5/22/13

What’s new in the San Francisco Bay Area Residential and Commercial Markets since 5/14/2013:

Central Subway in SF: The map of the project is here:

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Devcon Construction Inc., one of the best-known contractors in Silicon Valley is opening an office in San Francisco’s South of Market Street district. Devcon is completing some of the most high-profile corporate construction projects in Silicon Valley today. Devcon and Turner Construction Co. are co-general contractors on the $1.2 billion San Francisco 49rs stadium in Santa Clara. Devcon alone is building two South Bay campuses for Kilroy Realty Corp., including the headquarters for LinkedIn Corp. in Sunnyvale.Devcon is also building the 18,000-seat Earthquakes’ soccer stadium. In SF, Devcon is completing 1880 Mission St., a 202-unit apartment complex that it is building in the Mission District with fitness and tech rooms as well as a bike room with a service station and custom lockers and racks. It is building the complex on behalf of our friend Avant Housing, a joint venture between TMG and San Francisco’s AGI Capital Group. It also has done previous work in the city for Adobe. BNBuilders, a West Coast general contractor, is also expanding their Bay Area presence with a new office in the SoMa district of San Francisco. BNBuilders is currently providing construction services in San Francisco for Kilroy, Hudson Pacific, Shorenstein, Digital Realty, Vornado and tech heavyweights Twitter and GitHub.

Leasing by San Francisco-area technology firms is slowing just as developers are poised to add 6.5 million square feet of office space to the city and Silicon Valley, the most construction in the past 10 years. The current development wave is the most since 9.1 million square feet were added in 2001 and it includes speculative projects (over 50% are speculative).

The building boom comes after three years of expansion by Google, Apple and Salesforce triggered a surge in rents, making San Francisco one of the top U.S. office market Growth has slowed down, with leasing down 43 percent in the city and two quarters of occupancy losses in Silicon Valley in the past year, raising the prospect that tenants may not pay the higher rents.

Newly occupied space in San Francisco totaled 80,850 square feet in the first quarter, down from a quarterly average of 118,000 square feet in the trailing 12 months and 526,000 square feet in 2011, according to CBRE. In Silicon Valley occupancy dropped by a net 94,000 square feet from the fourth quarter, with the vacancy rate rising to 11.4 percent from 11.2 percent.

Asking rents in San Francisco rose 18 percent in the first quarter from a year earlier to $50.79 a square foot and in Silicon Valley they climbed 7.9 percent to $37.68. During the recession, rents bottomed in San Francisco at $30.50 a square foot in SF.

We don’t want to appear to be a cheerleader for the industry but it is really hard for us in the trenches to actually see any slowing down. Job growth is still robust, with employment rising for the 33rd straight month in both San Francisco and Silicon Valley. This year through March, 33,000 new jobs were added in the city and 28,900 in the valley, according to California’s Employment Development Department. Two-thirds of professional and business-services positions came from the technology industry.

The rise in San Francisco rents means that offices comparable to those leased at $30 a square foot in early 2012 are now asking $50 a square foot. Spec buildings under construction will require rents of $60 to $70 a square foot at minimum to cover development costs.

Each project has its own financing structure, starting with the price of land that can dictate success in a fast-moving market. Low-rise construction in Silicon Valley, at $375 to $425 a square foot, is cheaper than urban towers in San Francisco. Among San Francisco spec projects, the 535 Mission St. tower by Boston Properties, the biggest U.S. office real estate investment trust, will cost $700 a square foot. That’s 15 percent more than Kilroy Realty Corp. is spending to develop nearby 350 Mission St., a high-rise that’s no longer spec after being fully preleased to Salesforce.com.

The Boston Properties investment, with an expected 6 percent yield, “seems just OK” compared with Los Angeles-based Kilroy’s 6.5 percent or more and a guaranteed tenant.

Regarding 2650-2690 Third Street, the early paperwork has been filed to raze the existing structure, fuel station and surface area parking lot stretching from 1201-1225 Tennessee to 2650-2690 Third Streets and construct a six-story mixed-use building with 300 dwelling units over 255 parking spaces and up to 5,500 square feet of retail on the site.

