New 17 Year High...In Office Vacancy Rate

Well it can't always be optimistic news... An  article from Reuters today reported that according to real estate research firm Reis Inc.,  Q2 - 2010 office vacancies in the U.S. rose to 17.4%, the highest levels since 1993.  

The report went onto state that vacancy rates could still be heading up, with a probable weak 3rd quarter ahead, based on slowing job growth and dropping consumer confidence.

Locally there are still some signs of life, specifically in the Oakland area. Class-A rents in Oakland recently climbed to match Class-A rents in San Francisco. Additionally, nearly all of the 115,000 square feet of downtown Oakland Class-A space vacated in 2008 by American Presidents Lines (APL), has now been filled by various companies.   

More East Bay Commercial Defaults

Reports in the Oakland Tribune this morning about two East Bay commercial buildings falling into default. 1111 Jackson Street in Oakland,  and the Berkeley Tower at 2120 University Ave in Berkeley, have been pushed into default by Bank of America, lender on both properties.

1111 Jackson St. in Oakland: Photo courtesy of Laura A Oda, Bay Area News Group 

The properties were purchased back in 2007 by an affiliate of Scanlan Kemper Bard (SKB), a large Oregon based commercial real estate merchant banking group.

This is simply another chapter in the death and re-birth of commercial real estate. It appears clear that rather than the CRE Tsunami that many experts called for, we are actually going to experience a slow moving tropical storm.  Defaults will consistently crop up over the next several years, but not the chaotic crash that we experienced in the housing market.

Defaults are nasty but necessary. Old owners who are sitting on underwater properties get cleared out - and new owners can buy good property at current market prices, allowing for rents to be lowered, commissions to be paid, and TI allowances to be offered.

Shadow Space Impact on Vacancies

Report from CNBC reporter Diana Olick regarding the impact of "Shadow Space" on the major metropolitan office markets. Shadow space is loosely defined as space that is leased but not occupied (generally due to corporate downsizing). Essentially it is vacant space that doesn't show up on the vacancy reports because someone is still paying for it.

Charts Courtesy of CNBC.com

The report notes that if you add up all the shadow inventory, it equals roughly 420 million additional square feet of vacant space (approximately the size of all the office space in New York City).

BIFMA Revises 2010 Office Furniture Forecast

The Business and Institutional Furniture Manufacturers Association (BIFMA), has revised their 2010 forecast (again), now looking for a -5.1% decline in shipments for the year, versus the -3.8% decline they revised back in March (BIFMA Updates 2010 Office Furniture Forecast). BIFMA is now looking for 2010 production of $7.45 billion. For some historical perspective, BIFMA records go back to 1991, and only 1991 had lower production numbers than the current forecast for 2010.

The silver lining in the cloudy forecast is that Office Furniture is mirroring Commercial Real Estate (CRE Forecast - 2010 BAD - 2011 - Better...), which is looking for a strong rebound in 2011. BIFMA is calling for a sharp +11.1% increase of Office Furniture production in 2011, to $8.27 billion. While any increase is welcome, a quick check of the historical data shows that we have to go all the way back to 1993, to find lower production numbers than the current forecast for 2011.

CRE Forecast - 2010 BAD - 2011 - Better...

Confirming what I've heard from many in the local commercial brokerage community, the National Association of Realtors (NAR) is forecasting a rise in vacancy rates through 2010, with recovery coming in 2011.

 1330 Broadway, Oakland Ca.

The NAR is calling for Q1 2011 office vacancies to peak at 17.6%, before easing later in the year. The forecast also calls for negative net absorbtion of office space to peak in 2010 at 24.6 million square feet, before generating a positive 25.5 million square feet of absorbtion in 2011. 

As far back as the middle of 2009, the general consensus from the brokers I'd spoken with was that 2010 was going to be a "lost year", and that things were not going to pick up until 2011. Looks like that forecast is right on target...

Another One Bites The Dust..OR Death of a Zombie Building...

2300 Clayton Road, aka One Concord Center, aka "Zombie Building", a 15 story Class-A building in Concord Ca. has slipped into default.

Photo Credit: Susan Tripp Pollard/Inside Bay Area.com

This is the fourth time since November 2009, and the third time in the past 60 days, that I have posted a local Class-A building going into default. However, this one (as they say) is different. Different because it hits very close to home (literally down the street from our office), and different because it is a property where I have multiple clients, and a tremendous respect for the property management staff.

