Commercial Real Estate Blog

Kelly Associates will be going in front of the planning commission later this month to propose a new 155,000 square foot Class A office building in Cupertino. The project will feature three (3), 2-story office buildings alongside a 2-level parking garage.

The project is located at McLellan and Bubb on Results Way. The project is owned by Embarcadero Capital Partners, who picked up the project from Grosvenor in November of 2006. The Results Way Corporate Park consists of roughly 373,000 square feet on 20 acres. Embarcadero Capital paid $62M ($166 psf) for the project.

If the project passes muster with the planning commission later this month, it will move onto the city council in September.

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.

In most development projects in Silicon Valley, municipal codes and zoning generally dictate parking requirements. For most office projects, parking requirements are genrally in the ratio of 3.3-4 spaces per 1,000 square feet. For most multi-family developments which have a mix of 1-3 br, ratios are generally in the 1.5-2 spaces or stalls per unit. Retail can vary greatly, as the required ratio of parking for various retail uses can have a big impact on parking requirements, but generally requirement of 4.5 stalls per 1,000 SF is mandated, with requirements moving to 7-9 stalls per 1,000 SF for food-intensive retail centers.

The cost of construction for these parking stalls can also vary greatly depending on what type of parking is provided; will the parking be be subterranean or surface? will it be in a parking garage or in surface lot?

Pricing can vary greatly, but some back of the envelope pricing for the construction of parking in Silicon Valley is as follows:

• Grade-Level Surface Parking - $5,000 per stall
• Parking Garage Below Building
  • Above-Grade - $40,000 per stall
  • Below-Grade - $60,000-90,000 per stall
• Freestanding Parking Garage
  • Above-Grade - $18,000 per stall
  • Below-Grade - $40,000 per stall

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.

Over the past few decades, real estate investment has become increasingly sophisticated. Large institutional investors and developers have seen the line blurred between traditional investment banking for securities and that for real estate. Everything from the market analysis to the financing of the project has changed.

Investors in commercial real estate often classify projects and assets into various classifications, which we’ll try to explain below. In similar fashion to classifying office space as Class A, B, C, there is no absolute criteria by which an asset is graded, but most investment professionals are able to generally agree on which category an asset falls under. That said, the classifications investors generally hear about are:

• Core, or Core-Institutional: These assets are the highest-grade real estate asset. They are easier to finance, and generally command the lowest Capitalization Rates. An example of a core-institutional investment would be a fully or nearly fully-leased office property in a historically strong office market such as San Francisco or New York City.
• Core-Plus: A Core-Plus asset is an asset which is also high quality, yet one which represents to an investor the opportunity increase the asset’s investment yield through some event. For example, the asset might have some scheduled vacancy or leases rolling over which would give the owner the opportunity to increase rents. Another characteristic of Core-Plus is an asset which could benefit from some upgrades or renovations by which the investor could then command higher rents and improve his return.
• Non-Core: These assets generally fall into the “B” category. An example might be a “C” asset in an ”A” location, or even a Class A asset located in a secondary (”B location”) or tertiary market. These assets are generally overlooked by larger institutional investors, and generally have a higher vacancy rate, and slower rental rate growth, and investors demand a higher Capitalization Rate when acquiring these assets.
• Value-Add: Assets which fall into this class are those where a buyer has an opportunity (that’s the expectation at least) to acquire an asset, and add significant value through a major event. An example of a value-added asset might be one which an investor acquires an older office building, performs significant renvoations to the building’s interiors and exterior to reposition it from a Class B asset to a Class A, and leasing it at higher rates. Another example is an investor acquiring an asset and increasing density, to add value. Value Add is generally the riskiest investment class of those we have discussed so far.
• Opportunistic, Distressed: These assets represent one of the highest levels of risk for a property investor. An example could be a bank foreclosure or an asset whereby the seller is in financial difficulty. Given the condition of capital markets today, many are expecting these opportunities to begin to surface and funds have been setup to focus specifically on these types of investment. An example of an opportunistic deal would be to acquire a note on a property belonging to a troubled seller, negotiate control of the property, and then provide the equity or financing to renovate the property.
• Development, Redevelopment: These types of assets represent those whereby a buyer could acquire an asset which would benefit from a higher and better use. They can either be ground up development, or a redevelopment of an existing site. These assets demand the highest returns because of the inherit risk in both acquiring and constructing the asset, but also leasing and market risk taken on by the investor and/or developer. A local example would be Santana Row. The site Santana Row sits on was formerly a Town & Country shopping center, a single-story, surface-parked retail center. Federal Realty (NYSE: FRT) acquired the property and re-developed into a massive mixed-use project encompassing hotel, condos, apartments, retail, and office.  

The San Jose Flea Market land is up for sale. The 120-site, after going through nearly a decade of entitlements, has been put on the market for sale. The site is entitled for nearly 2900 homes and 350,000 square feet of commercial space (office and retail).

The site is a vast flat parcel in the middle of housing and commercial development in San Jose. Challenges facing the site include having to work with the seller’s to relocate the existing flea market inland and working on a timetable possibly centered around BART’s planned extension into downtown San Jose though a portion of the property is currently ready for development, allowing for 800 homes and about 100K SF of commercial development.

There is no price tag attached to the site officially, but in light of current housing conditions in North and East San Jose, as well as where capital markets are today, it is likely that the value of the property has dropped roughly 20% from where it would have been in 2005 or 2006.

Similar large transactions of residential housing in the valley have generally ranged from the $50-80 ($2.4-3.4M/Acre) psf range in the past few years and it is likely that this parcel will be near the lower end of that range given the inherit market risk, lower home values in that area of San Jose in contrast to Santa Clara/Sunnyvale markets, current state of capital markets, and of course the staggered/delayed timeline that any development proforma will need to account for.

Brocade, in an SEC filing dated today indicated that it has acquired land on North First Street for the construction of a 562,000 SF office project. We were previously the first to report on April 4th that Brocade was in negotiations to lease the project, however; as it turns out the transaction actually involved a sale of land and subsequent development agreement for the construction of the buildings and parking garage.

The agreement which was inked on April 24th between Brocade and MFP/Hunter@First Office Partners LLC (Hunter Storm Development of Cupertino and MacFarlane Partners out of San Francisco) consists of a sale of three unimproved parcels that are entitled for approximately 562,000 square feet of space in three buildings. The total purchase price for the property is $50.9 million.

In connection with the purchase, Brocade has engaged MFP/Hunter@First Development Partners, LLC as development manager to manage the development and construction of the office buildings on the property  for approximately $173 million which covers the construction of the three buildings and parking garage.

Brocade also obtained a four-year option to purchase a fourth unimproved approximate 4 acre parcel for a fixed price of approximately $26 million.