San Francisco Chronicle new development planned near 943 Howard Street

My commercial real estate practice concentrates 100% on tenant representation, which usually means I do not have listings other than subleases available to other parties, even though I have had years and years of experience representing landlords, or doing what we call “agency” work.  Why am I mentioning this? Because I represent a client putting its SOMA office building on the market, a gem not only architecturally but also one with parking.  Nothing like it in San Francisco, the details of which you can view here.  (Big file, by the way, due to lots of photos.)  It just went on the market last week. 

It’s on Howard, between 5th and 6th, 1/2 block from the Intercontinental Hotel and across from TechShop, a building owned by the Hearst Corporation.  I knew about Forest City and the SF Chronicle’s future plans to develop several acres near the building, but there were no concrete details until now.  It’s very exciting, even if planning will take 3 years.  For a description from a San Francisco Business Times article today, go here.  Imagine 1.3 million square feet of commercial space, 700 housing units, arts and community space, and a building for “collaborative” workspace.  The Chronicle building at 901 Mission stays but everything else goes.  That will be a  game changer.  Kudos.

3rd Quarter Office Report San Francisco, CA

By all reports, we are in a bull market in San Francisco, even if the rest of the country (and even the world) is mostly in the doldrums.  I’ll add the official Grubb & Ellis report in the next post, but for now here’s a look at the activity for the past few months.

New and renewing tenants:

Autodesk expanded 36,400sf at One Market; Dropbox expanded to 85,500sf at 185 Berry;Practice Fusion took 46,000sf at 420 Taylor; Zynga to 58,700sf at 650 Townsend; AECOM new to 300 Cal in 54,200sf; Ancestry.com inked 57,000sf at 160 King Street. Bank of the West renewed 132,000sf at 180 Montgomery;Wells Fargo renewed 70,000sf at 343 Sansome; Alliant University renewed at 1 Beach for 64,100sf; and Symantec renewed at 303 2nd St for 67,000sf.

Those are the really notable leases of the quarter.  There were many more, to the tune of approximately 300,000 sf of tenant absorption.  For the year, we are exceeding 1,300,000 sf of net absorption and still rising.  Class A rates average rents rose to $40.54 and Class B to $31.90, with vacancy overall at 14.9%.  Concessions are limited but may be coaxed with strong balance sheets.

Building sales were even more robust:  795 Folsom; 221 Main; 101 Howard; 201 3rd; 500 Sansome; 795 Folsom; 1155 Market;625 2nd; 75-95 Hawthorne;275 Brannan; and 642 Harrison.  With pricing hitting over $400/ sf (101 Howard), investors are confident that  market stagnation is a dim memory. If you would like more details, please call.

San Francisco Office Market Report 2nd Quarter 2011

San Francisco office rents in the last quarter rocketed right off the charts, moving fastest South of Market where tech companies like to cluster but also seeping into neighboring submarkets.

See the Grubb & Ellis Office Market Report for more official details.

*Net positive absorption hit somewhere around 1,000,000 SF–the number changes company to company depending on whether or not the research department counts a deal when signed or when the tenant occupies. Grubb & Ellis counts when the company occupies.

So our numbers would not include the Twitter deal until the company occupies its new space. However, at 210,000 SF, I have to mention the deal now: it is large; it is a relocation and an expansion (renewals make up most of the headline-catching big deals, as you will see below); and it certainly shut a lot of people up who have been poo-pooing the company’s importance when Shorenstein signed the lease. It is a very significant transaction, and the ripples being created as it energizes the dreary mid-Market area will be exciting to watch and participate in.

*San Francisco unemployment dropped to 8.4% in May’s statistics. 

*Vacancy overall dropped at least 40 basis points to around 16%, which pushed asking rates up 6-10% in Class A and B properties. In some buildings, ownership pushed rents up 10-12% over a couple of months, and there are examples that exceed even those numbers. Class A buildings are –loosely– in the mid $30′s to low $40′s FS range and B buildngs are low $30′s to mid $30′s. In a quickly moving market like this, it is almost impossible to measure accurately. By the time you quote a number, it’s gone up. Tenants and owners alike are both pretty much in shock at how fast everything is changing.

