Commercial Real Estate Blog

Though likely not surprising to anybody, year over year investment sales both in the United States and on a worldwide basis are down dramatically. According to a Jones Lang LaSalle (NYSE:JLL) report cited by NREI, first quarter investment sales in the US came in at $39.2 Billion, a number which is down 69% from the year ago period.

Internationally, investment sales during the first quarter were $154 Billion, which is down 46% less than the $283 Billion number from a year ago. This statistic was provided by Real Capital Analytics.

There is a lot of money currently waiting on the sidelines to acquire assets, but for the time being sellers are not conceding much on price. That might change though over the course of the next one to two years as loans mature. As Macklowe Properties found out, refinancing a short term loan in this market is difficult to do. If owners don’t can’t meet the heightened equity requirements currently facing those looking to acquire or refinance assets, they might be forced to sell.

According to the Allen Matkins/UCLA Commercial Real Estate Survey, San Francisco rents and occupancy will both fall over the next two to three years. This comes on the heels of several years of rental rate increases and a strong office market.

It should be noted that the economic models UCLA has prepared have a difference of opinion from the panel’s analysis. Citing continuing employment numbers, the model forecasts that office space supply in the city could in fact be in short demand within four years.

On June 18, UCLA will release its full findings at its 2008 Economic Outlook and Real Estate Conference.

Moffett Towers, Jay Paul Company’s massive office project at the intersection of Highway 237 and Highway 101 in Sunnyvale has been on the prowl for tenants since before it broke ground two years ago. Since then, there haven’t been any reports of any tenants signing up to take the space.

Initially Jay Paul brought the project online at an asking rate of $3.25 NNN with a $25 allowance over a shell. Since then they’ve lowered their asking rate to $2.95 and kept the same allowance. We’re now hearing that a couple letters of intent are going back and forth for some space at the project, though its unclear how much space the letters of intent represent and whether they will make it to lease. It should be noted that Brocade  (NASDAQ: BRCD) did consider this project as well as Legacy’s project on North First Street before deciding to take down Hunter Storm’s @First Development.

Sunnyvale is one of the markets that has seen the most speculative construction since rents and activity have spiked in the past few years. Some of the speculative projects in Sunnyvale include:

• Moffett Towers - 1.8M Square Feet (Phase 1 complete; approx. 800K SF)
• 111 Java Drive - 3 Building, 387,196 SF Project; Building 1 under construction
• 525 Almanor Ave - 5-Story 166K SF Building; Ready for TI’s next quarter
• 2502 Town Center Lane - 315K SF Office as part of Town Center Redevelopment. Should be ready approx. Q1, 2009.

In addition to these projects which are already out of the ground, other developers in Sunnyvale have approximately another 1M square feet of Class A entitled. This excludes the 2M square feet that Juniper Networks and Menlo Equities have adjacent to Jay Paul Company’s Moffett Tower project. 

The Contra Costa times featured an article today highlighting the relatively inexpensive rents in Fremont as spurring demand for space. While Silicon Valley and the Peninsula have seen office rates increase over the past two years or so, Fremont has remained a fairly inexpensive market. Rents have moved up in Fremont, but compared to space just over the Dumbarton Bridge or over Highway 92, Fremont is a bargain.

Fremont is a market which doesn’t have a lot of the Class A type of office space that you can find in Foster City or Redwood Shores, but it does have a few comparable buildings in its downtown area nearby the BART Station. Space in Fremont runs about $2.50 Full-Service for Class A office, while in Foster City or Redwood Shores would run you north of $4.00 Full-Service.

Supply is much higher in Fremont with vacancy rates for CTU construction offices and R&D facilities into the teens and rents 30-50% cheaper than the alternatives on the other side of the bay. Some of the new companies to move into Fremont recently include Solyndra, Super Micro Computer, and PurFresh. Also, the stock of single-story R&D buildings in Fremont is also making it a popular place for cleantech companies looking for a cheaper alternative to space along the 237 corridor in Sunnyvale, Santa Clara, and San Jose.

Tenant-Landlord relationships in San Francisco can often be “delicate”, particularly in rent-controlled buildings, but I just read a story in the SF Chronicle which is astounding, to say the least.

The story is that a pair of 33-year old landlords purchased a building, began the eviction process, and when things didn’t go entirely their way, a chemical imbalance caused them to completely lose it. They allegedly cut the electricity, cut phone lines, sawed a hole in the apartment floor, and even went so far as to remove beams supporting the apartments floor. The story doesn’t end there, the landlords were also accused of breaking into the tenant’s apartments to steal possessions and using ammonia to damage the tenant’s clothing and electronics.

You can read the entire story here. Simply amazing. If there is one thing Landlords and potential landlords in San Francisco need to understand, it is rent controls and the power tenants wield in that city. The city offers free legal aid to tenants, a legal system (jury) full of renters, and a very tenant-friendly rent control board.

We’re starting to see more reports of the credit crunch infecting Silicon Valley make the mainstreem press. IHT came out with an article the other day discussing how startups in Silicon Valley are beginning to feel the crunch.

For the most part, landlords and brokers have remained fairly bullish on the prospects of Silicon Valley with some landlords continuing to raise rents on some buildings despite having signed no deals in the building at the lower rental rate they were asking only a few months ago. It should also be noted that some landlords such as Jay Paul at their Moffett Towers project have been lowering rents at the same time.

But I think many people are making a mistake here. They’re looking at what’s on the ground now and assuming that because we have so many multi-national companies here, we will somehow be okay. But Silicon Valley has never been about “today”. It has been about innovation, and “tomorrow”, and that’s where I think people need to look when assessing the situation.

What is happening with the capital markets is affecting startups today, but tomorrow it will be the VC’s themselves who face a tight capital market when looking to raise capital for their next fund. VC’s with solid track records will likely be able to raise additional funds, but many others will likely not be as fortunate. As a result, we’re seeing some VC’s becoming increasingly cautious with their existing capital, and funding fewer companies and under better terms. It is that reason why that unless the capital markets are able to sort themselves out, Silicon Valley will not be immune and the downturn may be worse than many think.

As part of their cost cutting plan, Hewlett Packard is reducing its footprint in Cupertino and Palo Alto by approximately 25%. In addition, HP has in the recent past been divesting some assets it owned in the South Bay cities of Cupertino and Mountain View.

The plan is to more efficiently use space and is not a result of layoffs. HP has bounced back in recent years under the leadership of Mark Hurd, who made it part of his plan to reduce real estate costs.