Monthly Archives: October 2011
As promised, here is the Third Quarter Office Report for the San Francisco Peninsula Market:
The San Mateo County office market finished the third quarter with a net absorption of 1,061,365 total square feet, marking the third consecutive quarter with positive absorption this year on the Peninsula. The average asking rental rate increased slightly over that of the previous quarter, to a monthly $2.71/ square foot, full service. With venture capital increasing within the region, sectors such as e-commerce, gaming, technology, and bio-technology have added employees throughout San Mateo County, stimulating a steady increase in market activity. Expansion by Google in Mountain View and strong demand in Palo Alto have pushed many existing tenants to northern and southern submarkets.
Read the entire report: office-market-research-peninsula-2011-3q
Hurray, the long awaited Q3 Industrial Report! This report is for Industrial buildings located on the North Peninsula, including cities such as South San Francisco, Brisbane, Burlingame, San Mateo, Belmont, and San Carlos.
We recently touched on the Industrial Market from the 30,000 foot national view. Here we present stats and figures that hit closer to home. So without further adieu:
“The San Mateo County industrial market concluded the third quarter of 2011 with a moderate increase of absorption at 134,117 square feet. Net absorption rose by a total of 142,564 square feet, a sign that market stability and industrial lease interest on the Peninsula are evident. After negative absorption in 2009 and 2010, the second half of 2011 shows signs of modest regional market stability. The third quarter finished with an availability rate of 11.8%, a slight increase from the previous quarter at 11%. It is expected that by year-end the marketplace will see users slowly move back into the area.”
Read the entire report industrial-market-research-peninsula-2011-3q.
The wheels haven’t fallen off of Industrial Real Estate, despite the economy’s and government’s best efforts. There are certainly winners and losers in this, but overall Industrial has held it’s advantage and kept steady over the past 6 quarters; not a small feat considering the amount of shuffling amongst businesses and landlords. You can read our previous national report on the subject to understand why Industrial Real Estate is a good bet. Gross absorption continues to make positive gains, rents are maintaining pricing, and the balance between supply and demand seem to be keeping Industrial Real Estate chugging along.
We’ll be posting our Peninsula Office Report on Monday, and it won’t be spooky either!
CoStar presented their quarterly report for Industrial Real Estate on the national stage. They present their quarterly findings based upon not only their own research, but that of other analytic companies such as Moodys and government entities like the Federal Reserve. We’ll break down the graphs and highlights of the presentation and also show how local California Commercial is faring compared to the rest of the country. Overall there seems to be a tug-of-war between the bears and bulls with some good news and bad news as it applies to the past quarter and also the near future. Let’s break down the facts.
First, let’s start with some good news. As we begin to enter the Holiday season, many retailers are holding their collective breaths as the shoppers warm up the plastic and head to the 6am sales. There has been a steady uptick in retail sales since the collapse in 2009 and this should continue into Christmas, although many believe the season will be driven by bargain hunters. Many families have weathered the storm and personal savings are on the rebound. If this stays steady then we could be in for a strong rebound for consumer durables. Old cars in the driveway, springs coming out of the mattress, and older TV technology could have the consumer asking themselves, why not? The consumer durables pent up demand seems to be a loaded gun ready for the right economic trigger. This could bode well for manufacturers and importers over the near future.
While consumers have been stockpiling cash waiting for some good news, corporations have spent the past couple of years rethinking, reorganizing, and trimming the fat. Many organizations have streamlined operations and found ways to do more with less of a workforce, increasing corporate profits. We keep hearing about companies that are cash rich and sitting on profits and that makes for an interesting dichotomy. Obviously the bad news is that the profits are not being reinvested and circulated into the economy, therefore keeping unemployment high. The flip side is that corporations are going to be in a better position to weather any downturn in the economy, should that come to fruition. For commercial real estate this means that there should be less defaults on debt and leasing if the economy heads south.
Furthermore, although there is a slight downturn in government jobs, the private sector is beginning to make gains, although not at the pace one would hope. Moodys has a positive outlook on job growth, which is great for all economic factors and commercial real estate. That being said, we have a long way to go to catch up to the jobs lost over the past three years.
