Category: San Francisco CRE News (20)

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

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

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

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

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

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

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

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

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

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

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

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

Coveted Silicon Valley

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

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

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

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

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

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

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

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

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

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

Alternate Seattle Scenarios

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

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

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

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

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

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

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

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

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

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

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

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

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

Link to article: Government Surplus Properties

Source: San Francisco Chronicle
By: Roland Li
Date: July 26, 2018

Facebook’s recent share plunge was one for the stock-books as the $119 billion decrease officially became the largest drop on Wall Street, even surpassing Intel’s $90 billion one-day drop in 2000. Facebook is one of the Bay Area’s largest employers and drives a local economies–what does this severe decrease in stock value mean for the Bay? According to the The Chronicle, the plunge will not “hurt the Bay Area economy.” Coupled with their “$42.3 billion cash reserve,” and with a planned 20,000+/- jobs being added to the security team, Facebook will continue to “boost the local economy.”

Other economists worry that the drop in price could indicate a pending correction in the market. However, with Amazon’s massive increase in Q2 earnings, it may be too early to predict if Facebook is suffering from an overall market dip, or its own public relation woes.

According to Gary Schlossberg, a senior economist at Wells Fargo and quoted in the Chronicle article, the market has experienced a “mild deterioration in some of the fundamentals driving the market. The question is: how much will U.S. growth slow and with it earnings growth? A lot of strength in earnings has to do with corporate tax cuts. We need to see how aggressively the Fed will move interest rates. There could be a gradual turn toward ad less friendly environment for the stock market.”

Time will tell.

Source: CoStar
By: Jacquelyn Ryan
Link: Oyster Point Tech

Los Angeles’ Kilroy Realty Corp. has closed on its $308 million acquisition of San Francisco’s life science development site Oyster Point from a development group led by China’s Greenland USA, the company announced today.

The 40-acre industrial site, entitled for 2.5 million square feet of development, spans the waterfront in South San Francisco.

The sales price provides an 80 percent return for Greenland’s group, which has done some demolition work since buying it fully entitled for $171 million two years ago from Shorenstein Properties and SKS Partners.

In recent years, the South San Francisco region’s commercial biotech market has expanded to more than 12 million square feet of office and laboratory space across more than 500 acres, accommodating a range of entrepreneurial start-ups and established companies such as Amgen and Genentech.

The area’s popularity with the life science community is so strong that the market’s Class A office and lab space has a vacancy below 3 percent, according to Kilroy.

Kilroy plans to build 11 buildings that will include a laboratory and more office space in phases across the newly-acquired property.

The site adjoins the real estate investment trust’s three-building Oyster Point Tech Center, a 146,000-squre-foot project that is home to DNA testing company 23andMe Inc. The firm acquired the site earlier this year for about $111 million, according to CoStar data.

On a combined basis, the overall project will give Kilroy a significant footprint in South San Francisco’s large and rapidly-growing life science community, home to more than 200 biotech companies.

“Kilroy Oyster Point is a significant opportunity to expand our West Coast life science platform in a prudent and disciplined manner,” said John Kilroy, the REIT’s chairman and chief executive, in a statement. “It offers all the advantages we look for in new development – a strong location in a world-class market serving a dynamic industry with all the services and amenities required to attract today’s young, urban innovative workforce.”

The property adds to the company’s 13.9 million-square-foot portfolio in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle.

Source: CoStar
By: CoStar Research

For its fifth year in a row, Calco Commercial has been named as one of San Francisco’s Top Leasing Firms by CoStar, with Scott Mason also being listed at a Top Industrial Broker. Calco Commercial leased or sold a total of 415,000+/- square feet of industrial, flex and commercial spaces representing nearly 60 transactions in 2017. Calco is a leading industrial and commercial real estate firm with decades of experience in Landlord/Owner representation, Tenant Requirements, Property Management and converting assets into net leased investment properties.

Every year, CoStar’s research team verifies and records the commercial real estate sales and lease transactions that closed during the previous year. From that information, CoStar presents CoStar Power Broker Awards to a select number of brokerage firms and individual brokers who closed the highest overall transaction volumes in commercial property sales and leases within their respective markets. Now in its 17th year, the awards recognize those who perform at the highest levels in commercial real estate brokerage.

