san francisco commercial real estate | Calco Commercial, Inc.

Category: san francisco commercial real estate (137)

Dec

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

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

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

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

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

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

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

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

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

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

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

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

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

Link to article: Maker Hub coming to Potrero Hill

Oct

San Francisco 3rd Quarter Industrial Market Report

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

Source: CoStar

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

ABSORPTION

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

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

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

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

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

VACANCY

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

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

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

SUBLEASE VACANCY

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

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

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

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

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

DELIVERIES AND CONSTRUCTION

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

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

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

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

INVENTORY

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

SALES ACTIVITY

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

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

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

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

Full Report: 3rdQTR_Industrial

Oct

National CRE News: Office Demand Reaches Pre-Recession Peak

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

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

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

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

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

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

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

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

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

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

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

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

Link to article: US Office Demand

Oct

08

Calco Commercial Real Estate News: 111 S. Maple Avenue – SOLD

Calco Commercial represented the Buyer in the recent purchase of 111 S. Maple Avenue in South San Francisco. 111 South Maple Avenue consists of 27,360+/- square feet of commercial warehouse construction situated on a larger 1.25 acre lot. The warehouse boasts high ceilings, heavy power and close proximity to Highway 101, I-280, I-380 and SFO.

Calco Commercial has completed nearly 60 lease and sale transactions over the last year, representing approximately 450,000 square feet of commercial product. Calco continues to lead the San Francisco brokerage industrial marketplace. The Bay Area commercial properties continue to demand premium rental and sale rates as inventory and vacancies shrink.

Calco Commercial is a full service outfit that can help you make the most of your real estate properties and investments. If you would like to discuss your real estate options, or would simply like more information related to current market conditions, please call our office at 415.970.0000.

Sep

29

San Francisco CRE News: Potrero Hill Housing Project Shrinks as Vote Looms

Source: San Francisco Business Times
By: Cory Weinberg
Date Posted: September 28, 2015

Surrounding the Anchor Steam Brewing Co. headquarters in Potrero Hill, the real-estate equivalent of a late-night bar brawl has been raging in the neighborhood.

Most major residential projects proposed for Potrero Hill are in the melee, but developer Related California is trying to rise above the fray a block from the brewery at 1601 Mariposa St. Related California sliced the number of rental units in its controversial Potrero Hill apartment proposal by 7 percent and boosted the percentage of affordable housing as it stares down a date with the Planning Commission next month.

The 1601 Mariposa proposal — two four-story buildings pitched three years ago to replace a warehouse and parking lots on the northern slope of Potrero Hill — shrunk its project from 320 units to 299 units after criticism from neighborhood groups that the apartment would crowd the neighboring Live Oaks private school.

The developer also set aside 20 percent of the project for people making about half of the city’s median income instead of the initial required 14 percent. The project includes 28,000 square feet of public open space, and the developer has mulled another increase in the number of three-bedroom units to draw more families to the neighborhood. To help ease traffic, the project will swap out some retail space for workspace that will house small manufacturers.

“I’m sure you could find 10 people to disagree with me, but we’ve had a lot of big meetings lately, and I think people really like the plan in general – those who aren’t just opposed to any density at all,” said Bill Witte, Related California’s president and CEO. “The question is – which isn’t unusual in San Francisco – which community benefits are you willing to agree to to make it more neighborhood friendly, more affordable?”

The project is slated to get a large project authorization from the Planning Commission on Oct. 22, which would mostly greenlight it for construction. (The threats of lawsuits could always slow things down, of course.)

It would be one of the largest built in the neighborhood in recent memory and is part of a string of dense development there, including the 395-unit 1200 17th St. and the 234-unit 1301 16th St.

The 1601 Mariposa project – designed by David Baker Architects – already mostly conformed with current zoning under 2009’s Eastern Neighborhoods Plan. A city environmental study found the project would have significant and unavoidable traffic impacts at just one of 13 intersections studied – Mariposa and Mississippi streets. Combined with other projects that are in the development queue, the intersection of 16th and Arkansas streets will also get squeezed. Muni congestion would be insignificant, the study found.

