Commercial Real Estate Blog

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.  

Word is a buyer has been picked by Oracle Corporation (NASDAQ:ORCL). BEA paid about about $335 psf ($130M) in 2007 for the 388,000 square foot tower. You can read more about the story of the tower in a previous post. If I had to guess, I’d say the building will trade for significantly less than what BEA paid for it. It’s going to take a serious piece of equity to buy this vacant building and tenant it up.

I’m going to make a prediction here and say that the buyer is going to pay around $260-270 psf ($100-$104M) for the tower. And since we’re making predictions, I’ll predict the buyer is either (in this order): Legacy Partners, Boston Properties, or Tishman Speyer.

Anybody else want to make a prediction?

We previously reported that the deal was essentially done, but Jones Lang LaSalle (JLL) confirmed today that it is in fact buying Staubach. Jones Lang LaSalle is paying $613M for Staubach over 5 years, with $100M in stock and $123M in cash up front at the closing. An additional $114M in earnouts will be paid to Staubach depending on whether it meets certain performance goals, bringing the total acquisition price potentially to $727M.

The deal is expected to close by the third quarter. The acquisition caps on and off rumours of an acquisition. We indicated on June 9th that it was a done deal, and more details trickled in over the following week.

Yahoo has entered into a non-exclusive agreement with Google (NASDAQ:GOOG) to allow Google to run ads on Yahoo’s web properties. The deal is estimated to ad approximately $800M a year in cash flow to Yahoo. As of June 8th, Microsoft and Yahoo have concluded their negotiations as well.

Microsoft (NASDAQ:MSFT) has expressed interest in continuing negotiations for a portion of Yahoo, but supposedly is no longer interested in an outright takeover of all of Yahoo. Yahoo still is not out of the woods though, their will undoubtedly be some anti-trust scrutiny of the deal, as well as continued pressure from Carl Icahn, Boone Pickens, and other large shareholders as they likely still seek to oust Jerry Yang and supplant the board with their own, presumabely so they can push through a deal with Microsoft.

Yahoo’s shares (NASDAQ:YHOO) ended down the day 10% to $23.63, roughly 30-40% less than where a deal with Microsoft could have been struck a few months ago.

As for the real estate plans of both companies, Google recently signed a deal with NASA for a ground lease to build a campus, and Yahoo owns some 50 acres in Santa Clara that is available to it to construct a campus if need be. As of now, Yahoo is mainly spread out between its Sunnyvale and Santa Clara campuses, with much of the Santa Clara campuses and buildings owned by Sobrato.

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.

It’s been rumoured in the past that Google was nibbling at taking down space at Jay Paul’s Moffet Towers Project. In what could be construed as less than favorable news for Moffett Towers, insofar as Google is concerned, NASA announced today that it has inked a deal with Google for 42 acres of land at the NASA Ames Research Center in Mountain View for the purpose of developing a high-tech campus for Google. Under the terms of the 40-year lease, Google will lease 42 acres to construct up to 1.2 Million square feet of an office and R&D campus. Google will pay NASA an initial base rent of $3.66 million per year. NASA will use the proceeds to cover the full cost of the lease and the balance may be used for capital revitalization and improvements of the real property assets at Ames.

Construction of the project will be in three phases, with the first planned to begin by the end of September 2013, the second phase by 2018, and the third by 2022. Google also intends on constructing company housing and dining, sports, fitness, child care, conference amenities.

In the late nineties, Sobrato signed a ground lease for the construction of its Mission Valley College office campus in Santa Clara. That was a 26-acre piece that they used to develop 685,000 SF of office on. That lease represented about $.147 per SF, per month on the dirt, and $.243 per buildable SF. In contrast, the Google/NASA deal has Google paying about $.164 per SF, per month on the dirt, and ultimately when the 1.2M SF is built out, $.254 per buildable SF.