Commercial Real Estate Blog

It seems an agreement has been reached between the city of San Jose and San Jose, Santa Clara Union School district officials on the funding of schools in support of the development slated for North San Jose. The agreement averts a decision by the school district to place an initiative on the november ballot will calls for a $30,000 per housing unit fee. We discussed the fee in additional detail in a previous post.

Under the terms of the deal, developers will kick-in $58 million, and the city will provide an additional $75 million in funding. The city will also be providing 8-acres of land adjacent to the Alviso Fire Station for the school district to use as a development site for a school.

Neiman Marcus has finalized the lease for its new 100,000 square feet store at Broadway Plaza in Walnut Creek. The store is expected to open as early as the first half of 2010. Broadway Plaza has been a historically strong retail center with average rents north of $750 per square foot.

The center is owned by the Macerich Company and Northwestern Mutual Life. The new store will be on the corner of South Main and Mount Diablo Blvd, and will be two storie.

As Stanford finishes building its outpatient center in Redwood City this year, it is looking forward to adding additional density at the site. The clinic is scheduled to be completed in the coming 2-3 quarters and Stanford is already working on plans to expand the site beyond the outpatient clinic.

Stanford’s future plans for the site include an addition 1.5 Million square feet of administrative offices and 5,000 parking spaces on the remaining 33-acres. The plan is still several years out and the city still needs to go through zoning changes and entitlements. The first step is on August 12 when the university will seek city approval to have the city devote resources to study the change.

Stanford acquired the Mid-Point Technology Park in 2005 from the French lender Credit Lyonnais for roughly $145 Million (TMG Partners had a remaining minority interest in the project at the time as well). The project encompassed roughly 890,000 SF of buildings on 46-acres. TMG Partners acquired the 46-acres the site sits on in 1996 from Ampex Corp for roughly $36 Million and developed the 380,000 SF complex on a 13-acre portion of the site, which will now be home to the Stanford Outpatient center.

The latest offer in the ongoing negotiations between the school district, the City of San Jose, and developers has Mayor Chuck Reed of San Jose offering to kick in $75 million in redevelopment funds towards building schools to support the planned developments. The $75 million is in addition to the $58 million developers have agreed to pay. The district is projecting the need for 3 new schools, including a high school requiring 30-acres of land.

The cost of the schools is estimated at over $400M by the school district. Given land costs of roughly $40-45 psf, the cost of acquiring enough land for the high school alone will be close to $60M, so it is conceivable that the cost of acquiring the land necessary for three schools is up there. Still though, $400M seems like a strong number, but this is the government we are talking about so anything is possible.

If the city and the school district are unable to come to an agreement, the school district intends on getting the support it needs from the community through the ballot initiative it is pushing. If successful, the initiative would slap a $30,000 per unit tax on new development in the area, and would raise $12.20 per unit from existing owners.

At $30,000 per unit, that is a very significant number, particularly if developers have to contend with construction prices continuing to rise, and BMR (below market rate) requirements which are imposed on them. Many developers have claimed that the additional fees would put a lid on new development. The reality is that development will more likely than not continue, land owners will simply just need to lower their price expectations as developers reflect the per-unit fee on their development proformas.

A local investor (Grant Sedgwick) has partnered with Hyatt to work to bring a Classic Residence senior housing project to Los Gatos. The project is located on the current Los Gatos Lodge site, which is located on Highway 9 (Los Gatos-Saratoga Road), just east of Highway 17.

The project is fairly massive, with initial plans including underground parking, six levels above grade, and consisting of 300 1-2br apartments. In addition, the project would feature amenities such as dining areas, fitness center, library, and pool.

Not including the parking, the project comes in at a massive 680,000 square feet! This is a massive project, one which the town of Los Gatos and its residents will likely have trouble supporting in its current form. Though its sits down from the street, and it is mainly senior housing (which is a fairly low impact use), the site would have an impact on the traffic on the already heavy Highway 9 traffic. Another issue is the walkability to/from downtown. It is crucial that there be a safer pedestrian path from the project to town as people walking from the project down Highway 9 currently need to pass through an on-ramp and an off-ramp to get to town.

Nevertheless, the site would benefit from an upgrade and senior housing is a fairly low impact use. The current Los Gatos lodge was built about 60 years ago and consists of about 130 rooms, and sits on nearly 9 acres. It will be interesting to see what happens, but the town of Los Gatos is generally one of the tougher cities with respect to entitlements, particularly near its downtown.

Rumor is that there is a Big Four firm on the troll to take down 150-200K SF of Class A office space in Downtown San Jose. The likely suspects consist of Deloitte, KPMG, PWC, and Ernst and Young. “Friends” inside E&Y indicate it is not them, KPMG is not a likely candidate, and Deloitte’s lease obligations would indicate it’s not them either. That leaves PriceWaterhouseCoopers. We’ll assume it’s them until somebody emails us and says otherwise.

While the vacancy rate of Downtown San Jose is close to 20% for office space, there remain few options for a 150-200K square foot user when it comes to Class A Office Space in the CBD. The only two “real” options are Legacy Partner’s RiverPark Two Tower, a 300,000 SF Class A tower under construction, or what will likely be Legacy’s other tower, the former Oracle/BEA/Sobrato building located at 488 N. Almaden Blvd. (we’re speculating Legacy is the buyer, but I suppose we will find out shortly).

Other options that might work for PWC, but that are relatively shelved include Boston Properties project over by Highway 87, and the site at 2nd and San Fernando that was dreamed about a decade ago by Kimball/Small/Rockefeller. Given where construction prices are today and those projects are not even close to being out of the ground yet, those are likely not viable options.

Going back to the two real options, should Legacy not buy the Oracle/BEA/Sobrato building at 488 N Almaden, then they will have real competition on their hands. The buyer of that building will likely scoop it up for around $250 per SF and possibly less. That number would likely represent a lower or similar basis to Legacy’s RiverPark II Tower it is constructing.

What is interesting to note though is that Legacy Partners was the original developer of the RiverPark project. It sold the project to MetLife Insurance Co. and repurchased the project about three years ago. The parking structure was already in place (it was constructed at the same time Tower I was constructed), and Legacy had kept in storage for a long time many of the materials, windows, skin of the RiverPark II building it had planned to construct originally but never got around to. As a result, when they decided to break ground on the second tower, it made it a lot easier to proforma than had they wanted to build from the ground up.

Regardless, it’ll be intersting to see how this requirement shakes out and where PWC (assuming it is them) lands.

Cedar Fair, the owner of Great America Theme Park is reportedly asking north of $110 Million for the park and the land lease it has with the city of Santa Clara for the 181 acre parcel the park sits on. The annual minimum rent for the land lease is $5.3M and runs through 2039. At the same time, Cedar Fair is working to reduce the property’s assessment for tax purposed to $44M.

This is interesting because it highlights how the value of a property can vary so widely between buyers. To the 49ers, the deal represents an opportunity to get Cedar Fair out of the way on its march to getting a stadium to help the franchise increase its overall value. To any other party looking at the site, there are two basic options, a) taking over a theme park with declining revenue, or b) developing the site with only a 30-year window to recover their investment. Both options seem to be less than appetizing..

It will be interesting what sort of deal the parties can negotiate, if any, but it’s fairly clear right now that the 49ers don’t have to worry about to many other buyers jumping into the fray.