Commercial Real Estate Blog

The Contra Costa times featured an article today highlighting the relatively inexpensive rents in Fremont as spurring demand for space. While Silicon Valley and the Peninsula have seen office rates increase over the past two years or so, Fremont has remained a fairly inexpensive market. Rents have moved up in Fremont, but compared to space just over the Dumbarton Bridge or over Highway 92, Fremont is a bargain.

Fremont is a market which doesn’t have a lot of the Class A type of office space that you can find in Foster City or Redwood Shores, but it does have a few comparable buildings in its downtown area nearby the BART Station. Space in Fremont runs about $2.50 Full-Service for Class A office, while in Foster City or Redwood Shores would run you north of $4.00 Full-Service.

Supply is much higher in Fremont with vacancy rates for CTU construction offices and R&D facilities into the teens and rents 30-50% cheaper than the alternatives on the other side of the bay. Some of the new companies to move into Fremont recently include Solyndra, Super Micro Computer, and PurFresh. Also, the stock of single-story R&D buildings in Fremont is also making it a popular place for cleantech companies looking for a cheaper alternative to space along the 237 corridor in Sunnyvale, Santa Clara, and San Jose.

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.

The San Jose city council approved a plan by Oakland A’s and San Jose Earthquakes owner Lew Wolff to develop a mixed-use office, hotel, and retail project near the San Jose airport. The property which encompasses 66 acres will contain roughly 100K SF of retail, a 300-key hotel, and 1.5 million square feet of office space.

Of the 66 acres, approximately 13-16 will be retained for a future 18,000 seat stadium for the San Jose Earthquakes. The development of the stadium however hinges on the city approving a re-zone of 70 acres of industrial land Lew Wolff controls in the Edenvale district of South San Jose to housing. The plan is that the rezone will bump up the value of the Edenvale land, thereby allowing Wolff to make the tidy profit that necessary for the stadium’s construction.

This is certainly a step in the right direction, but I see a few problems with this plan. The first big one is that the approval of Wolff’s Coleman Avenue Airport land doesn’t seem to hinge on him delivering an Earthquakes stadium at all.

That said, given current construction costs and where the leasing market currently is with respect to rental rates and demand in San Jose, there doesn’t currently seem to be the necessary economic drivers in place to warrant the speculative construction of 1.5M SF of office space.

The second problem has to deal with the Edenvale land in South San Jose. It’s not clear who currently owns the land, but in past reports and talks it was noted that the land is under Wolff’s control (presumable optioned), and not actually owned.

To get its stadium, the city would have to go and rezone the Edenvale land to housing, so that the step up in land value can fund the stadium’s construction. There are problems with this plan as I see it.

The big problem in my opinion, has to deal with property rights and the city’s “behavior”. The city is seemingly considering rezoning industrial land to housing so that a private developer and sports team owner (Lew Wolff) is able to reap the necessary profits he needs to build a soccer stadium. In a time when the Mayor and city have generally turned against converting industrial lands into residential lands, I find this interesting to say the least.

If I were a nearby land owner, or even worse, the Edenvale land owner whose land Lew Wolff has optioned (presuming that is what has happened), I think I would be livid that this particular individual is getting preferential treatment because the city wants him to make the profits necessary to build the stadium.

Even though it seems he would donate the stadium to the city and the Earthquakes would lease it back, I think there might be some lawsuits filed before such a scheme is allowed to take place. I find it doubtful that the city would otherwise rezone 70 acres of industrial land into residential use at this time if it was not for the soccer stadium.

I’m just not sure I’m comfortable with limiting somebody’s property rights because they don’t have a sports team that happens to need a stadium on the other side of town.

Oracle has put up its tower at 488 Almaden Blvd. on the market for sale. BEA paid about $335 per square foot for the building last year in hopes of moving workers from its north first street campus over but instead Oracle has decided to turn around and put the vacant building back on the market.

The 388,000 SF Class A building is located on Almaden Blvd. in Downtown San Jose. Built by Sobrato Development about 7-8 years ago at a cost of nearly $100M the property is on the market unpriced, though it is very likely that it will trade for below its replacement cost. The building was previous to BEA in play with NVIDIA, but that deal fell apart partly due to the economic incentive package not being sweet enough, and likely because the move from Santa Clara to Downtown would have represented a relatively cumbersome move from a logistics and personnel standpoint. NVIDIA instead acquired San Tomas Commerce Park across the street from its existing campus and intends on building a 2M square feet campus.

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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.

Centex has sold approximately 8,500 residential lots and units to Farallon Capital Management, RSF Partners, and Greenfield Partners. Part of the sale, which came in at an effective $455 Million after factoring in tax refunds back to Centex, included the Plant51 project in San Jose. According to the Business Journal, Centex did not even sell a single unit in the 265-Unit historic rehab project after spending in excess of $100M over the course of the past four years developing the project. The project is still only 70% done.

The deal as structured still gives Centex a 5% stake as well as earnouts depending on the financial performance of the deal. The book value of the properties which were sold was in excess of $520M.

On a side note, something which I found pretty humorous was the home page of RSF Partners’ web site, where they indicate that they have “over $.5 billion in assets”. Normally people say $500 Million, or perhaps even “half a billion” under management, but this $.5 business just seems silly…were they hoping somebody wouldn’t see the decimal place?