People seeking U.S. citizenship are financing Bay Area real estate projects using an immigration program that grants green cards in exchange for capital investment. For example, the Renoir Hotel’s renovation in SF is financed by this program also known as the Federal EB-5 program. Assuming you can’t a regular construction loan, EB-5 is 50% less costly than Private Equity. Under the program, applicants are required to invest up to $1 million in a commercial enterprise and to show that their investment has resulted in the creation or preservation of 10 full-time jobs within two years of the investment. In exchange, an investor and her immediate family gain a path to citizenship. If the investment is located in what the program calls a “targeted employment area” a rural area or a place where unemployment is elevated, the investment can be lowered to $500,000 for the same immigration benefit. Note that Canada has a similar program with much less hurdles…

Most investors come from China and there are no country-by-country EB-5 visa allocations. The U.S. government caps at 10,000 the number of visas that can be granted annually under the EB-5 program (There are also categories EB-1 through EB-4 which we’ll discuss in another post). Note that only 20% of the applications get a green card because of the stringent requirements which are quasi inexistent for the Canadian counter-part of this program…

We have all heard that a $5 billion wave of apartment construction is about to hit SF. This addition of housing may reshape San Francisco’s skyline, neighborhoods and politics. The last decade in SF was marked with high-end condo towers. Now, almost 8,000 new apartments, mostly in mid-rise and high-rise buildings, will come on line between now and 2015: 3,498 in 2015 alone. It’s more new rental housing than was built in the last 15 years combined!

Commercial Insurance

We’re often by clients both Landlords and Tenants about Commercial Insurance requirements, Tenant’s Improvements costs, Lease Negotiation, Commissions. We will cover the first two topics below and the rest in a future post. Landlords typically ask Tenants of Commercial Spaces for four coverages: General Liability, Property, Business Income, and Workers Compensation:

  • General Liability: This is the most common policy and every tenant in any building will be required to have some form of general liability coverage before you even set foot in the building. A basic liability policy will come with limits of $1M per occurrence $2M in the policy aggregate. What this means is that your policy allows for a total loss of $2M dollars with a cap of $1M in any one loss. This policy protects Tenants and also Landlords from liability from liability from injured Third Parties who may bring suit. If a Landlord asks for more liability coverages, Landlord may want Tenant to show that Tenant’s business is insured for liability and not just for the space. For more liability coverage Tenant may need an umbrella policy. Umbrellas come in increments of $1M.

 

  • Property Insurance: Landlord wants to make sure Tenant’s office property is insured for loss in their building. If Tenant’s property is not insured, landlord is concerned Tenant would bring suit against Landlord to get replacement value.

 

  • Business Income:In the event of a catastrophic event, this coverage insures Landlord that Tenant with business income coverage will be able to pay the lease obligations. Business income coverage is part of a typical business owner’s policy and covers income and extra expenses up to 18 months.

 

  • Workers Comp.Landlord may require a Tenant to prove that they have their workers covered under the workers compensation system (Note for those of you running a Real Estate Brokerage firm and employing independent contractors, CA requires you to provide Workers Comp insurance). Landlords in general require Workers Comp insurance because Tenant’s employee may get injured on the job and go after Landlord if Tenant does not have Workers Comp insurance.
  • Additional Insureds It is typical for Landlord to ask that Landlord be an additional insured on Tenant’s policy. This will pool both policies in the event of an occurrence.

 

Tenant Improvements

We’ll cover negotiating them in later posts. Here we’re focusing on the work itself: Landlord and Tenants need to find a good contractor via referrals etc. Even when you find a good contractor, get multiple bids. It keeps everyone honest. You may also need to hire an Architech/Designer. Ask the Contractor for referrals. It helps if they have worked together in the past. Do you best to get everyone to agree on a price and schedule: put some sort of liquidated damage clause in place: it does not have to be harsh e.g. $100/missed day. Regarding change orders, let everyone know from day one that you prefer not to see any and if you come across any you will examine them with a magnifying glass. This approach forces everyone to be thorough in their cost projections, will set the tone and manage everyone’s expectations.

The Lofts at Seven at 277 Golden Gate Avenue right around the corner from Hastings has been developed by Dolmen Property Group into 88 new urban loft and studio homes. Scheduled to open in July 2013, The Lofts at Seven will offer 31 studios and 12 junior one-bedroom residences with 10-foot ceilings, and 45 split-level one bedroom lofts with 18-foot ceilings. Studios range from 275 square feet to 450 square feet, junior one beds from 400 to 525 square feet, and one bedroom lofts from 400 square feet to 850 square feet of space. Onsite amenities include a 6,500-square-foot landscaped roof deck with an outdoor cinema, barbeques and fire pit as well as a fitness center.

A new plan proposes to build a sixteen-story, 240-foot office building at the corner of Harrison and Fourth Streets with the remainder of the site covered by a six-story, 95-foot tall office building connected to the high-rise building at the ground floor. The project also includes the construction of a two-level subterranean parking garage with 575 parking spaces.