The problem is that Potrero Hill – along with neighboring Dogpatch– has seen a string of residential proposals that add badly needed housing to the city’s stock, but rankled neighbors who are starting to see heavy construction with little transit or park improvements to show for it. (The 1601 Mariposa development would pay about $4 million in fees for the city to acquire and upgrade city parks.)

A group opposed to 1601 Mariposa, called “Grow Potrero Responsibly,” has said that the project would further congest Muni, provide insufficient parking and would be too dense for the neighborhood. The site is also zoned “urban-mixed use,” a designation that allows for flexible use and has paved the way for housing to replace production, distribution and repair (PDR) businesses.

J.R. Eppler, who heads the Potrero Boosters neighborhood group, said he only had quibbles with the project and that much of the large differences had been resolved. The group will vote on endorsing the project Tuesday.

The census tracts surrounding the 1601 Mariposa project include median household incomes that are about double the city as a whole and that also have much higher home-ownership rates. The neighborhood is attractive to builders not only for its zoning but for its proximity to technology and biotech headquarters in South of Market and Mission Bay.

While few projects have been completed so far, the Potrero Hill/Showplace Square plan area includes 19 percent of the city’s total units approved for construction, according to the city’s Housing Inventory report.

Adding to the irritation, the Warriors arena proposal, Pier 70, and the Giants’ Mission Rock development are large projects that will sit nearby. (Those haven’t galvanized significant, organized opposition in Potrero Hill, however.)

The Planning Commission is due for a briefing on the Potrero Hill/Showplace Square plan area this Thursday. Meanwhile, developers fighting against a proposed moratorium on market-rate in the Mission District have feared a similarly drastic measure in Potrero Hill.

Eppler of the Potrero Boosters said neighbors aren’t mulling a moratorium but want the Planning Department to re-evaluate the Eastern Neighborhoods plan as it “reaches the end of the pipeline” of construction planned there.

“There needs to be the political will necessary to devote a significant amount of resources to Potrero Hill, Dogpatch, Mission Bay, South Beach and to connect dots of development to implement new systems that will allow them to operate together,” Eppler said.

link to article: Potrero Housing

Sep

17

National CRE News: Interest Rates & CAP Rates Don’t Always Correlate

Cash Flow, CRE Fundamentals Pose Strong Counter Punch to Potential Rate Increase Impact on CRE Values According to Accounting Firm
Source: CoStar News
By: Mark Heschmeyer
Reposted: September 16, 2015

As the Federal Reserve readies an expected decision this week on whether to begin raising interest rates, common assumptions among some commercial real estate investors, developers and lenders are that CRE values will take a hit when interest rates are raised.

The basis for this assumption appears intuitive at first. Rising benchmark interest rates, like Treasuries, should tend to make all yield-oriented investments to be less attractive,

However, according to a new report issued this week by accounting firm EY, the relationship between interest rates and CRE values is much more nuanced. While the Fed’s initial policy adjustments likely will have a marginal impact on CRE valuations and investment momentum, interest rates and cap rates aren’t always correlated, the EY report authors claim.

Several factors affect the trajectory of capitalization rates and real estate values, such as demand and supply changes, transaction activity and trends in the overall economy. An in the current market, CRE fundamentals are strong.

At the worst, EY predicts, an uptick in the federal funds rate may make it more expensive to develop new projects and refinance certain debt, and possibly cause a reactionary sell-off in publicly traded real estate investment trusts (REITs).

However, as it currently stands, relative to historical averages over the last 30 years, the spread between the 10-year Treasury and CRE yields appears to allow for further compression. This suggests that CRE values are not immediately threatened by rising interest rates, EY said.

The EY report was authored by members of EY’s real estate M&A advisory team led by Steve Rado, a principal in Ernst & Young LLP’s Transaction Advisory Services practice, with contributing author Dr. W. Michael Cox, the former chief economist of the Dallas Federal Reserve Bank and a professor at Southern Methodist University’s Cox School of Business.

EY noted several drivers that are expected to buttress real estate values, including record amounts of inbound capital, available private equity ‘dry powder’ for investment, a generally positive economic outlook with some obvious caveats, and relatively strong CRE fundamentals.

