Week in Review: 5/13 - 5/17
Leasing by San Francisco-area technology firms is slowing just as developers are poised to add 6.5 million square feet of office space to the city and Silicon Valley, the most construction in a dozen years. Twenty-six projects are under way, from glass towers in downtown San Francisco to suburban office parks in Sunnyvale and Santa Clara. About 3.4 million square feet (316,000 square meters) of the new development, or more than half, is speculative, meaning landlords broke ground without signing tenants, CBRE data show. The building boom comes after three years of expansion by companies including Google Inc., Apple Inc. and Salesforce.com Inc. spurred a surge in rents, making San Francisco the top U.S. office market in 2012 based on forecasts for future increases, according to Green Street Advisors Inc. Growth has cooled, with leasing down 43 percent in the city and two quarters of occupancy losses in Silicon Valley in the past year, raising the prospect that tenants won’t be easy to find at higher rates. Newly occupied space in San Francisco totaled 80,850 square feet in the first quarter, down from a quarterly average of 118,000 square feet in the trailing 12 months and 526,000 square feet in 2011. In Silicon Valley, occupancy tumbled by a net 94,000 square feet from the fourth quarter, with the vacancy rate rising to 11.4 percent from 11.2 percent. San Francisco’s leasing boom drove up costs for the most desirable office space -- including rent, local taxes and service charges -- by 36 percent in the year through September, the biggest jump among 133 global markets, CBRE said. Technology firms accounted for more than half of all deals, with San Francisco-based Salesforce.com leasing 1.3 million square feet, the most by one company in a year since at least 2000. Asking rents in San Francisco rose 18 percent in the first quarter from a year earlier to $50.79 a square foot, the 12th straight gain, and in Silicon Valley they climbed 7.9 percent to $37.68, the highest since 2001’s third quarter. During the recession, rents bottomed in San Francisco at $30.50 a square foot, and vacancy peaked at 16.2 percent, in the first quarter of 2010. Silicon Valley rates hit a low of $27.71 a square foot in the third quarter of 2010, with vacancy peaking at 21 percent a year earlier. Across the country, office leasing in central business districts fell 5.3 percent in the first quarter from a year earlier, and vacancies were little changed at 13 percent, according to brokerage Cushman & Wakefield. San Francisco’s office market is now in the “fifth inning” of a nine-inning recovery, with “decelerating” growth that’s dropped its five-year outlook for rent increases to second in the U.S. based on revenue per square foot, Michael Knott, managing director of Green Street, wrote in an e-mail. West Los Angeles is the top office market based on forecasted rent growth through 2017, he said. The current development wave, the most since 9.1 million square feet were added in 2001, include speculative projects in San Francisco such as Tishman Speyer Properties LP’s Foundry Square III” and a tower by Boston Properties Inc., at 535 Mission St. In Silicon Valley, Menlo Equities LLC and Beacon Capital Partners LLC are constructing three buildings at 3333 Scott Boulevard in Santa Clara. Jay Paul Co. is developing the second property of a planned six-building campus in Sunnyvale, dubbed Technology Corners. Job growth is still robust, with employment rising for the 33rd straight month in both San Francisco and Silicon Valley. This year through March, 33,000 new jobs were added in the city and 28,900 in the valley, according to California’s Employment Development Department. Two-thirds of professional and business-services positions came from the technology industry, the agency said on April 19. Companies are willing to pay triple the cost of suburban space to locate in the city because workers prefer an urban environment, said Carl Bass, CEO of Autodesk Inc. The San Rafael, California-based maker of computer-aided design software signed three leases last year at San Francisco’s One Market and Pier 9 that will almost double its occupancy to 287,000 square feet by mid-2014. Landlords are contending with smaller space needs from tenants across industries, down by almost a third to 170 square feet per employee, on average, said Studley’s Barker. Technology firms in San Francisco need 30,000 more hires to fill space that’s already been leased, he said. “This tech market has been driven by a race to control contiguous space and pre-empt rising rates,” Barker said in an interview. “They’ve massively over-leased. It remains to be seen whether they can