550 Kearny St purchased by Montgomery Partners and partner Highridge Partners for $37.7 million in March of 2011 is about to be sold for about $400/SF or $78 million…

What is the “Grand Central of the West” It is simply San Francisco’s Transbay Transit Center project, now under construction a $4 billion bus and train station and mixed-use development, designed by Pelli Clarke Pelli Architects, which stretches from Second to Main streets, and will feature five levels with a 5.4-acre rooftop park and surrounding plazas. A complementary Transit Tower designed by PCPA and developed by Hines will be built adjacent to the Transit Center. The project’s goal is to transform downtown San Francisco and the San Francisco Bay Area’s regional transportation systems, and create a friendly surrounding neighborhood with homes, offices, parks and shops. The new transit center will replace the old Transbay Terminal at First and Mission with a modern regional transit hub which will connect 8 Bay Area counties and the State of California through 11 transit systems: AC Transit, BART, Caltrain, Golden Gate Transit, Greyhound, Muni, SamTrans, WestCAT Lynx, Amtrak, Paratransit and future High Speed Rail from San Francisco to Los Angeles/Anaheim.

706 Mission’s Tower is shown below: it will be a 550-foot tower with 215 condos over a four floor Mexican Museum which we hope will have actual exhibits Artwork unlike its neighbor the Museum of the African Diaspora…

706%20Mission%202013%20Rendering%20With%20Aronson.jpg

 

5/14/2013

What’s new in the San Francisco Bay Area Residential and Commercial Markets since 5/6/13:

Recap of SF New Office Towers:

  • 140,New Montgomery, 280,000 SF, Meany, 2013
  • 680 Folsom, Boston Properties, 521,610 SF, 2013
  • Foundry Square 3 by Tishman, 286,000SF, ready 2014
  • 350 Mission, 400,000SF by Kilroy, already leased to Salesforce, 2015
  • 181 Fremont, 400,000SF, Jay Paul, 2015
  • 535 Mission, 307,000 SF, Boston Properties, 2014
  • Transbay Tower/101 Mission, 1.6M SF Boston Properties, 2016
  • Foundry Square 3 by Tishman, 286,000SF, ready 2014
  • 222 2nd street, by Tishman, 452,000 SF, ready in ?

 

Columbia Pacific Advisors and Long Market Property Partners’ JV acquired 995 Market Street SF Investment L.L.C for $17 million. The 85,000-square-foot office building is at 995 Market St. Twitter is next door at 1355 Market. The anchor tenant is Black Rock City, the mastermind of the Burning Man Festival with 20,000 square feet. 45% of the space in the building is available…

San Francisco-based BRE Properties Inc. a REIT has begun vertical construction on its 360-unit MB360 apartment development in the Mission Bay area of San Francisco. Cost is estimated at $227 million, or $630,000 a unit. Yield should be in the high 6 percent once the property is leased. The project, at 1200 4th Street and 701 China Basin, is one of five the company has under construction in California and Washington including three in the Bay Area; the second, in Sunnyvale, is a $121.9 million project, while the third, in Redwood City, is a $97.8 million project. The company’s development pipeline includes an Emeryville property with two existing and occupied offices buildings. It also has a Walnut Creek site adjacent to BART under contract where it is pursuing entitlements.

 

Renderings of the Towers across the planned Warriors Arena:

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San Francisco’s Renoir Hotel thanks to Federal tax credits and a federal immigrant-investor program is being redeveloped. The Kor Group and EB5 Global SF said May 7 that they have closed on the purchase of the 1100-1112 Market St. property after first gaining interest in early 2011. They hope to re-open the triangular, 135-room hotel at the end of 2014. It’s unlikely the project would have been able to gain financing through typical real estate channels. Instead the company turned to the tax credits and the Immigrant Investor Program, also known as the EB-5 program. Under the law, the federal government sets aside 10,000 visas a year to reward immigrants who make capital commitments to a new or troubled commercial enterprise in the United States, according to the U.S. Department of Homeland Security’s Web site. The investment must preserve or create 10 full-time jobs. With $500,000 in a “targeted employment area” —a specially designated high-employment or rural area—or $1 million elsewhere, the investors may gain lawful permanent residency in the United States for themselves and their immediate family.

Converse is opening an 8,200-square-foot store, at Market and 4th.

Hines, the developer with Boston Properties of the 1.4 million-square-foot Transbay Tower, is making a foray into Rincon Hill residential development and has filed an application to build a 184-unit complex at 525 Harrison St., currently the Factory nightclub. The Harrison Street project would include a 16-story, 164-foot residential tower on a 13,000-square-foot lot. Hines is looking for a lot of parking — 280 spots in a four-level basement garage accessible from Harrison Street, according to public documents. The area zoning requires 40 percent of the units to be two-bedroom or more.

If approved the developer would have to pay just over $2 million in Rincon Hill infrastructure impact fees and $2.5 million in South of Market Stabilization Fund fees. That would add about $25,000 to the cost of each unit. In addition, the developer must made 12 percent of the units market rate if provided on site, or 17 percent off-site.

DM Development Partners, LLC and New York-based DDG have begun construction on 8 Octavia, a 47-unit condominium project at Octavia and Market streets.