Top Transactions of the Quarter:

*EPA renewal at 75 Hawthorne, 285K SF
*Twitter to 1355 Market for 210K SF
*Farallon Capital Management renewal at One Maritime, 176K SF
*Farella, Braun, & Martel renewal at 235 Montgomery
*PG&E renewed at One Market, 78K SF
*Idle Games, new lease at 875 Howard for 33K SF

As I write today’s post, the Dow has dropped 500 points.  So in spite of the economic moat that is San Francisco, unsettling events like this are making me very, very uneasy.

Take Aways: 2011 First Quarter San Francisco Office Leasing Report

In a nutshell, rents continue to rise and vacancy to decrease throughout San Francisco submarkets.

•  Overall vacancy is down to 16.5% from 17.4% in Q4 2010, with available space also down to 12.9 million SF from 13.2 million in Q4 2010.  Class A rates stand at $35.71/SF/Yr, and Class B now $28.72.  Absorption quadrupled to 625,000 SF this period, from positive 161,000 SF last quarter.

• February unemployment numbers are slightly better, at 9.1% in February, from 10.4% in early December.

• South of Market (SOMA) tech tenants continue to gulp up inventory, with certain buildings increasing rates as much as 25-35% from last quarter. One Class A building near the Ballpark just hit $45.00/SF/Yr + electrical as an asking rate.  The only new construction is Shorenstein’s topping out of 120 Howard/aka 188 Spear with 4 additional stories, totalling 70,000 SF–and that won’t be ready for tenant improvements until 3/2012. With over 500 tech tenants in SF now, this niche partitioning will not abate.  It’s a leasing frenzy especially for small to medium-sized spaces (2,000-15,000 sf) .

• Large tech companies are also compromised in their space searches, with big moves influencing neighborhoods–witness the recent Salesforce.com land purchase of 14 acres to build out its campus in Mission Bay.  But it’s Twitter’s potential move to 1355 Market–forecasting to hire 3,000 employees by 2014– that will have the biggest impact, transforming that generally seedy area into one hot neighborhood in under 3 years: a transportation hub with new cultural, retail, and residential projects such as  City Center; ACT”s potential  building; apartments from Trinity and Crescent Heights developments; plus a payroll tax breaks for employers in the area.

• Other neighborhood makeovers to watch now:

√ North Waterfront because of the cruise terminal at Pier 27 scheduled to start in 2012; because of America’s Cup at Piers 27-32 in 2013 (and other races in 2012); and because of the Exploratorium’s  9 acre, 230,000 SF museum at Pier 15 and 17 slated to open 2013.

√ Anywhere a new hospital is going.  Over 1100 new beds will be delivered, whatever form health care reform ultimately takes:  285 beds at SF General to open 2015 and 289 at UCSF Medical Center at Mission Bay, to complete 2014.  CPMC’s new medical center at Van Ness/Post is in planning for 555 beds plus a new medical office building.

• Investment sales are too numerous for this post, but include 500 Terry Francois; 1355 Market; 530 Bush; 200 California; 250 Brannan; 560 Pacific; 625 Third;550 Kearny.  Grubb & Ellis’ national research department just released national investment trends which showed  “ …the dollar volume of direct investment in commercial properties soared by 77 percent in the first quarter of 2011 compared with the first quarter of 2010. ” San Francisco  sales seem to be either well-located, stabilized assets at prices exceeding expectation (i.e., Sobrato’s 500 Terry Francois purchase for $325/SF, plus full tenant improvements from shell condition) or not so well-located, underperforming assets at low pricing (i.e. Shorenstein’s purchase of the million-square foot ex-Furniture Mart at 1355 Market for less than $100/foot – but that doesn’t count extensive infrastructure work required). For both marketed and off-market properties in the mix now, there are beaucoup suitors vying for top position.