fill it.” The rise in San Francisco rents means that offices comparable to those leased at $30 a square foot in early 2012 are now asking $50 a square foot, according to Barker. Spec buildings under construction will require rents of $60 to $70 a square foot at minimum to cover development costs, he said. Each project has its own financing structure, starting with the price of land, that can dictate success in a fast-moving market, said Henry Bullock, chairman of Palo Alto, California-based Menlo Equities. Low-rise construction in Silicon Valley, at $375 to $425 a square foot, is cheaper than urban towers in San Francisco, Bullock said. “There’s not a lot of development as a percentage of the existing inventory, so we’re not worried,” Bullock said in a telephone interview. Among San Francisco spec projects, the 535 Mission St. tower by Boston Properties, the biggest U.S. office real estate investment trust, will cost $700 a square foot, Green Street said in a Feb. 6 note. That’s 15 percent more than Kilroy Realty Corp. is spending to develop nearby 350 Mission St., a high-rise that’s no longer spec after being fully preleased to Salesforce.com. Spec builders probably believe the potential for profit is greater by “developing to core, rather than buying to core,” said Wise of Metzler Realty. (Bloomberg)
Comstock Homes and San Francisco-based Maracor Development are banging out a slice of suburbia smack in the middle of San Francisco’s Sunset District. More than a decade in the making, the developers have broken ground on Summit 800 on Brotherhood Way, a 182-home development nestled between the San Francisco Golf Club and Parkmerced. This summer and fall will be spent on vertical construction — dry and wet utilities, curbs, gutters, sidewalks, streetlights. Once that is complete, construction will start on the first six to eight single family homes, which will be built in about six months. New phases will be put up as fast as the developers are able to sell the previous homes. Polaris Pacific will market the property. The equity partner on the project, work-out specialist Real Capital Solutions, closed on the property earlier this year. U.S. Bank is providing financing, while Comstock Homes is in charge of overall project management and Maracor Development is responsible for site development. The 7.7-acre parcel is approved for 182 homes in a mix of attached and detached plans. The project, formerly known as 800 Brotherwood Way, was blocked for years by neighborhood groups who argued that the formerly city-owned site was set aside in 1958 for educational and religious uses, not housing. Eventually the city’s board of appeals ruled against the neighborhood opponents, which included former supervisor Tony Hall and retired Judge Quentin Kopp. Real Capital Solutions has purchased and managed more than 250 commercial and residential deals totaling more than $1.25 billion and completed work-outs on over 10 million square feet of property, according to the company. Real Capital CEO Marcel Arsenau said Bob Comstock brought the deal to the table. The groundbreaking earlier this month included a blessing conducted by feng shui consultant Deborah Gee. Gee led the blessing according to the ancient principles of restoring energy and encouraging positivity, prosperity and synergy, according to a press release. “When you build on or alter the natural landscape, it’s important to take steps to strengthen the energy force that has been disrupted in order to bring back peace and balance—and that’s exactly what we’ve done at Summit 800,” stated Gee. (SF Biz Times)
San Francisco-based BRE Properties is under fire from labor unions and elected officials who contend that the real estate investment trust is paying sub-standard wages and cutting corners on worker safety. Led by Local 104 of the Sheet Metal Workers International Association, over the past few weeks labor groups have picketed BRE’s board meeting and handed a letter of complaint over to the CalPERS investment committee. CalPERS is a major investor in BRE, owning more than 200,000 shares. BRE has just wrapped up its Lawrence Station project in Sunnyvale and its Solstice project there is still in construction. It broke ground on a Redwood City project about a month ago and has large projects close to starting in Walnut Creek and Pleasanton. The group’s project is Mission Bay is using 100 percent union labor, which is required under a Mission Bay project labor agreement. (SF Biz Times)