With the ever present shift of brick & mortar retail to e-commerce, the recently completed 350K square foot “retail center” located at 945 Market Street may also undergoing a shift of its own. According to SocketSite, the developer Cypress Equities, “is now seeking approval to convert 47,522 square feet of the five-story building’s retail space into open floor office space.”

The San Francisco Planning Commission is scheduled to hear the proposed conversion pitch by mid-March 2018. What will become of the remaining vacant 217,000 square feet remains to be seen.

In a partnership with Build Inc., the San Francisco Recreation & Parks Department (RPD) plan on redeveloping over 38 acres of land in the India Basin area of San Francisco into a mixed-use project consisting of retail, commercial, residential and open spaces.

According the Draft Environmental Impact Report (EIR) released on September 13, 2017 (EIR-1 and EIR-2), two iterations of the project are being considered: “(1) a residentially-oriented project with approximately 1,240 dwelling units, 275,330 square feet of commercial space, 50,000 square feet of institutional space, and 1,800 parking spaces; or (2) a commercially-oriented variant with approximately 500 dwelling units, 1,000,000 square feet of commercial space, 50,000 square feet of institutional space, and 1,932 parking spaces.”

The Draft EIR public comment period now open through October 30, 2017 with a public hearing date scheduled for October 19, 2017.

Amazon today is posting another unique offering you can bid for online: a new headquarters site in North America.

The company is seeking sites in major North American cities for a “full equal” to its Seattle headquarters, dubbed Amazon HQ2. The online retailer expects to invest over $5 billion to build and operate its new co-headquarters, which it said could include as many as 50,000 high-paying jobs.

In addition, Amazon HQ2 is expected to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community.

Amazon estimates its investments in Seattle from 2010 through 2016 resulted in an additional $38 billion to the city’s economy, providing data that showed every dollar invested by Amazon in Seattle has generated an additional 1.4 dollars for the city’s economy overall.

Real estate owners and state and local government leaders interested in learning more about how they can bring Amazon to their community can visit AmazonHQ2.

“Amazon HQ2 will bring billions of dollars in up-front and ongoing investments, and tens of thousands of high-paying jobs,” said Jeff Bezos, Amazon founder and CEO, in announcing the new headquarters search. “We’re excited to find a second home.”

Amazon listed the following criteria for choosing the location for HQ2:
Metropolitan areas with more than 1 million people;
A stable and business-friendly environment;
Urban or suburban locations with the potential to attract and retain strong technical talent; and
Communities that think big and creatively when considering locations and real estate options.

Amazon said the new location could be, but does not have to be, an urban or downtown campus with a similar layout to Amazon’s Seattle campus and a fully entitled, development-prepped site.

“We want to encourage states and communities to think creatively for viable real estate options, while not negatively affecting our preferred timeline,” the company said in its announcement.

Amazon expects to hire new teams and executives in HQ2, and said it plans to allow existing senior leaders across the company to decide whether to locate their teams in HQ1, HQ2 or both. The company expects that employees who are currently working in the Seattle HQ can choose to continue working there, or they could have an opportunity to move to HQ2.

Growing Exponentially

Amazon has been experiencing exponential growth and announced earlier this year hiring projections of adding more than 100,000 new, full-time jobs through next June. And, it has been expanding in markets across the country. The following is a list of major expansions undertaken just this year.

-Amazon Expansion Move – Date
-Opens search for Amazon HQ2 – A second headquarter city in North America — September-2017
-Announces first fulfilment center in New York, creating 2,250 full-time jobs — September-2017
-Expands in Oregon with Salem fulfilment center — August-2017
-Announces plans for new fulfilment center in Ohio — August-2017
-Completes acquisition of Whole Foods Market — August-2017
-Announces new fulfilment center in Romulus, OH — July-2017
-Opens new fulfilment center in Orlando — July-2017
-Announces plans for Salt Lake City fulfilment center — July-2017
-Announces new fulfilment center in Thornton, CO — June-2017
-Announces new fulfilment center in North Haven, CT — June-2017
-Announces plans to open first Oregon fulfilment center in Troutdale — June-2017
-Announces plans to expand in Miami with new fulfilment center — June-2017
-Announces fulfilment center to open in Fresno, CA — June-2017
-Announces new fulfilment center in Georgia — June-2017
-Announces plans to open three additional New Jersey fulfilment centers — April-2017
-Announces second Houston-area fulfilment center — March-2017
-Announces new fulfilment center in Virginia — March-2017
-Announces two new California fulfilment centers — February-2017
-Announces new air cargo hub in Kentucky — January-2017
-Announces first fulfilment center in Colorado — January-2017
-Amazon announces ninth fulfilment center in Texas; new robotics site — January-2017
-Announces new fulfilment center in Maryland — January-2017
-Confirms second Jacksonville fulfilment center — January-2017

