy Amdur
Date: December 9, 2014

Link to article: Peninsula Development