Trumark Urban is scaling back its plans for the University of Pacific’s Dugoni School of Dentistry property at 2155 Webster St. The developer has reduced unit count in the existing Dugoni building from 93 to 77 units, according to planning department staff. The changes will prevent Trumark from having to go through a lengthy rezoning of the property, which would likely complicate an approval process that will undoubtedly be already fraught with neighborhood politics. The proposal also calls for 11 townhomes in four buildings on a surface parking lot. The project is being designed by Solomon Cordwell Buenz, which is also designing 100 Van Ness. That property, like the Webster Street building, is being converted to residential from other uses. Trumark is anticipating maintaining the existing pre-cast facade while replacing the windows. In its comments, planning staff stated that the “institutional character of the facade and lack of open space may be solved by varying the facade with a composition of recessed balconies.” The Dugoni School of Dentistry is moving its campus from Pacific Heights to 155 Fifth St. in downtown San Francisco. (SF Biz Times)
The median price for a single family home in San Francisco hit $1 million in April — the highest level since 2007. The new median price is a 32 percent jump from $760,000 last year. “Shrinking inventory combined with low interest rates and motivated buyers has resulted in historically high sales prices,” said Christine Dwiggins, president of the San Francisco Association of Realtors. Inventory levels are significantly low with only 1.1 months of inventory available — that means the amount of time it would take to sell off all the homes on the market if no new supply came on — in April whereas five to seven months of inventory is considered a balanced market. Single-family homes in San Francisco are selling in an average of 28 days, down about 44 percent from an average of 49 days a year ago. Meanwhile, the median price for a condo in San Francisco reached $850,000 in April — the highest level in the last two years. (SF Biz Times)
Kimpton Hotels & Restaurants is heading to sunny Palm Springs with a new four-star hotel in the center of the city’s recently revitalized downtown district. The 190-room hotel will have a rooftop pool and bar, as well as a chef-driven restaurant and 24,000 square feet of event and meeting space. Taking a spot on North Palm Canyon Drive, the hotel will be built by Wessman Development Co. and be the first new construction property in the area since the late 1980s. The new project will be the San Francisco-based hotel group’s seventh property in Southern California and the latest in its plans to acquire or develop more than $500 million worth of hotels over the next three years. Kimpton has been buying and rehabilitating a number of properties over the past year, as CEO Mike Depatie is on a mission to place the boutique hotel brand ahead of big chains. The Palm Spring project is the fourth new hotel Kimpton has announced this year. Earlier, Kimpton unveiled plans for new hotels in Savannha, San Antonio and Milwaukee. Kimpton now runs 58 hotels and 67 restaurants in 24 cities, and is bringing in $900 million in annual revenue. (SF Biz Times)
The compromise legislation repealing Nevada’s threatened withdrawal from the TRPA will be passed out of the Assembly Government Affairs Committee Thursday, Speaker Marilyn Kirkpatrick said. The measure containing amended language developed between Nevada Gov. Brian Sandoval and California Gov. Jerry Brown and lawmakers from both states not only pulls back Nevada’s threat to withdraw from the bistate compact, but agrees that both states will work to implement new regional compact rules developed over the past 18 months and partner into the future on protecting Lake Tahoe — while also committing to include economic conditions in developing and adopting rules at the lake. Another key provision in the amended Senate Bill 229 is the law would establish a burden of proof for anyone challenging the regional plan or TRPA Governing Board decisions, said Gerald Gardner, Sandoval’s chief of staff. He said that includes pledging to support the newly developed regional plan, even though it’s currently being challenged in court by the Sierra Club. TRPA’s new regional plan not only recognizes economic conditions in considering development and other actions at the lake, it surrenders a significant amount of authority long held by TRPA to the two states and the five Nevada and California local governments in the basin. (Sierra Sun)