The story could be a bad horror movie, "Attack of the Zombie Buildings..." that keeps re-playing. It goes like this:

• Large investors purchase Class-A building at the top of the market.
• Market crashes - existing tenants close, consolidate, or simply disapear in the middle of the night
• Ownership ends up "underwater", can't refinance, can't adjust rents, can't fund TI dollars
• Brokers start avoiding the building for all the reasons listed above hence - no new tenants
• Ownership stops making payments - building goes into default

The happy ending at the end of the story is after the unavoidable default, and foreclosure process, new ownership comes in and; lowers rents, funds TI dollars, and restores the former "Zombie Building" back to health. (and we all live happily ever after...)

IFMA White Paper: Economics of Sustainability in Commercial Real Estate

The IFMA Foundation has released "The Economics of Sustainability in Commercial Real Estate". The white paper provides "a practical, real-world study of the incentives and motivations of real estate managers to invest in energy efficiency retrofits."

Some of the research findings:

• Commercial building owners often find the best return on investment in sustainable upgrades before a significant lease rollover.
• Public perception is a driving factor for many public companies considering energy efficiency improvements.
• Owners are more likely to invest in energy efficient upgrades when tax incentives are in place.

You can download the study (HERE) - PDF.

How Lease Expirations are Impacting Used Office Furniture Supply...

In the past three days I have had the opportunity to look at more quality used office furniture then I've seen in the past three years. The two inventories I looked at shared a lot of characteristics:

• Both were in excess of 75 offices (combination of cubicles and private offices)
• Both had been purchased within the last five to seven years by Fortune 1000 corporations
• Both were located in the same East Bay city (in fact literally across the street from each other)
• Both were being liquidated due to corporate "consolidation"

These inventories were a sharp departure from the mortgage and residential real estate left-overs that have been filling up the local landfills for the past eight years. Interesting that everyone expects there to be an abundance of used office furniture available right now, but the fact is that the Bay Area in general, and the East Bay in particular ran on mortgage and residential real estate after the Dot-Com bust. These industries in general bought the cheapest products available, so there simply hasn't been a consistent supply of quality used office furniture since late 2004.

Now I'm wondering if all that is about to change...The companies that called me in to review their inventories are not distressed, they appear to be going through an orderly "wind-down" of these particular sites, which is clearly tied to their lease expiration. The products were all A-Grade, both in terms of design and the way the offices were planned. I'm thinking that we may see a rise in the quality and quantity of available used office furniture in the Bay Area, as we see the leases signed by large users in the 2000 to 2005 era expire.

S.F. & Oakland - Top List of Best Cities for Green Building

Lots of dueling surveys floating around these days -- Just this past Friday I posted: SF Ranked # 3 in Green Buildings... which highlighted the fact that the U.S. EPA ranked the San Francisco Metro Area in third place for having the most energy efficient buildings (Washington D.C. was 1st and L.A. was 2nd). Today comes a survey from Cushman & Wakefield ranking the top 25 U.S. Markets in Opportunity for Green Building, and San Francisco comes in 1st ,with Oakland in 2nd.

The Green Building Opportunity Index, conducted by Cushman & Wakefield, in collaboration with the Northwest Energy Efficiency Alliance's (NEEA) BetterBricks initiative, is the first office market assessment tool to provide comparisons of top U.S. office markets on the basis of both real estate fundamentals and green development considerations. Unlike the EPA survey which focuses on the number of Energy Star-labeled buildings in each city, the Green Building Opportunity Index ranks each market on multiple factors, in addition to the number of Energy Star labeled and LEED certified buildings.

According to the index, the top 12 markets overall were:

1. San Francisco
2. Oakland
3. Midtown - New York
4. L.A.
5. Chicago
6. Orange County
7. Downtown New York
8. Washington D.C.
9. San Diego
10. Boston
11. Seattle
12. Portland Ore.

To see the complete national overview click: (HERE)

Commercial Real Estate - Getting Interesting Again...

Lots of interesting things going on in Commercial Real Estate (CRE) right now, both nationally and locally.

Nationally: Costar reported on the survey results of the PricewaterhouseCoopers Korpacz Real Estate Survey:

• Cap-Rates: "Survey respondents forecast that overall cap rates will hold steady in 19 of the survey's 30 markets over the next six months. This compares to the fourth-quarter survey, when participants forecast cap rate stabilization in just two markets."
• Available Credit: "Looming debt maturities and delinquencies will continue to pose major hurdles for owners and lenders going forward...However, lenders appear more willing to extend credit to commercial real estate investors, though at more conservative underwriting and equity requirements than in the past."
• Rental Rates: "(E)xpect rental rate declines and vacancies to flatten overall in coming quarters. To offset weak tenant demand, investors reported the continued need to offer potential tenants free rent during lease negotiations..."

Locally: Lots of movement and expansion by some of the regional Commercial Real Estate Brokerages.