A 25 to 50 BPS Jump Doesn’t a Spike Make

A shock to the U.S. CRE investment environment from a 25 to 50 bps increase in the overnight lending rate seems unlikely in light of the forecasted environment for the sector, according to EY. With vacancies trending down in office, retail and industrial properties and hospitality and multifamily exhibiting increased rents, the report’s authors expect the effect of contractionary monetary policy and rising interest rates on real estate values and cap rates to be mitigated in the near term, especially for investors focused on cash flows from higher lease rates and strengthened property operations.

While many observers purport a negative outlook for CRE based on the premise of a spike in long-term interest rates, the possibility that long-term interest rates will see only moderate increase over the near term is more likely given the slower pace of the U.S. economic recovery, the EY analysts said.

They also expect CRE will continue to be an attractive investment on a risk-adjusted basis in the near-term, given current conditions of increased capital supply and strong fundamentals, along with room for compression in the spread between cap rates and interest rates, according to the report.

However, EY cautioned investors on underwriting risk as trophy assets in gateway markets appear to be fully priced with new supply is coming on the market at a faster pace.

Finally, the EY report authors urged investors to see the glass as half-full rather than half-empty.

“Actions of the Fed to normalize interest rates should not be seen as a bane for the industry, but rather should instill confidence that their efforts are a proactive measure to provide stability in the future,” the EY report concluded.

Link to article: Interest Rates & CAP Rates

Sep

10

National CRE News: Is a Commercial Real Estate Bubble Looming?

Despite Investor Concerns of Overheating, Market Indicators Support CRE Pricing
Re-posted: CoStar News
By: Randyl Drummer

As commercial real estate prices have continued to surge, some have become concerned that valuations may be overheating or even reaching bubble levels as a combination of high demand, low interest rates and loosening loan underwriting standards contribute to a record spike in deal activity and price paid per square foot for trophy properties in top U.S. and global markets.

But while investors and analysts agree the surging demand for commercial property should be closely scrutinized for signs of overheating, several market indicators appear to reflect solid justification for the upswing in prices. So while peaking prices are a concern, analysts said it is premature to characterize the recent valuation increases as a ‘bubble’ that will inevitably lead to a market correction.

Rather, they said, the price increases seen over the past 12 months appear to be a direct function of the long period of low interest rates in a low-yield environment, coupled with strengthening fundamentals and rising property-income levels.

“Indicating that we are not in a bubble, we are still seeing a wide pricing gap for taking risk that did not exist in 2006 and 2007, when vacant buildings could fetch premium pricing because investors did not have to wait for leases to expire to get at the embedded rent growth,” said Walter Page, director of U.S. research, office, for CoStar Portfolio Strategy. “Capital is very risk adverse compared to 2007.”

Perhaps most significantly, Page added, previous pricing bubbles have burst only after developers flooded the market with a large supply of new space within a very short time. With the possible exception of the office construction boom in Houston, this is not the case today.

Showing a measure of caution following recent stock market volatility and swings in August and into September, property investors appear to be taking a pause to assess conditions, with previously acquisition-minded investors now saying, “Not so fast.”

In recent meetings with several major investors, Page said the discussions have changed tone and now focus on not rushing in and taking their time to place money. As a result, they expressed expectations that sales volumes may slow somewhat in the second half of 2015, Page said.

Price appreciation has also slowed, both from earlier this year and compared with the early to mid-recovery period from 2010 to 2013, suggesting that pricing is reaching market-clearing levels, added Page.

Using the term ‘bubble’ to describe the current pricing advances gives the false perception that the market is not stable and is ready to burst,” notes Andrew Nelson, chief economist for Colliers International.

“Investors like to buy closer to the bottom, and it certainly seems we’re closer to the top, even if not quite necessarily there,” Nelson said. “At the same time, market fundamentals are strong and getting stronger, and I do believe we have some time left on the clock in terms of continued economic growth.”

While the abundant supply of cash looking to find a home in U.S. properties is helping to propel sales, only about half of U.S. office markets are achieving pricing above the last peak, with top-tier markets like San Francisco, New York and San Jose leading the way. Other major world cities show a similar trend.

CoStar sales data shows record CRE sales volumes in all product types totaling $600 billion over the past four quarters, which is 7% above the 2007 record of $556 billion, and up by 23% from the four-quarter period a year earlier.

