Square Feet

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.

The owner of the Savoy Hotel in London, Prince al-Walid bin Talal, is proposing a Mile High Tower in a sea port town near Jeddah in Saudi Arabia. This building, if it is even possible, would be more than twice the height of its nearest competitor.

Estimated to cost approximately $10 Billion dollars to construct, this building will likely put all engineering theories to the test. I can’t even begin to think how the engineers will handle issues such as counterweights and building systems.

On a personal level, I think this is as just excessive and completely unneccessary. I wonder what the carbon footprint of this thing is. I’d hate to have to calculate that too.

Under current law, only 2.5% of a improvement costs to a commercial (or residential) property could be written off in the first year. The new economic stimulus package now allows for up to 50% of the improvement costs to be written off the first year provided the work is started and completed this year.

This will likely spur some activity both on the leasing front as well as construction front as Landlords and Tenants both will seek to take advantage of the favorable tax treatment.

Quite a number of startups were advised to hold excess cash in instruments referred to as Auction Rate Securities. These assets, classified as AAA debt have recently been dragged into the lock-up of the credit markets.

In an effort to achieve enhanced returns on their cash, some startups are now finding themselves in a cash crunch. Some reports estimate that up to 20% of startups hold some of their funds in ARS, with some stories reporting holdings into the millions of dollars.

The lockup of the ARS market occurred in late February. In the event this evolves into as big of a problem as some are predicting it to be, we should here about more venture loans collaterized by the ARS taking place, in addition to hearing about some startups perhaps even going under.

Fresh & Easy, the grocery store concept by british-based Tesco who has been on an aggressive expansion plan in Southern California and soon to be Northern California reported sales numbers well below the $100M estimate over six-months.

Turns out that sales only came in at $30M. The poor performance comes at a time when the retailer is continuing its expansion plans with four stores planned in the South Bay.

I recently came across a tool for international travellers that is absolutely awesome. The product is called MaxRoam (www.maxroam.com). It essentially lets you roam with an unlocked GSM cell phone, while giving you the ability to add up to 50 local numbers. That way people in each place you roam have a local number to call!

The pricing is reasonable too. If you are a frequent traveller overseas, I encourage you to check out this cool product!

I attended a broker luncheon of NAIOP’s (National Association of Industrial and Office Properties) Silicon Valley chapter today. The panel was comprised of three brokers, two brokers who spend a majority of their time representing landlords, and one who is a predominately tenant representative.

There seemed to be some concern in the air about the overall economy, but at the same time there was a fairly positive outlook on the current economic situation. The two brokers who provided insight into the market from a landlord’s perspective indicated that rents remained fairly unchanged from a decade ago and that the general expectation was that there would be sufficient demand to drive absorption of the nearly 4M square feet of new product coming online over the course of the next 12-18 months.

I tend to hear investors and brokers discuss construction costs quite a bit and how there is a disparity between face rents today and the rental rate required to support new construction. Right on cue today was an audience member who raised that very same point.

While I agree there is a disparity, I disagree with the philosophy that construction costs are a significant factor which will drive future rent increases. Rent is a function of demand, pure and simple. The only time when there is a divergence from this is when the supplier has pricing power so great that they are able to shift the supply curve.

We have seen rents increase most in the markets such as Palo Alto, Menlo Park, and Cupertino. In those markets, rents have increased because the demand has materialized.

In and around San Jose, rents have increased as well, but the rate of increase has been fairly consistent with the growth rate of of demand. In markets such as Redwood Shores where a single landlord (Equity Office) controls a large portion of the supply, they have been able to move rents upwards at a rate which can be classified as a bit artifical. By large, this pricing power does not extend much beyond niche submarkets and it is therefore very important for investors and tenants to discern between what is simply hype and reality.

The economy is really teetering on recession. The next few weeks and months will be vital in determining if the steps the government is taking will be enough to keep us out of a recession. While there are some large requirements likely floating around right now (Facebook, etc.), it is difficult to see how nearly 4M square feet of new product will lease at rates representing a 30-40% premium to existing space in a matter of 12-24 months.