Commercial Real Estate Blog

After seeing rents continuously rise over the past 24 to 36 months, Tenants are finally beginning to see an easing in rental rates. During the past two quarters, net absorption in the South Bay and Peninsula markets have either been flat or mildly negative. In the Silicon Valley, depending on whose numbers you use, net absorption in the first quarter was in the range of minus 50-100k. At the same time rents remained fairly static.

Landlords, experiencing a marked slowdown in leasing activity have now begun to question the strength of the market. In some instances, Landlords are keeping asking rents up but getting more aggressive in providing concessions. Equity Office, which first used this approach with some of its projects, has now begun to actually lower their asking rents in some of their projects.

It helps to understand how the debt markets had an impact on the rapid rise in rents, and what could be the beginning of a period of weakness in the markets. During the past several years, cheap financing coupled with lax lending standards allowed investors to buy and sell buildings and projects at an unprecendented rate. 

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In a sign of where the housing crisis currently is, Michael Crews Development in Escondido has opted for a nover approach to selling homes: they’re offering a second home for free! If you buy into one of their more expensive subdivisions in Escondido, they’ll throw in a home from their less expensive Cityscape subdivision.

The offer has expired, but I suspect the developer is at least pleased with the coverage they are getting by putting out this offer. Nevertheless, the offer provides some insight into how far developers are looking to go in order to move inventory. A tough environment to be selling in for sure.

Buried in a housing bill which was passed by the Senate housing committee by a vote of 19-2 on Tuesday is language attacking the privacy of those in the mortgage profession. Eessentially anybody receiving compensation for a loan or accepting an application will be required to provide their fingerprint into a newly created National Fingerprint Registry. The provision would seemingly cover everybody from lenders, to brokers, to real estate agents who receive compensation from mortgage activities.

The Nationwide Mortgage Licensing System and Registry which would be created would serve as the national repository for the fingerprints. The provisions covering the fingerprinting were introduced by Senators Chris Dodd and Richard Shelby.

To be honest, I’m not sure how this will accomplish anything meaningful and from what I’ve read it seems most people agree and in fact think that this might even increase identity theft. It’s for this reason that I’m concerned about this legislation. Based on the definition it seems I’d escape the need to fingerprint, but I’ve already written letters to Senator’s Feinstein and Boxer urging them to look into this, and vote against it if it comes up for their vote.

It should be noted that many states, including California already require some mortgage and real estate professionals to be fingerprinted. The concern here stems from the creation of a national database of fingerprints as opposed to fingeprints being taken solely for the purpose of verifying identity.

To read about the amendment put forth which contained the fingerprinting provisions, you may read the document here.

Over the past several weeks, construction prices have climbed about 10% as the combination of a weak dollar and high crude oil prices filter their way through the economy. The weak dollar and global demand has caused base materials products to increase thereby causing an upswing in building material prices. High fuel prices further compound the problem by naturally increasing the cost to transport the goods.

After spending nearly two years working to entitle 7 acres of commercial property in West San Jose for housing, Silverstone Properties came up a vote short in the city council. The council voted this past week 6-5 against the rezoning of the property from its current office/industrial use to residential.

The mayor and the city have recently taken an increasingly firm line against rezoning of commercial land to residential use. During the past several years, land all across the valley was being rezoned to residential at a fast clip as the residential market outperformed the commercial market. Land owners sought to take advantage of the hot housing market by converting lands to residential use to increase the value of their property.

Once land is converted from commercial use to housing, particularly for sale housing, it is very unlikely that it will be converted back to office or residential. For that reason, there is a need to preserve commercial lands where possible. This particular property though, located on South Monroe Street is a property which I personally believe should have gone housing. The site doesn’t have great access and visibility, and it is currently surrounded by a park and other residential housing units, making it a great residential site rather than an office or industrial site.

To balance commercial land preservation while providing adequate housing stock, the city should look instead to encourage higher density mixed-use developments (commercial+residential) nearby and along major arterials, public transportation lines, freeways, and other sites where traffic impacts are minimized. Some progress is being made in North San Jose, but there are other areas of the city which could benefit from this same approach. This is of course a simplification of a complex problem, but the point is that there is a way to balance housing requirements while preserving commercial lands, and the two uses need not always be at odds with each other.

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.

NREI is reporting that in January, not a single CMBS was priced in a one-month period. This is the first time in the 20-years since CMBS product was introduced that this has happened.

Also telling is that despite this lack of activity, some $37B in securitizations remain in the pipeline. In the face of this prices have seemed to remain resilient. Longer term though, it is difficult to see how prices will be able to withstand the financing conditions if they continue. Goldman Sachs analyst James Fotheringham doesn’t see it happening and has forecasted that commercial real estate prices might be susceptible to a drop of up to 26% in value through 2009.