Office sales of $148 billion over the past four quarters trail the record $203 billion in 2007, which included $60 billion in sales and re-trading stemming from sale of Equity Office Properties to Blackstone, which some consider to mark the previous cycle’s peak. The current four-quarter sales volume represents a 21% increase from a year earlier, so clearly office sales volumes are strong, Page said.

However, the office value appreciation rate has slowed to 2.4% over the past year, down from the 5% to 8% appreciation rate between 2011 and 2013, Page said. Value increases over the past year have ranged from just over 4% in the San Francisco Bay area to less than 1% in Chicago, Seattle, and Denver.

A marked slowdown in cap rate compression, from 50 to 90 basis points per year during the 2010-2013 period to a 20 bps decline over the past year, also has contributed to the slowing depreciation.

“Because of the expectation of rising interest rates, we are forecasting that the current 5.7% national office cap rate will mark a market bottom, with a rise of 20 basis points forecasted by 2018,” Page said.

Valuations should increase in most markets for several more years, suggests that the growing strength of local economies will be a key factor in improving property returns, Page said.

“Our forecasted annual returns through 2019 range from over 9% for San Francisco and Nashville to 2% for Houston and Washington, D.C.”

Also, rent levels in a large number of metros have not yet risen to the point that justifies new office construction. With the exception of multifamily, levels of new supply remain moderate in most property types, particularly the office market, where construction is almost exactly at its long-term average of roughly 124 million square feet per year, well below the 184 million square feet added at the peak of the last market bubble, Page pointed out.

Moreover, the construction is highly concentrated in about one-third of U.S. markets, led by Houston and New York with 13 million square feet. Seattle, San Jose and San Francisco are also hot spots for office construction.

The remaining two-thirds of markets have roughly half their historical level of new office construction, yet the vacancy rates for these markets are about the same as in 2007.

Globally, property is expensive on a per-pound basis in some top markets, and cap rates are low for the best properties, typically signaling modest returns and expensive pricing, Colliers’ Nelson agrees. With inflation and interest rates still very low, however, spreads between cap rates and long-term Treasury note remain above their long-term averages, making pricing look much more reasonable, he added.

Link to article: Market Indicators Support CRE Pricing

Jul

30

National CRE News: Borrowing Rates Edging Up in Advance of Expected Fed Move

But in Current Competitive Environment, Other Banks Still Cutting Deals
Source: CoStar
By: Mark Heschmeyer
Posted: July 29, 2015

Even though the Fed today signaled that it remains on course to raise interest rates in September or later this year, a few banks have already begun raising interest pricing on their commercial real estate loans, particularly for multifamily property. While long expected given the overall strength of the economy, the bump in pricing is coming weeks in advance of an expected hike in the Federal Reserve Bank lending rate.

“We’ve seen rates increase, both on the Treasuries and on swaps, and we’ve seen the increase being sustained and we’ve been wanting to raise interest rates for the last several weeks,” said Joseph DePaolo, president and CEO of Signature Bank.

However, DePaolo said his bank wasn’t able to raise rates in the second quarter because their competition wasn’t moving.

“You can’t be a half or more [percentage points] higher because no matter how much they want you and no matter how efficient our commercial real estate team is, half is a half, and it means a lot,” he said, noting the highly competitive lending environment.

But that has changed in the last 10 days.

“We did some due diligence last week and again yesterday (July 20) and found that our competitors were raising their five-year fixed from let’s say as low as 3% to 3.25%,” DePaolo said. “We were 3% and we simply raised ours to 3.5% and that was yesterday.”

While all the signs appear to point to interest rates finally moving up after many previous fals starts, not everyone is convinced that higher rates will finally take hold.

“That’s possible, but there’s no guarantee,” said Peter Ho, chairman, president and CEO of Bank of Hawaii. “We have seen these [trends] in the past, where it sure looks like rates are moving up and margins stabilized only to find out that, it’s not really a trend, it’s an aberration. So it’s definitely possible, but as I said, I just can’t guarantee that.”

With the expected change in rates, Stephen Gordon, chairman, president and CEO of Opus Bank in Irvine, CA, said his bank has been cutting back on multifamily lending, reducing its multifamily loans in its portfolio from 59% of its holdings to 53% this past quarter.

