Commercial Real Estate Blog

The SF Chronicle today is featuring an article discussing the trouble San Francisco office market is facing as a result of all that is going on in the equity and debt markets. There are two key takeaways in this article. The first is that we could see a 900 basis point increase in the office vacancy rate in the not too distant future. That is a serious number.

The second thing to take note of is in the last section, where a landlord who seemingly has a tenant in hand is running into trouble securing additional monies from his lender to fund tenant improvements. That is something we have been seeing become more common recently, along with landlord’s bumping up their security deposit requirements.

As a tenant, given the inherent risk in the market, if large security deposits and improvements are involved, it becomes absolutely crucial that non-disturbance agreements be attained from existing and future lenders as part of the deal. Tenants need to have assurance that no matter what happens with the building, there tenancy and investment is secure.

Furthermore, if an increasing number of landlords become unable to fund improvements, that will put significant downward pressure on rents as many landlords will be forced to offset what they can’t provide in TI dollars with a lower rental rate and/or additional free rent to secure tenants.

The Business Journal is reporting this morning that according to their sources, Legacy Partners is in fact that buyer of the Oracle/BEA/Sobrato tower located at 488 N Almaden Blvd in San Jose which Oracle (ORCL: 18.86 +13.07%) acquired as part of the BEA acquisition. The Business Journal is reporting the sale at “nearly” $100M at about $275 psf (the math is a bit off), but nonetheless that number is close to what we’ve speculated. BEA purchase the building for about $135M about sixteen months ago and had started some of its TI’s.

The Business Journal reports that it will take about $50 psf to get the building tenant ready, which might be slightly low given what has happened with commodities and materials prices lately. What is more important is that Legacy was able to solidify control of the market and prevent another player from entering the market with a low basis. We’ve written extensively on events surrounding this building, the importance for Legacy to buy the building, and our previous posts include more history about the building. We’ve also heard that Divco West was in the running for the building.

All the blog posts previously discussing 488 Almaden are:

• Oracle/BEA Tower on the Market (May 20th, 2008)
• Who is the Buyer of the Sobrato -BEA-Oracle Building at 488 N Almaden Blvd? (June 18, 2008)
• Possibly Brilliant Timing for Buyer of Oracle/Sobrato Tower; PWC Possibly on the Hunt (July 24, 2008)

Legacy is taking a big gamble on Downtown San Jose, but based on our post from yesterday, their purchase of 488 N Almaden was in many ways crucial. It will be interesting to see if 488 N Almaden finally gets a name that will stick, perhaps PwC Tower.

Under current law, only 2.5% of a improvement costs to a commercial (or residential) property could be written off in the first year. The new economic stimulus package now allows for up to 50% of the improvement costs to be written off the first year provided the work is started and completed this year.

This will likely spur some activity both on the leasing front as well as construction front as Landlords and Tenants both will seek to take advantage of the favorable tax treatment.

Tenants are often amazed at how quickly construction costs for interior build out of offices can add up. Very high end office construction (venture capital, private equity, law firms) is now in excess of $100 a square foot with some jobs moving in on $150 per square foot territory, with office construction for a typical office user generally coming in around $50-60 per square foot.

We are often asked what typical office construction costs are, and while they can vary depending on materials, building, and other conditions, we are able to provide our clients with some ballpark figures to help determine the costs involved when building new office interiors from a warm shell (HVAC, sprinklers, electrical in place). Of course when the deal gets to the point where tenant improvement negotiations come up, it is advisable that an actual plan is costed out to avoid any unexpected surprises. Nevertheless, below are some ball park construction prices for office space in Silicon Valley:

• A typical office (~120 SF): $8,000
• Conference room (~300 SF): $16,000
• Break Room (~300 SF): $20,000
• Open Office Area: $25 per SF
• Reception Area (~200 SF): $12,000

As previously mentioned, the cost of construction can vary depending on many factors and can vary greatly depending on things such as what is already there (lights, ceiling, carpet, plumbing, etc.) and the materials used. If you’re a tenant looking for a reputable construction firm in the San Francisco Bay Area, feel free to contact us and ask for a referral.