• Jones Lange Lasalle: Added Jason Volpe as a Senior VP to their San Francisco office. Volpe was most recently with Studley in Chicago and San Francisco. This is the second "marquee" broker that has joined JLL in the past year (in July of 2009 Kevin Brennan, another top broker, left Studley and joined JLL).
• Cornish & Carey: Recently opened two new North Bay offices, one in Larkspur and one in Santa Rosa.
• Grubb & Ellis: Hired long-time East Bay power broker Ed Del Beccaro away from Colliers International to manage Grubb's Walnut Creek office.

These are not small investments, and indicate to me that these firms are gearing up for a recovery in late 2010.

Tishman Speyer tosses the keys...Another one bites the dust...

Tishman Speyer, once one of the nation's most respected commercial real estate developers, is now "exhibit A" of the commercial real estate implosion, as they leave a trail of projects collapsing into foreclosure from coast to coast.

Already infamous for the largest commercial foreclosure in history, the dramatic collapse of the Manhattan-based Peter Cooper Village and Stuvesant Town Apartment complex (purchased in 2006 for $5.4 Billion and most recently valued at $1.8 Billion), Tishman Speyer has "graced" Northern California with its presence, by "returning the keys" of the Santa Clara Towers, twin 11 story towers totaling 422,485 square feet, to San Francisco based Shorenstein Properties, according to recent reports in the San Francisco Business Times.

Santa Clara Towers

The story on Santa Clara Towers is pretty typical, Tishman Speyer purchased the project in 2007 for $213 million, and now the value of the project is less than the total outstanding debt. Rather than continue to pay off its obligations, Tishman Speyer agreed to a consensual transaction with Shorenstein, which holds the "mezzanine loan" on the project, and now will assume ownership of the buildings.

Amazing how accepted it has become to default on a loan these days.

CRE issues lurking just over the horizion...

My East Bay neighbors, Foresight Analytics, appear bound and determined to stomp on my "rose-colored" outlook regarding the long-term state of the Commercial Real Estate industry. An article posted on housingwire.com , featured Forsight's most recent report, which noted that between 2010 and 2014, $770 billion in commercial loans will be on properties in negative equity.

According to the article, the good news, is that only 36% of the $270 billion set to mature in 2010 will be underwater. The bad news is that the percentages accelerate to a peak in 2012 at 63%. The really bad news is that a large amount of these loans will need to be written down by the banks who hold the loans, which will pose a significant (some say systemic) risk, for both community banks and larger commercial banks.

I am a big believer in letting the markets take care of themselves. Foreclosures cleanse the system, allowing new ownership to invest capital and make deals (which in turn means office furniture sales). Having said that, I don't think allowing a catastrophic situation where credit locks up is acceptable. It appears that Washington is aware of the pending issue, lets hope that the Red State/Blue State bunch can work together for once to create some reasonable "work-out" process.

Nationwide Office Market posts stronger than expected Q4 results

An article on costar.com reported that "the U.S. office market unexpectedly posted positive net absorption" (more space occupied than vacated) during the 4th quarter of 2010. The most likely reason for this surprise result was an increase in jobs in the office sector. The article noted that "since the end of August (2009), office-using employment is up 154,000 jobs."

Unfortunately for those of us on the west coast, things aren't so rosy. Orange County posted negative net absorption (more space vacated than occupied) of 1 million square feet, San Francisco comes in a close 2nd with negative net absorption of 900,000 square feet. All told Washington, Oregon, and California combined for negative net absorption of over 2 million square feet.

To read the complete article please click (HERE).

Nobody Lending...Not so say the bankers...

I don't envy anyone in commercial banking these days. From one side comes the hue and cry "we bailed you out - but you aren't lending any money" while the other side is screaming about the "lax lending and bad loans" that got us into this mess in the first place.

According to a reuters.com story this week, lenders surveyed at the Commercial Mortgage Securities Association conference in Washington, agreed that there was "plenty of cash for office, retail and apartment buildings with solid cash flow and low debt..." However, "lenders were not willing to extend billions of dollars for maturing loans made at the top of the market..." In other words, we have plenty of money for projects that look great, but we aren't lending to those poor suckers who bought at the top (who are the ones screaming that no one will lend to them).

Is this such a bad thing? I know it means pain and suffering for those who won't be able to roll their financing over, however we have recently seen that the foreclosure timeline from notice (death) to auction (re-birth) is about 6 months. Forget "extend and pretend" - take your medicine and let the market work, so the rest of us can get back to business.

Time to negotiate a SPECTACULAR lease...

With the dramatic crash of the commercial real estate market, there may never be a better time to lease office space. Having said that, before you go into negotiate (or renegotiate) your lease, make sure you can hit the "pressure" points that will generate your greatest return.

According to a recent article published on globest.com, rather than simply asking for the basics (like tenant improvement dollars, or lower lease rates), tenants should be negotiating for things like property tax reductions.