However, while certain banks have begun the shift to more costly money, the improving economy has banks competing intensely for borrowers as they return to market. As a result, aggressive competition for commercial real estate lending is continuing across much of the country.

“In my opinion [lending competition] remains brutal,” said Mark Hoppe, president, CEO of MB Financial Bank in Chicago.

That is particularly true in CRE lending, Hoppe noted. Loan to values are clearly going up and the bank is seeing more relaxation in the amount of guarantees required in some deals.

“We understand that this is the world we live in, a very competitive one, and we’re going to compete on every front but do it where we think it makes sense,” Hoppe said.

CRE Borrowing Moving Beyond Major Metros

René Jones, chief financial officer of M&T Bank, noted a significant shift in CRE lending patterns. In previous quarters, most of the lending growth in M&T’s markets were primarily around the New York City metro area. That’s not the case this past quarter.

“Right now, growth is everywhere,” Jones said.

Total loans in upstate and western New York, were up 4%. In metropolitan New York and Philadelphia, up 8%; in Pennsylvania, up 12%; in Baltimore, up 7%; and in its other regions, loan growth went up 5%.

Other CRE lending trends noted among the nation’s major banks emerged from mid-year earnings conference calls. Highlights follow:

The Eyes on Texas

“The Eyes of Texas” is the school spirit song of the University of Texas at Austin and the University of Texas at El Paso, but from an economic and CRE standpoint all eyes have been on just Houston for the last three quarters. With energy prices not rebounding much from their 2014 collapse, there has been a lot of concern about how Houston multifamily and office properties will hold up.

Although lenders are seeing some softness in the market, second quarter results appear to be muted.

“Our office construction portfolio is very modest in size. And the office term loan portfolio is performing well there,” said Scott J. McLean, president and COO of Zions Bancorp in Salt Lake City. “On the multifamily piece, we’ve had about five, six multifamily transactions that have come out of the construction period and they’re achieving rents that are actually above the pro formas. But clearly, there will be softness there for office and there will be softness in multifamily, but we think our real estate portfolio is about $1.5 billion less going into this downturn than it was going into the 2009 downturn,” McLean said.

However, McLean likes the overall direction of the Houston economy. While job growth won’t be the 80,000 to 100,000 new jobs it has averaged over the last couple of years, McLean said the market could see 10,000 to 20,000 new jobs this year and about 30,000 new housing starts.

“Sure Houston continues to be a dynamic market,” said Keith Cargill, president, CEO of Texas Capital Bancshares, but “there is no change in our view that we will see muted growth in CRE.”

“We know we are early relative to what appears to be still a very healthy market really in all categories. Our multifamily is still extremely strong. Even in our Houston market where we have some projects, I had some concern about six or eight months ago. They are holding up quite nicely and as they complete they seem to be hitting pro forma rates or better. And so we hope that continues,” Cargill said.

“We just believe strongly that you can have too much of a good thing in terms of concentration risk,” he added. “And while today [CRE, building and energy] are three of the healthiest businesses we have, they have more cyclical risk in a down cycle. And that’s the only reason that we are tamping down the growth rate.”

Lending for the Long-Term, Borrowing for the Short-Term

Rapidly escalating CRE prices are a mixed bag for banks. On the one hand, they create demand for loans. Banks are pricing those loans based generally on 10-year payback periods. But with the run-up in CRE values stretching into its fifth year, borrowers are flipping investments much more quickly than that.

Loan prepays are definitely on the high side, said Russ Colombo, president and CEO Bank of Marin in Marin County, CA.

“There is a fair amount of profit-taking going on,” Colombo said.

Link to article: Fed Move

Jun

30

Bay Area Real Estate News: East Bay Office Rents Surge/Tech Stays In SF

Why Office Rents are Surging in these East Bay Cities
Source: San Francisco Business Times
Reporter: Roland Li
Date Posted: June 30, 2015

Rents are rising in the East Bay office submarket along the northern I-680 highway corridor as local companies expand, despite still-high vacancy rates and limited migration from companies outside the area, according to brokerage Newmark Cornish & Carey.