Commercial Real Estate Factors
We’ve laid out the potential for economic expansion and job growth, if current trends continue. Should we see this uptick on the demand side, there could be a potential for explosive growth on the construction side of Industrial real estate and here’s why:
Over the past couple of years, new construction has come to a near standstill across the country. The average construction start has been in the 125,000 sq foot range for larger distributors/suppliers and there has been a shortage of smaller projects. Also, there have been virtually no speculative commercial starts, with nearly all of the new construction coming in the way of build to suits and pre-leased spaces. With the economy in tatters, it only makes sense that builders are going to start swinging hammers on a sure thing. In 2008, approximately 40% of new construction was spec and today’s rate sits at about 10%. The second graph is great news if you are in construction or are an industrial investor. Vacancy for industrial has not been as wild as some of the other commercial sectors, such as hotel and retail nationwide. That means that we haven’t seen a glut of available space in the market overall when compared to other commercial types. This factor coupled with a lack of new construction means that we could see construction and pricing pressure, should increase for demand continue.
Are you an industrial investor? Soon you could be patting yourself on the back. As demand for warehousing grows, industrial investors could be in a prime position. Traditionally, industrial real estate has not been as sexy as the other commercial sector types. The thought of being a hotel mogul or owning a high-profile office building has usually been more appealing than the idea of owning a dirty distribution center or manufacturing facility. But let’s look at the facts. As you can see from the “Distress by Property Type”, the sexy investments are usually the first to fail. Why is that? Typically the shorter the lease term, the greater the risk. Think about it. Hotels lease out their space on a daily basis, meaning you could have vacancies as early as tomorrow. Multi-family, although a hot commodity now, has short lease terms, usually on a yearly basis, meaning that you can have major turnover every 12 months and declining gross income. Industrial leases are typically a longer term and have more stable tenants. Owners that signed 5- year leases in 2008 are still sitting pretty and collecting rents, as long as their tenants did all right. This point is re-emphasized when you look at the players that are beginning to look at industrial real estate, such as life insurance companies which traditionally stayed in the office arena:
And now you can see why the fundamentals may be in place for a run on industrial…
We have seen positive absorption of industrial space for the last 6 quarters nationally, Northern CA being no exception. The inverse relationship between vacancy rate and quoted rents is seen in graphs above.
It can’t be said that rents are on the fast track to increase, despite the consistent positive absorption and general lack of available space. There have been several landlords who have been sitting on vacant space and would rather keep their rents competitive.
So where are the hot spots for Industrial nationally?
As far as markets exploding, the Inland Empire in Southern California has seen the greatest amount of growth among all markets in the US in net absorption. They have also posted well in sales volume, which only makes sense when you follow the money. The San Francisco Bay Area hasn’t been a slouch either. With its traditionally stable economy, the Bay Area is usually one of the first markets institutional investors look to when putting cash in on commercial real estate. We’ve seen this not only in industrial, but also in office buildings.
We don’t mean to paint a completely rosy picture of the industrial real estate market. To be sure, we are cautiously optimistic. Will continued high unemployment take its toll on retail and manufacturing? Negative consumer sentiment is on the rise, how will this affect the economy? Will the proposed ‘Cap and Trade’ have potentially negative consequences for U.S. business? There are too many variables at play in the current economy to make any predictions and there are no crystal balls in commercial real estate. Yet, the positive news is that there seem to be some stable fundamentals in place should the economy perk up.
What do you think? Will we continue to see positive signs for growth, or will economic factors hamper a potential rebound?
By Sharon Simonson:
In a long-anticipated property exchange, Google Inc. has acquired The Landmark at Shoreline for $100 million.
The 240,000 square-foot office campus on 18 acres in the city of Mountain View is adjacent to the company’s headquarters at 1600 Amphitheatre Parkway and fronts HIghway 101. The property is 90 percent occupied, but existing tenants’ leases are short-term and will expire over the next two or three years.
Broadreach, which was founded in 2002 by the former executive team of Spieker Properties Inc., has had economic control of the Landmark complex since October 2007. It paid $80 million and has made modest investments in its improvement. The negotiations with Google have been ongoing in fits and starts over the last several months, according to a source with direct knowledge of the transaction.
“It seems to me that it is a win-win. It is good for Broadreach and its investors, and it is good for Google because they have secured a large complex across from their headquarters,” said David Hiebert, an executive vice president and managing director for Cassidy Turley BT Commercial. Hiebert sold the property to Broadreach in 2007 and has been a listing broker since.
Mountain View has become an extremely sought-after location for companies seeking an attractive headquarters address, with Shoreline emerging as a favorite for larger companies that need greater amounts of space, Hiebert said. Besides Google, Microsoft Corp., LinkedIn Corp. and Intuit Inc. are located in the Shoreline area.