• Owners and tenant need to carefully follow the repercussions to the recent new law passed by Mayor Lee that requires owners to  file an energy benchmark report and to conduct more extensive energy audits every five years.  Under the measure, starting in October of 2011, owners of commercial properties that are larger than 50,000 square feet must file an annual report summarizing the energy performance of their buildings. Similar reporting requirements for commercial buildings ranging from 10,000 square feet to just under 50,000 square feet roll out through 2013.

•  Also watch new laws tightening ADA compliance, to be implemented on the state level by March 2012. This will  most affect the retail, medical,  and hospitality sectors, however.

• Full into 2nd quarter now, we will be tracking other factors influencing our market: redevelopment uncertainties until early summer; local, state, national, and international political and economic uncertainty; inflation possibilities; and a slow broad-based employment recovery. For a full report from Grubb & Ellis’ SF research department, click here, and for a snapshot of statistics, click here.

Guest Post: Enterprise Zone Tax Benefits Threated

Scott Nelson is the Managing Principal of Tax Incentives Group, a San Francisco-based firm which provides tax and financial incentives consulting to small business and middle-market companies.

California: Closed for Business

California Gov. Jerry Brown just had this sign printed and is placing it all over the State; on billboards at the borders, on bumper stickers in Sacramento, on his website, pretty much everywhere possible. He’s even sending letters to governors in neighboring states so they can poach our companies and lure them away. Well, not literally. But figuratively for sure.

 I’m sure by now you are aware that Brown has proposed to extend the temporary tax increases approved in 2009 for 5 additional years through 2016. The tax increases include a 0.25 percentage point increase in personal income tax, a reduction of the dependent exemption credit, a 1 percent increase in sales tax, and a 0.5 percent increase in the VLF. The Legislature has to pass by 2/3 vote any legislation that proposes to increase taxes. Brown is so confident that the Legislature will pass these increases that he’s already stated the measures will be put before voters on a June 2011 special election ballot. But those are just some of the tax increases in Brown’s budget proposal.

 In addition to the aforementioned items, Brown also wants to eliminate redevelopment agencies and Enterprise Zones in California. Not only is California one of the most difficult and expensive states in which to do business, we hardly have any economic development tools left to attract new business and retain our existing pool of employers. In fact, all that would be left is a credit for research and development. I wonder if Brown will eventually want to eliminate that incentive, too. That would be one way to send a message to Silicon Valley about how much we care about homegrown innovation.

 But I digress. Let’s focus on Enterprise Zones. The California Enterprise Zone (EZ) program has been in existence since 1985. It was originally created to help generate new jobs & increase investment in some of California’s most blighted areas which desperately needed development. We’re talking about Economic Development 101. There are currently 42 zones around the state which provide tax credits and other incentives to companies doing business within the boundaries of the zones. It is certainly true that the program has been abused at various levels over the years, but reform legislation has tightened up the program and eliminated some inefficiencies. Don’t get me wrong, more reform is needed and there are some bills already in the works in both arms of the Legislature. However, under Brown’s proposal, businesses would no longer be able to claim any new credits, and they would forfeit all credits they have earned in prior years but not yet claimed on their tax returns.

Legislative hearings have already taken place on Feb. 7 and Feb. 16. Brown’s administration has elicited support from the Legislative Analyst’s Office (which opposes anything that doesn’t create new taxes), labor unions like the California Labor Federation (which dislikes anything pro-business), and the Public Policy Institute of California which issued a study in 2009 that discounts the effectiveness of the EZ program. On the other hand, support for the EZ program has come from the cities which applied for and currently have zone designations, businesses that have benefited from the program and a competing 2008 study from USC that shows the EZs create jobs, increase incomes, and reduce poverty and unemployment in the zones. In fact, the latter group has formed a coalition called Californians for Jobs and Safe Communities (http://jobsandsafecommunities.com). The debate is no doubt heated.