The submarket, which includes Concord, Walnut Creek and Pleasant Hill, has seen rents increase in some areas by as much as 30 percent, said Tom Fehr, executive vice president and regional manager of Newmark Cornish & Carey. Rents range from $48 per square foot in Class A space in Walnut Creek near the BART station to $24 per square foot in less desirable space in Concord, he said.

The vacancy rate in the submarket of roughly 10 million square feet remains high at 15.3 percent, but it is down from 16.7 percent at the beginning of the year, according to Newmark Cornish & Carey data. Concord has improved to 17.8 percent vacancy, from 20.4 percent at the start of the year.

“What is driving it is organic growth within our market,” said Fehr. “These tenants are not, for the most part, tech companies. The tech companies are staying in San Francisco.”

The northern I-680 submarket is still rebounding from the 2008 recession, when a swath of businesses related to home buying closed, including mortgage bankers, insurers and homebuilders. “We got hit pretty hard. Our recovery’s been much slower,” said Fehr.

Part of the market’s appeal is its proximity to more affordable housing in the East Bay. Workers also typically encounter lighter traffic when driving northeast, in contrast to crossing the Bay Bridge into San Francisco, said Fehr.

Newmark is now fielding more inquiries on space from companies considering a relocation from Oakland or San Francisco. “We’ve been waiting for the spillover to happen probably since the second quarter of 2013,” said Fehr.

Rents aren’t near the $60 per square foot that would justify new construction of office space, and the vacancy rate in the area further discourages any new construction. But if the submarket is able to continue the current momentum to lure more tenants, the area may see its biggest recovery since the recession.

“It’s the first time since 2010 that we’ve had a really dynamic six-month period,” said Fehr.

Link to Article: EAST BAY OFFICE RENTS

Jun

10

San Francisco Commercial Real Estate News: Office Sublease Availability Hits Five-Year High

Don’t Fret: 5 reasons San Francisco companies are dumping office space
Source: San Francisco Business Times
Reporter: Cory Weinberg
Date Posted: June 8, 2015

The sizzling San Francisco office market may have gotten some cold water sprinkled on it, now that the amount of space for sublease has hit a five-year high. Some office market observers have said this could be a signal that the office market may be cooling off, possibly a leading indicator that technology companies are getting too ambitious with their space needs.

But real estate brokerages have sprung to the market’s defense, arguing that the sublease trend is a positive sign. Subleases loosen the market, which makes it healthier, and give startups in need of quick space the opportunity to stay in San Francisco, they say.

“Many landlords are unwilling to sign for less than seven years, so tech startups in particular are finding the sublease market to be a viable option,” a market report by the brokerage JLL said. JLL also pointed out sublease space is being gobbled up at a quick pace – staying on the market for just 94 days on average.

Cushman & Wakefield said there’s “no need to fret.” San Francisco has “nowhere near the amount of vacant sublease space recorded during the dot-com bust just after the turn of the century.”

And now CBRE has crunched numbers that detail why tech firms and non-tech firms are ditching their office space. Tech firms have put 450,000 square feet of space on the market, while non-tech firms have put 745,000 square feet.

The graphic at the bottom (click here for infograph: Graph) breaks down why companies have put up space. We’ll explain what they are:

Space banking

The biggest reason that tech firms have been subleasing is because they’re banking space. That accounts for about 135,000 square feet on the market. Square is one of the tech firms that fits into this trend. “Space banking means they’ve taken another space and would have already occupied it, but they took more than they needed,” said Colin Yasukochi, director of research for CBRE.

Outgrowing space

More than 100,000 square feet is on the market because a tech company has outgrown its space. The biggest example here? Salesforce, which is leasing out space in 1 California and 123 Mission as it grows into its new urban campus next to the future Transbay Transit Center.

Consolidation

About 100,000 square feet is on the market because tech firms have consolidated due to a merger or acquisition. That’s likely why the market has seen some real estate tech firms try to shed some space after Zillow acquired Trulia earlier this year.

Downsizing

About 17 percent of tech company sublease space and 22 percent of non-tech firm space is due to downsizing.
Exiting San Francisco

The bulk of non-tech firms that are trying to sublease space are moving jobs out of San Francisco. That’s why Charles Schwab is looking to shed 350,000 square feet of its space, though it’s maintained it will keep its headquarters present in San Francisco.

Link to article: SF Office Space

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