The city of roughly 75,000 people benefits from its central Silicon Valley and Bay Area location and strong transportation network, which links it well to San Francisco, the East Bay and locations to its south, Hiebert said. Those connections are strong aids in employee recruitment and retention. The city also has done a commendable job over the last decade revitalizing its downtown.
Besides those attributes, Mountain View is close to the executive housing in places such as Los Altos Hills and Atherton and benefits from proximity to Palo Alto, Stanford University and the venture capital community on Sand Hill Road.
Read the entire The Registry article here.
Well, the Dog Days of Summer have given way to changing leaves and thoughts of holidays in the near future. And with that departure of hot weather, we begin to get a glimpse of what the 3rd quarter brought those in the commercial real estate industry.
This is the first in a series of reports that we will be posting on both local and national trends in the office, industrial and biotech sectors. We will also give you some “boots on the ground” analysis and what the figures mean, so make sure to stay tuned in. Our first report comes out of CoStar and their national perspective on the office market. Their findings seem to trend in the same way as our local Bay Area market, albeit on a slightly slower scale, especially when you consider the red hot Silicon Valley area. Surprisingly, according to CoStar, although net absortption is positive, there was actually a slight decrease in average asking rental rates. I suspect, although I haven’t seen a local report yet, that Peninsula figures will have risen due to the decrease in available Class A space.
Here’s the report:
The U.S. national office market ended the third quarter 2011 with a vacancy rate of 12.5%, down slightly from the 12.6% reported at the end of the second quarter 2011 and 12.7% in the end of the first quarter.
Net absorption for the overall U.S. office market was positive 23.7 million square feet in the third quarter, up significantly from positive 9.4 million square feet in the second quarter 2011. Vacant sublease space decreased in the quarter, ending the quarter at 52.6 million square feet.
Tenants moving out of large blocks of space in 2011 include AT&T Wireless moving out of 376,350 square feet at Cobalt Center in Atlanta, and Deloitte moving out of 295,136 square feet at 50 Fremont St. in San Francisco. Tenants moving into large blocks of space in 2011 include Facebook moving into 1 million square feet at the new Menlo Park campus in the San Francisco market, and Northrop Grumman moving into 328,851 square feet at Park Tower in the Washington, DC market.
The average quoted asking rental rate for available office space, all classes, was $21.30 per square foot per year at the end of the third quarter 2011 in the U.S. market area, a 0.1% decrease from the end of the second quarter.
A total of 182 buildings delivered to the nation-wide market in the quarter totaling 7 million square feet, with 50.7 million square feet still under construction at the end of the quarter including the 3-million-square-foot One World Trade Center in New York City.
Stay up to date on local and national trends with the Industrial Pros. Our coveted Kidder Mathews reports are soon to follow…
Much of the blame for the current market turmoil was directed at Washington, particularly the president, as voiced in a lively exchange Tuesday between real estate icons Sam Zell and Mortimer Zuckerman during the keynote presentation at DLA Piper’s 10th Global Real Estate Summit in Chicago.
One major issue, not only in this country and around the world, is the huge global overhang of debt, Zuckerman, chairman of Boston Properties, Inc. (NYSE: BXP), said at the summit.
“That debt is going to take a long time to unravel, particularly for the American consumer, whose spending drives 70% of the economy,” Zuckerman said, asserting that 25 million working-age Americans are unemployed or underemployed and not a single full-time job has been created on a net-net basis since the current administration took office in January 2009. “They have lost complete confidence in the economy as well as in the leadership of this country. The collapse of confidence in this Administration and in the economy is going to affect everything.”
Zell, chairman of Equity Group Investments, leveled a critique of the Obama Administration using particularly salty language, comparing the president unfavorably to former presidents Reagan, Clinton and even Carter.
“The president sets the agenda, and the agenda is out of line with America,” said Zell, whose $39 billion sale of the assets of the former Equity Office Properties Trust to Blackstone Group topped the real estate boom market. “In the end, what makes America work is the risk takers, whether they be in real estate or social engineering. America succeeded better than anyone else in the world for one simple reason — we created a culture of risk, and we encourage risk. We’ve now created an environment that’s so difficult and so uncertain that everybody’s appetite for risk decreases accordingly.”
A new chapter in the company’s history? Don’t judge a lease by its cover? Ok, enough of the book jokes, here’s the comp.
Address: 177 Bovet Road, San Mateo
Landlord: Cassiopeia Venture Corp
SF Leased: 32,000
Pricing: Contact us
This company was originally across the street and will vacate that space which was about half the size of this new lease.