Details of Amazon’s Current Seattle Headquarters

-Number of buildings — 33
-Square feet — 8.1 million
-Local retail within Amazon headquarters — 24 restaurants/cafes + 8 other services
-Amazon employees — 40,000+
-Capital investment (buildings & infrastructure) — $3.7 billion
-Operational expenditures (utilities & maintenance) — $1.4 billion
-Compensation to employees — $25.7 billion
-Number of annual hotel nights by visiting Amazonians and guests — 233,000 (2016)
-Amount paid into the city’s public transportation system as employees’ transportation benefit — $43 million

Source: CoStar News
Author: Mark Heschmeyer

Link to article: AMAZON

Source: CoStar News
By: Randyl Drummer
Date Posted: July 20, 2017

Investors continued to buy less commercial real estate in both the second quarter and the first half of 2017 compared to the same periods a year ago, a trend that started in 2016 as steady fundamentals that have resulted in generally robust occupancies and rental rate gains have boosted valuations across most property types.

However, CRE investment sales are still running about 10% above the historical sales volume average over the past 10 years, according to preliminary U.S. investment sales data collected by CoStar’s nationwide research team. In the second quarter, preliminary volume fell to $106.7 billion compared with $129.2 billion in second-quarter 2016.
The lodging property sector saw the biggest decline in the first half of the year compared with hotel property sales in the same period in 2016, including a significant drop in the second quarter from year-prior totals. Retail and multifamily also post sales volume declines of more than 20% in the first six-month period of 2017.

The drop-off in U.S. apartment transaction volume from previous peak levels is consistent with slowing rent growth and the market’s perception of oversupply, particularly at the top of the multifamily market, noted CoStar research strategist John Affleck.

That being said, even as buyers and sellers have continued to benefit from low interest rates, which supported the trading volume among all types of commercial property that resulted in the record-shattering pace of the last two years. With interest rate beginning to trend upward, the low-financing advantage enjoyed by property investors is expected to gradually diminish in coming quarters.

“Higher interest rates have investors reevaluating commercial real estate’s core appeal this cycle: a wide spread in a low-yield world,” Affleck added. “The maturity of the economic cycle and the new administration also raise uncertainty.”

While industrial sales volume declined by double digits in the second quarter, the warehouse and light industrial market ended the first half of this year with the smallest decline among the major property types.

Conversely, office sales volume was roughly even in the second quarter of 2017 compared with the same period a year earlier, and was down only slightly in the first half compared to the first two quarters of last year and down by an even lower percentage for the trailing four-quarter period ending June 30, 2017.

Despite the modest declines in the sales volumes, “indications from our clients, especially lenders, are that the pipeline for 2017 is very strong for the remaining part of the year,” said Walter Page, CoStar director of U.S. Research, office.

Page also noted that office sales over the past year don’t factor in an additional $30 billion in new office real estate expected to deliver in 2017 due to the 90 million square feet of expected office deliveries within the top 54 U.S. metros.

“While the sales data is tracking property sales, the true level of capital transactions would count new construction as well,” Page added.

U.S. office fundamentals are tracking at a steady and balanced clip, with average vacancy holding at about an average 10.2% for each of the last four quarters, Page noted.

“The last time we had four quarters in a row with the same vacancy rate was back in 2003 and 2004, when vacancy was 12.5%,” Page said, adding that CoStar’s forecast calls for vacancy to remain in the 10.2% to 10.5% range until 2019 as delivery of new office supply is expected to track with demand and net absorption.