There is even discussion suggesting the proposal to eliminate the EZs is unconstitutional. Donald M. Griswold, an attorney with ReedSmith in Washington D.C., was brought in to provide legal advice to the pro-EZ coalition. Griswold told legislators the proposal to eliminate state EZ credits is bad public policy and would violate the Due Process Clause and Contracts Clause of the U.S. Constitution. The biggest issue being Brown’s plan to eliminate the credits retroactively, meaning companies that have earned credits but not yet claimed them would lose them beginning with the 2011 tax year. Griswold has also stated that the retroactive elimination of outstanding credits would be an unprecedented move. Even the LAO questioned the governor’s plan to void unused credits in their briefing for lawmakers Feb. 7. “Businesses made decisions under the assumption the state would meet its credit commitment,” LAO said. “Voiding unused credits not only raises concerns about the state’s treatment of businesses that have such credits; it also could weaken incentives provided by other credits.”

I am curious about the accounting metrics used by Brown’s administration. Somehow this proposal is now being discussed as a $1 billion annual savings. See if you can follow this logic. The actual savings estimate for the current fiscal year 2010-2011 is $343 million. The actual savings estimate for the next fiscal year 2011-2012 is $581 million. The substantial year-over-year increase is explained in the budget proposal as a “new accrual method”. Apparently with a little magic we can just accept the new accrual method, add the numbers together and get close to $1 billion. Even though the “estimated savings” represent 2 separate fiscal years, they are now being combined into the term “annual savings” by the proposal’s proponents.

Here’s an explanation of that new accrual method directly from the LAO’s budget overview. Generally, the state operates under an “accrual” accounting system that requires recognition of revenues and expenditures to the fiscal year in which they are realized. The administration’s budget package estimates 2010–11 and 2011–12 revenues from its PIT and CT proposals with a new budgetary accrual technique that accrues a portion of final payments to the prior fiscal year. Such final payments previously have been accrued to the same fiscal year in which they are received. The new accrual method increases estimated General Fund revenues in 2010–11 and 2011–12 (combined) by $860 million.  Does this sound like “cooking the books” to anyone else? I know politicians aren’t accountants or mathematicians, but let’s not lie to the public and expect them to take everything at face value.

There are many other organizations and individuals who have already gone on record in support of the EZ program including chambers of commerce & mayors throughout the State, assembly members and senators representing both parties. The ultimate fate of the EZ program is still unclear, but bipartisan lawmakers are some of the strongest supporters of the program. The legislators argue the program’s economic incentives are crucial to reviving the state’s weak economy. Some legislators are working to shift the focus from eliminating EZs to reforming the program. Assemblyman V. Manuel Perez (D) has introduced three bills this year to bolster conversation about reforms to the program. A.B. 231, A.B. 232, and A.B.X1 11, introduced Feb. 2, would make various changes to the program. Assemblyman Luis Alejo (D), a co-author of the bills, touted the EZ program and the need to shift the debate from elimination to reform of the program at a news conference Feb. 11 in the Salinas Valley EZ. “These bills that we have introduced are meant as a catalyst for changing the discussion from cutting the enterprise zone program to reforming it and making it more effective,” Alejo said.

Don’t get me wrong, we need to fix the budget issues in California. But not at the expense of economic development programs that help businesses create jobs and increase investment in our State. The EZ program does just that. I have personal knowledge of companies that would not have stayed in California, hired new employees nor made significant investments but for the Enterprise Zone program. Let’s tell Jerry Brown that we want California to be open for business. Now and forever.

While working in the industry for 20 years, Scott has been a frequent speaker at the Tax Executives Institute and authored numerous articles in Site Selection and Area Development magazines. You can find him on LinkedIn (http://www.linkedin.com/pub/scott-nelson/0/258/696) and his company on Twitter @tig535 (http://twitter.com/#!/tig535).