“Tenants should negotiate lease terms that require landlords to seek property tax reductions and, if successful, to pass through savings, particularly in the case of anchor or sole tenants... Additionally, while many gross leases contain provisions whereby the tenant is responsible for increases over base year expenses, tenants should seek the benefit of decreases as well. Owners of more than 1,000 commercial properties in San Francisco have asked the Office of the Assessor-Recorder to have their property taxes reduced this year, based on lower building values.”

This article went onto highlight some additional key points (lease rates have fallen to 2006 levels, a large number of subleases are tied to a number of leases that expire within the next 12 months).

My biggest take away from this article is that negotiating a "good" lease at this time is not difficult to do given the low hanging bargains available. However, the time is right to negotiate a spectacular lease. To do this, one needs to bring in a professional Commercial Broker (preferably a dedicated tenant representative), someone who has a deep understanding of the market, and can apply the necessary pressure to grind out the spectacular deal.

To read the complete article click HERE.

333 Bush St...Snapshot of the CRE Bust

333 Bush Street in San Francisco illustrates the ruthless efficiency of the marketplace at work, and provides us with a real-life snapshot of the CRE "bust" in action. The class "A" 34 story building in downtown San Francisco was purchased at the height of the commercial real estate bubble in 2007, by developer Hines and their joint venture partner, Sterling American Property.

333 Bush Street - San Francisco Ca.

After the bankruptcy of a major tenant in 2008, the the Hines ownership team slipped into default during the summer of 2009, and the building ultimately went into foreclosure in November of 2009.

On December 3, 2009 333 Bush Street was officially turned over to its lenders (Brookfield Properties), after an auction on the steps of the San Francisco City Hall produced no offers above the debt of the property. According to published reports from Globest.com, this "acquisition is Brookfield's first in the San Francisco Market; a stated goal of the company is to build a portfolio of assets in San Francisco..."

Start to finish - from initial default to new ownership in 6 months. Lets hope that all of the messy transactions heading our way move this fast. To read the complete article from globest.com click (HERE).

Commercial Real Estate Tsunami Hits Walnut Creek Ca.

Proving there are very few "safe-harbors" from the commercial real estate tsunami, 1111 Civic Drive in Walnut Creek has slipped into default on its nearly $23 Million mortgage. Published reports in the Contra Costa Times state that "lenders...are moving towards a foreclosure of the $22.8 million loan and seizure of the office building." (to read the full article click HERE)

The building changed hands in 2007, well within the commercial real estate "death period" of 2005 - 2008, and the ownership's plans to turn the space into commercial condos never materialized.

There could yet be a happy ending (for the next ownership group). Foreclosure will "re-set" the building's value, and free up the next ownership group to actively court new tenants with lower rents and the potential of higher TI allowances. And the cycle continues....

A San Francisco Icon Goes Green...

A landmark building in San Francisco has completed its journey into the 21st century by going green. The iconic Transamerica Pyramid building, long associated with the San Francisco skyline, has acheived LEED-Gold certification.

Image CC licensed by Daniel Schwen.

In 2009, LEED certified square footage in San Francisco increased five-fold, and SF now has more green buildings than New York or Los Angeles.

A report by the San Francisco Existing Commercial Buildings Task Force, which provides "practical solutions to green the city's commercial buildings" has also recently been released.

To download a copy of the report click (HERE).

2010 - Year of the "Zombie" Building

How will the impending crash in commercial real estate play out in the field..." Knowledgeable sources in the industry are talking about 2010 as the year of the "Zombie" building... A Zombie building is an office building where the ownership no longer has the resources (capital and/or access to capital), to fund needed leasing requirements (such as Tenant Improvements and/or Commercial Broker commissions).

Word is that an unofficial "blacklist" of current or potential "zombie" buildings is already shaping up. The blacklist contains buildings that are "excluded" from being shown to potential tenants. Much like the "counter-party" risk in the stock market that hastened the demise of Bear Stearns and Lehman Brothers (where other firms stopped lending because they were afraid they would not get paid back), ending up on the "blacklist" will most likely choke off the stream of needed tenants, and speed up the death spiral of the "zombies..."

Another One Bites The Dust (again...)

Dominoes keep falling in the East Bay commercial real estate market. This time the Tri-Valley was hit (specifically Pleasanton Ca.), with the Britannia Business Center II complex falling into foreclosure. Various news outlets are reporting that the loss of key tenants Nellcor (moved out to Colorado for lower labor costs) and Chrysler (used the bankruptcy to jettison their lease obligation) strangled cash flow, forcing the foreclosure action.

Britannia II was yet another project purchased in 2005 (which was not a great year to be a buyer...)

Click HERE for the full news report...