The preliminary data shows both suburban and CBD office properties logged increases in the average price per square foot between the first and second quarters of 2017, according to CoStar Vice President of Research Dean Violagis.

Industrial: E-Commerce Continues to Drive Warehouse Demand

Likewise, the U.S. logistics and light-industrial property market remains in healthy balance, with more than $33 billion in U.S. industrial sales recorded in the first half, down only slightly from the same period in 2016.

“Investor appetite remains strong for industrial properties in large part because of the compelling e-commerce demand story,” noted CoStar Portfolio Strategy Managing Consultant Shaw Lupton. “With industrial construction in balance with supply, rent growth remains uncharacteristically the highest of any property sector.”

Logistics occupancies have seen little change over the past few quarters, ending the second quarter of 2017 at 93.4% as second-quarter absorption totaled a strong 42.8 million square feet, driving the 12-month trailing average to 182.3 million square feet.

Strong interest from the capital markets should keep industrial yields low, even in the face of rising interest rates, Lupton concluded.


Retail: Store Closures Affecting Investor Appeal

The ongoing spate of store closure announcements this year have had a measurable impact on the liquidity of U.S. retail properties, with investment volume decreasing by significant percentages in the second quarter and first half of 2017 compared to the same period a year earlier, according to CoStar Portfolio Strategy managing consultant Ryan McCullough.

The retail market posted its second straight quarter of flat fundamentals in the second quarter, with vacancies holding at 5.2%. Demand has lagged behind supply growth since the start of the year as the market officially transitions to a “late expansion” phase in the real estate cycle, lowering rent growth expectations for landlords, McCullough said.
However, the announced closures by dozens of national chains, including Sears, Kmart, Macy’s, JC Penney, RadioShack, Payless ShoeSource and most recently, Gymboree, have not had a similar effect on pricing, McCullough noted.

Retail property pricing has increased by 8.5% over the past four quarters, according to the equal-weighted CoStar Commercial Repeat Sale Index (CCRSI).

“This divergence is perhaps an indication that investors taking a more critical eye toward asset quality, being more selective about acquisition targets but still valuing performing assets highly,” McCullough said.

Both composite indices within the CoStar Commercial Repeat-Sale Index (CCRSI) posted gains in May, even as slower growth at the top end of the CRE market continued while overall absorption moderated and transaction volume continued to trend downward.

The equal-weighted U.S. Composite Index, which reflects more numerous but lower-priced property sales typical of secondary and tertiary markets, increased 1.3% in May, contributing to an annual gain of 16.7% in the 12-month period ending in May 2017.

Meanwhile, the value-weighted U.S. Composite Index, which reflects the larger asset sales common in core markets, advanced by just 0.3% in May, for a total 4.8% gain for the 12-month period ending in May.

Link to article: 2017 Sales Volume

According to the New York Times, industrial real estate is experiencing a pot fueled “boom”. In the US states where steps have been taken to make marijuana legal, the demand for grow & pot processing warehouses and industrial spaces has increased with some “factories, warehouses, and self-storage units…being re-purposed for cultivation and processing of potent marijuana”.

While some in the real state industry view grow facilities as a gamble due to the fact that marijuana remains an illegal substance at the Federal level, for now Landlords across the nation are taking advantage of the premium rents being achieved for such facilities. Commercial real estate research firms are reporting prices for warehouse spaces increasing “by more than 50% from 2010 and 2015” in the Denver market where recreational pot was legalized in 2012. But, Denver is not the only commercial market experiencing a boom in industrial real estate activity. According to the New York Times, industrial areas “from Monterey, CA to Portland, ME” have undergone a transformation spurred by the pot industry and, “once-blighted neighborhoods and sending property values soaring.”

Furthermore, according to BISNOW, “legal pot sales hit $6.7B in 2016 and are expected to rise above $20B by 2021.” With increased sales of legal pot, the demand for industrial space will continue to grow, potentially creating a “new sector in the industrial real estate market.” But, with the new Federal Administration in place, some in the industry are concerned that the weed bubble will pop due to stricter regulation of pot sales and pot cultivation.

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

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

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

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