SBA free workshop 2/16 “How to Negotiate a Commercial Lease”

“You just found what you think is the perfect space for your new business, and you are ready to sit down and talk to the landlord. Now what?  We’ll provide a primer on how to negotiate the best deal for your company.  You will learn the lease process from start to finish, whether or your new space is an office, biotech space, restaurant, store or warehouse. “ 

 If you are a business owner interested in the commercial leasing process, the Small Business Association is providing a free workshop in its offices on  Wednesday, 2/16, from 6pm-8pm at 425 Market Street in San Francisco. I will be there, along with Rosanna Russell of the Rimon Law Group, with a lively group full of questions.

For more information, go to this website.

Charts, Maps, and Company Report

To go along with the recent post on state of the market last quarter, here is the report with additional material from Grubb & Ellis’  research department plus a map of subdistricts showing high rental rates of certain South of Market areas compared to Northof Market sections of the City.  You may be surprised at the discrepancy.

San Francisco Office Market 4th Quarter 2010 Review

Nascent Signs of Improvement

The quarter ended with city-wide vacancy of 17.4% after beginning at 17.7%, a positive decrease.  Available space eased into 13.2 million square feet from 13.6 million, another small drop. Net absorption did increase 57%–but it was an underwhelming change from 102,68  to 161,981 square feet.  2010 still managed to end with an almost 60% increase in absorption compared to 2009, from negative 1,100,000sf to negative 700,000 square feet. Still negative, but in a positive direction.

• Asking rental rates rose again in 4th quarter, Class A buildings to $34.36, a 2% increase, and Class B to $28.27, a 2.6% increase.  Real rental rates, however, spiked 20-35% over the year in certain SOMA properties with iconic tenants and locations. A prestigious address on Montgomery and California Streets? Practically usurped by tech tenants on Townsend and South Park in SOMA. In fact, many Class B buildings in that submarket have surpassed Class A building rates North of Market and beyond.
• Impressive leasing activity, approximately 1.6 million square feet, was led by CNET’s 282,400 sf renewal at 235 2nd Street. Hills Plaza landed both Wharton School of Business, moving into 34,700 sf at 2 Harrison, and Google, expanding another 63,600 square feet at 345 Spear. KKR Financial Corp; Adaptive Path; Eventbrite; Aliph; Macy’s.com; Berry, Appleman & Leiden; and Federated Media are indicative of larger-sized tenants inking transactions in the quarter. However, companies under 15,000 sf, usually tech firms, still drive the market.
• Sales of buildings in the quarter rocketed, especially in December, partially because Proposition N passed in the November election to increase transfer taxes .5%-1% on properties over $5 million selling after 12/17.  Two North of Market transactions were Hudson Pacific’s purchase of 222 Kearny/180 Sutter and Principal Global Investors/Lincoln Property’s acquisition of 655 Montgomery. Hudson Pacific also took down 1455 Market Street (in a joint venture with Bank of America/Strada Investment Group) in the Civic Center submarket.
• Sales velocity South of Market was off the charts: Hudson Pacific bought 51% (the office portion) of Rincon Center in a joint venture with Beacon Capital Partners. New Urban Properties scooped up 144-54 and 156-60 Second Street. TMG Partners/ Rockwood Capital bought 680 Folsom and 50 Hawthorne Street. 340 Brannan sold to TA Associates and 625 Third Street to PMI Properties. After purchasing 303 2nd Street in September, Kilroy Realty added 100 First Street to end their year on a high note. 500 Terry Francois, soon to be sold again, found Lionstone Group its latest owner, a group that also bought 298 Utah in September. PMI bought 625 3rd Street, while the 77 Federal Street warehouses sold to SF Rents. Continental Development’s 155 Fifth Street got a joint venture boost from TMG Partners.
• Sale of the Quarter and the Year: Salesforce.com, one of America’s largest technology companies currently headquartered at One Market and occupying at least 750,000 square feet in its various locations, announced a game-changing purchase of 14 acres in Mission Bay for $278 million from Alexandria Real Estate Equities. Approved for up to 2 million square feet of offices, the coveted land is slated to be the company’s future global headquarters. Overnight, Mission Bay went from a biotech hub surrounded by residential development to a biotech hub with an office concentration surrounded by residential development.  Where will all the other biotech and office tenants craving Mission Bay go now?

