Commercial Real Estate Blog

In Silicon Valley, it’s often joked amongst commercial real estate professionals that once a company starts making a foray into owning its real estate, things tend to go downhill for the company. Past examples have included Palm, 3Com, and Yahoo (they bought 50-acres in Santa Clara for a campus development that is currently on hold). Obviously this is not always the outcome, as evidenced by Google, Apple, Cisco, and a host of others, but it’s joked about nonetheless. Given NVIDIA’s (NASDAQ:NVDA) dismal performance over the past week, this seems to be holding true. Back in March, we posted on NVIDIA’s purchase of San Tomas Business Park.

On the heels of this news, we also one of the first to report Brocade’s chasing the @First Business Park in San Jose. It turned out that Brocade actually purchased their campus from Hunter/Storm and MacFarlane Partners. It will be interesting to see if Brocade also cracks.

A conspiracy is nothing but a secret agreement of a number of men for the pursuance of policies which they dare not admit in public.” - Mark Twain

Normally I don’t get to engrossed in conspiracy theories and the such, but what is happening with oil and the financials and the dollar is becoming so gross that it is difficult to ignore. We talk about here the impact, whether directly or indirectly, all these forces have on the commercial real estate market and the general situation we find ourselves in today, but I felt compelled to write a post about what I believe is happening with the economy, financials, and the bailout underway at the hands of the populace.

First, a graph showing the Dow Jones Financial Services Index vs an ETF tracking the price of crude oil since the credit freeze began in earnest last summer (click for full-size).

I am of the camp that is fascinated by Wall Street. The ability with which Wall Street has managed to screw up, only to find a creative solution to the problem has been one which amazes me. They’ve managed to do this time and time again. This time, it goes without saying, they’ve managed to dig a giant hole. One where losses are into the hundreds of billions, with some estimates pegging total losses to be at over a TRILLION dollars when this is all said and done. That’s a lot of cheddar.

It seems Wall Street has again found a cure. Over the past few years, we’ve started to hear the term Sovereign Wealth Funds (SWF). These are funds which are state-owned investing in assets, projects, and securities worldwide. Over the past year, since the credit meltdown hit Wall Street, SWF have been running around Wall Street investing in everything from Citigroup, Morgan Stanley, Merrill Lynch, and real estate as well to the tune of billions and billions of dollars.

The SWF of Kuwait, UAE, and Saudi Arabia seem to me to be working in concert with the investment banks to bail them out. The same investment banks who are blaimed for “speculating” the oil price to where it is right now are benefitting from huge cash infusions from the very same SWF benefitting from high oil prices.

Thus it is easy to see that Wall Street has once again managed to find a cure by getting the public to bail them out at the gas pump. The investment banks drive the price of crude up (and thus gas prices). The money flows into the oil producing countries and their sovereign wealth funds, which in turn reinvest the premium the investment banks created for them back into our financial institutions, with all of this financed by the public without having to mess with a tax increase or a congressional bailout replete with lobbying, hearings, public scrutiny or outcry. Absolutely Genius.

Palo Alto has announced that any commercial construction greater than 25,000 square feet will require Green Building Council verification. That move makes it the first south bay city to codify green building. While many new projects coming out of the ground today seek LEED certification, the fact is that ultimately the increased expense of LEED building, at least for the first few years, will be something which will affect the land costs a developer can afford to build. Ultimately, it is the tenants which much demand LEED buildings, otherwise the only difference to a developer is that they are delivering a building at a higher cost. If tenant’s do not demand LEED space and are prepared to pay for it, then mandating LEED does nothing more than reduce the land cost a developer can pay.

The mandate however is not something that will bring commercial construction to a halt. It will simply take a few years to work out as ultimately the tenant demand for LEED space will materialize one way or another; whether voluntary or driven by market forces. Until then, developers will continue to build but it will just take more to make a deal to pencil.

South China Mall, a 7 million square feet monstrosity (the largest mall in the world), sprawled over 200 acres and built in 2005 in the southern Pearl River Delta city of Dongguan sits nearly empty. The mall was originally designed to house 1,500 tenants. There are less than a dozen. The mall was featured a few years ago in the New York Times to demonstrate the development and shift in socio-economic behavior in the world’s most populous country. Unfortunately, it seems the developers didn’t bother to look at demographics as the neighborhood it is built is in the suburbs where average incomes don’t justify such a giant mall and the location is only convenient by car. Oops.

The mall was developed by a noodle billionaire (really), and took design cues from all over the world. Yet after all this, it’s a huge failure. You can read more about the mall here.

The lesson here is that if you’re making billions of dollars selling noodles, keep doing it.

There’s not much else you can say, Tiger Woods is awesome. Sinks a 12-15 footer to force a playoff tomorrow against Rocco Mediate. Between Euro Cup 2008 (soccer for you non-hooligans), NBA finals, and the playoff tomorrow between Tiger and Rocco Mediate, I suspect the bookies will be much more active than any CMBS banker on Wall Street.

A little less than a week ago we reported that the rumours of Jones Lang LaSalle (NYSE: JLL) merging with Staubach were true, or so we had heard. Today, Property Week News out of the UK is providing additional credence by publishing a price for the acquisition, $735M.

Property Week’s article indicates that the acquisition price represents a 10x multiple on Staubach’s EBITDA, and a 1.8x multiple on revenues.

No formal announcement has been made, but it seems imminent from what we heard. And from what Property Week is publishing, it will be announced as early as next week. Jones Lang LaSalle and Staubach have refused to provide any comment on the merger rumours.

The deal would represent a smaller acquisition for JLL than the Trammell Crow deal it had chased, but lost to lose it to CBRE.

We’ve launched a commercial real estate forum.

We hope the forum will become self-sustaining at some point in the near future, but until then we’re available to answer any questions users might have about commercial real estate. We also welcome posts advertising space, goods, products, and services, so long as it is commercial real estate related.  Anything that is spam or isn’t relevant will likely be deleted.

Other than that, give it a go.