It looks like you can forget about the biggest hurdle within the city of Sacramento’s big-box ordinance. City planners have recommended that the Sacramento Planning and Design Commission at its meeting on Thursday support getting rid of the requirement for proposed superstores to submit an economic impact analysis. The commission, in turn, would offer its recommendation to the Sacramento City Council. “The existing superstore regulations,” the staff report says, “are ineffective because they place Sacramento at a competitive disadvantage with surrounding jurisdictions; superstores continue to be approved in surrounding jurisdictions — resulting in the city’s loss of potential sales tax revenue.” The city leaders will consider eliminating the requirement for an economic impact analysis — a study that includes data about wage and benefit differences between existing stores in the city and the proposed superstore. As proposed, the city would still require a conditional use permit for stores larger than 40,000 or 60,000 square feet, depending on where it is located. In the central business district, stores smaller than 125,000 square feet are allowed by right, the staff report says. In different forms, the ordinance language related to superstores larger than 90,000 square feet — with at least 10 percent of their floor space devoted to grocery items — goes back to 2005. (Sac Biz Journal)
SSA Pacific Inc. has taken over the master lease for the Port of West Sacramento, which port officials said would give them greater ability to reduce administrative costs and focus on developing real estate assets. The new lease replaces an existing terminal operations management agreement between the port and takes effect July 1, according to a news release Thursday from the city of West Sacramento. Under the agreement, which was approved by the Sacramento-Yolo Port Commission, SSA Pacific handles all maritime related expenses and the city of West Sacramento receives guaranteed rent payments. Terms of the lease are for a minimum of five years, with the lease extendable in five-year increments up to 20 years. While minimum rent payments to the city would be $650,000 annually, the revenues for the city increase as tonnage shipped through the port increases. The agreement also eliminates $850,000 in existing debt the port owes to SSA, and under it SSA agrees to buy the port’s existing air credits for handling bulk cargo for $50,000. (Sac Biz Journal)
The Sacramento region’s retail vacancy levels fell in the first quarter, but barely, a new report shows. As for individual communities within the region, the first three months of the year were a mixed bag. The communities that tend to have the strongest retail markets saw slight occupancy gains, while other submarkets within the Sacramento region did backslide a bit. Those were some of the findings of the Terranomics Retail Services report, released last week, on the region’s retail real estate for the first quarter. Shopping center vacancy in the Sacramento region fell to 13 percent from 13.1 percent, Terranomics reported. During the first quarter, some 82,000 square feet of shopping center space was backfilled, with most of that space in the Highway 50 corridor, the brokerage found. Vacancy “has declined or held ground every quarter” since the first quarter of 2010, finishing the quarter at 13.0 percent, according to the report. “However, occupancy gains have been slow and rental rates remain depressed.” The average asking rental rate for the first quarter was $16.67 per month, with the tenant paying for taxes, insurance and operating expenses. Terranomics explained that the “metric has been slightly skewed downward” because there’s a lot of Class C space available and many landlords of Class A properties won’t even quote their asking rents. Class A properties have been recovering from the economic woes faster than B or C tier shopping centers, which may be older, in disrepair, lack big-name tenants or have less-than-ideal locations. (Sac Biz Journal)
Another big project by Angelo Tsakopoulos will get a public vetting with the Sacramento County planning commission later this month before the project’s environmental review gets underway. Jackson Township, a 1,400-acre proposal for southeastern Sacramento County, will be the subject of a public workshop May 20, and is set for a similar workshop before county supervisors next month. According to county principal planner Cindy Storelli, a master plan for the project is still to be created, but the overall concept includes 6,300 homes on 600 acres, 150 acres of parks and open space, 225 acres of wetlands preserve and 110 acres of commercial and mixed-use properties. Proposed for between two other similar large development projects also in the pipeline, West Jackson and Newbridge. Though there will be more opportunities for the public to weigh in, county planning director Leighann Moffitt said the goal of workshops like these is to make sure people have a full understanding of the project. (Sac Biz Journal)