For Early 2011 (and Beyond):

• Savvy tech (and other) tenants expand location horizons quickly, not only because inventory is scarce around the Ballpark and Caltrain but also because of better rents and more concessions elsewhere in town.  Landlords vie heavily to draw a name, hub tenant that will magnetize others to their building.
• Even with economic stability and job creation, companies continue to re-think, downsize, and return space as they become more and more efficient, employing fewer to do more in less space per person.
• Pier 70, the 25-acre Port of San Francisco-controlled site contiguous to Mission Bay to the south, is the next phoenix rising as major developers prepare bid packages and designs for a new neighborhood.
• Aggressive actions by lenders electing foreclosure over workout bring a few more sale properties to market. Witness 500 Sansome, a 150,000 sf building, and the three-building 888 Brannan portfolio of 539,600sf, both recently taken back by Wells Fargo. This will only partially sate the property-hungry. Off-market deals still proliferate.
• Endings and beginnings blur.  2011 momentum is expected to out-perform 2010, but outside forces could always interfere.  The City is at the mercy of a new mayoral election this year, and the power of national politics and the economy can never be discounted.
• For more information on companies, comps, size/$$ paid, or other information, please contact me anytime  janine.watson@grubb-ellis.com

Grubb & Ellis San Francisco 3rd Quarter Office Update

From our marketing department, here are more stats and general overview referenced in the previous post for trends of the quarter. 

And today just happens to be election day, so cast that vote–and Go, Giants!!!!  See you at the parade tomorrow.

San Francisco Office Market 3rd Quarter 2010 Update

The 2010 3rd quarter office market in the City inches backwards,
then forward.

• The quarter ended with a citywide vacancy of around 17.7%, which is a drop from the previous quarter of 18.3%.  Rental rates are creeping up in certain buildings and markets. Leasing activity is stronger and fewer new subleases hit.  Sluggishness is out and forward movement is in—maybe not fast forward yet, but a significant change is in the air in the last few months.
• Tech tenants requiring precise geographical boundaries of only a few blocks from AT&T Park and Caltrain, short(er)-term space, and a creative build-out are paying the highest rates in town, except perhaps for view space in a select few Class A properties. Of the top 15 deals this quarter (both for renewals and new leases), only 3 were in buildings north of Market Street, (18% of 1,150,000sf).
• Activity still on track in 4th quarter is mainly a tech-driven surge, but not only:  witness large requirements from Dolby, Twitter, Sephora, Morgan Stanley,  Autodesk, Goodby Silverstein, Salesforce, Kaiser Permanente, and Adobe, to name a few.  Also count various state of California and federal government requirements, not to mention the Academy of Art, which is almost always in the market for something or other. More details from the latest G&E report fon vacancy, rental rates, and leasing activity will be posted Monday, November 1st.  
• Investment sales activity would be higher if there were more inventory, so buyers are seeking off-market transactions and direct distressed assets in order to find more properties to park that cash in.  Prominent transactions that did close include 170 Columbus, 351 California, 208 Utah, 555-575 Market, and 255 Market.

For the remainder of 2010 (and Beyond):

• The leasing market will not set records but will continue its momentum as Silicon Valley companies add continued fuel to San Francisco’s home-grown strong growth firms.  Employees want to live here or if that’s not possible, they want to work here; and they want to work around one another.  They do not want to work in boring, institutional-looking space.  The least a building owner should at doing now is tearing out 2 X 4 grids to create exposed ceilings—it’s not just tech tenants who prefer high ceilings and light-filled workplaces. 
• FASB rule changes proposed for all companies using GAAP accounting will alter the landscape—could be a sea change for some– in leasing and sales. Staying abreast of new rules and regulations will necessarily be on firms’ agendas as details are firmed up.
• Data points will move up in investment sales.  Ditto for rental rates in certain buildings. Nonetheless, there are still fabulous deals for buyers—investors and owner/users—and for tenants taking new space or renewing in place.  Savvy companies can still find outstanding opportunities in these fragmented times.