A recap of the largest office space transaction of 2012. Congratulations to all our colleagues, Landlords and Tenants involved:

2012 largest Office leases in SF:

Rank Office Leased vs.Building SF Tenant/Broker Landlord/Broker
1 350 Mission 444,000/451,000 Salesforce/Cushman Kilroy/JLL
2 50 Fremont 401,786/787,389 Salesforce/Cushman TIAA/CAC
3 1455 Market 246,078/1,019,000 Square/Custom Spaces Hudson/Cushman
4 680 Folsom 242,753/515,000 Macy’s/Grubb&Ellis TMG/JLL
5 101 Spear 253,733/500,000 Salesforce/Cushman Hudson/CAC
6 888 Brannan 169,538/400,253 Airbnb/Creative Brokers SKS/Colliers
7 680 Folsom 167,788/515,000 Riverbed/JLL TMG/JLL
8 101 California 121,986/1,203,065 B of A/Merrill/Cushman Hines/Hines
9 345 California 119,000/600,000 TPG/Axiant Metropolis/Cushman
10 500 Terry Francois 111,761/280,964 Meraki/Custom Spaces Sobrato-TMG/C&CCNF
11 One Market Plaza 108,360/483,726 Autodesk/Colliers Paramount/JLL
12 458 Mission Bay Blvd 105,000/105,000 Bayer/Kidder Mathews Alexandria/Kidder
13 1155 Market Street 103,388/139,956 City of SF Laurus/CAC
14 90 Fremont 100.562/787,389 Salesforce/Cushman TIAA-CREWF/CAC
15 140 New Montgomery 98,144/294,100 Yelp/CBRE Stockbridge/CAC
16 250 Brannan 92,948/95,008 Splunk/Colliers Kilroy/Cushman
17 1355 Market 85,259/751,000 Twitter/JLL Shorenstein
18 188 Spear 83,154/142,327 Amazon/JLL Shorenstein
19 600 Townsend 82,852/82,852 Salesforce/Cushman LBA Realty/CAC
20 1355 Market 78,792/751,000 Yammer/JLL Shorenstein
21 655 Montgomery 78,011/264,000 Hotwire/Cushman Lincoln/CBRE
22 760 Market 75,000/350,000 Obvious/Custom SpacesThorEquities/C&CCNKF
23 One Market Plaza 72,872/483,726 Velti/Cushman Paramount/JLL
24 1001 Front street 70,938/101,160 Y&R/CBRE La Salle/JLL
25 One Market Plaza 68,611/483,726 RPX/CBRE Paramount/JLL

 

5/6/13

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Here’s what happened in the SF Bay Area’s Residential and Commercial Real Estate Markets since April 28:

SF Investment LLC, a joint venture between Seattle-based Columbia Pacific Advisors and San Francisco-based Long Market Property Partners, has closed on the acquisition of 995 Market St. an office building. The price was $17M or $200 a square foot.

A JV joint between Columbia Pacific Advisors and Long Market Property Partners purchased 995 Market Street in San Francisco. Terms of the deal are not known. The 16-story, 93,000-sq.-ft. office building is part of the city’s mid-Market corridor and is within the Payroll Tax Exclusion zone, which allows new company hires to be exempt from payroll taxes.

The gorgeous Hallidie building at 130 Sutter Street designed by Willis Polk and built in 1918 as an investment property for the University of California has a steel and glass facade and just completed a major renovation. Check out the caption picture.

Boston Properties is accelerating development of the 1.4 million square-foot Transbay Transit Tower in San Francisco by a year and started a speculative development on a second San Francisco office tower at 535 Mission St. with 307,000 square feet. There are a lot of tenants such as Uber, Microsoft, Google, Yahoo!, WeWorks, Square, Salesforce, AppDynamics etc. and they are all looking for large office plates. The company spent $192 million to buy the 50,000-square-foot parcel and would have another $120 million or so invested so far.

At the same BP which is a REIT agreed to take millions of dollars in write downs on a downtown San Jose office building with 158,000 square feet acquired in 2006 plus a neighboring 3.7 acres entitled for 850,000 square feet of office development. The company has owned the land since 2000. It appears BP has decided to sell the building for $40 million, or $253 a square foot. The Buyer is not known at this point. The company took a $3.2 million charge to net income in its first quarter in relation to the pending sale of 303 Almaden Blvd. and an $8.3 million impairment expense that reduced the value of the land to $29 million. It now is considering whether to sell the land as well.

The San Jose building sale is part of a larger disposition effort by Boston Properties to sell $1 billion more in assets this year in addition to $510 million in sales in the first quarter. The company also sold 125 W. 55th St. in New York City. The company has eight office projects under development, including 680 Folsom St. in San Francisco, where it expects to invest $340 million. That tally does not include 535 Mission or the Transbay Tower. Overall the company anticipates $1.77 billion estimated total investment in the eight projects that it has underway.

 

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