Commercial Real Estate Forecasters Calling for Growth in Bay Area

Commercial real estate forecasters are calling for a strong South Bay and San Francisco renaissance over the next couple years, with some saying San Francisco could return to its 2007 peak employment levels as soon as 2013.

Published reports in the The Registry (an SF Bay Area real estate monthly magazine) have forecasters calling for  "San Francisco, and to a lesser extent San Jose, [to] lead the U.S. economic recovery, with San Francisco regaining its peak 2007 employment levels no later than 2013 and San Jose not far behind, driven by business demand for its technology. But Oakland, a perennial laggard, will stay true to form, not recovering until San Francisco and San Jose are in full bloom and begin to send overflow demand its way sometime in 2014 and beyond."  Click: (HERE) to read the complete article.

In a separate story (also from the The Registry), Ken Rosen, chairman of Berkeley-based Rosen Consulting Group and Rosen Real Estate Securities, stated "Silicon Valley, which created nearly 10,000 jobs in the first three quarters, adding 1.1 percent to its employment base, is the strongest geography in Northern California and one of the strongest in the nation".  Click: (HERE) to read the complete article.

Anecdotal reports from various office furniture manufacturers and dealers confirm that activity has picked up significantly in the South Bay and San Francisco (specifically the SOMA area). I can tell you that the East Bay is still lagging, as it struggles to replace the mortgage and residential real estate and construction businesses that drove growth through the mid 2000's.

East Bay Economic Update - August 2010

Latest update from the East Bay Economic Development Alliance - take it with a grain of salt, because it feels like things are changing rapidly (for the better), and this data is now 30 days old.

Unemployment:  East Bay rate was 11.8 percent in July 2010, up from a revised 11.4 percent in June 2010, and above the year-ago estimate of 11.3 percent. This number compares to the following:

• California: 12.8 %
• Alameda County: 11.9%
• Contra Costa County 11.7%

Building Permits: The dollar value of commercial permits issued in the East Bay fell 49.9 percent when compared with the previous period. Commercial building permit values declined throughout the Bay Area during this period, falling most sharply in the Napa region (down 98.1 percent).

Industrial permits were actually up during this time period, primarily due to the East Bay and Vallejo-Fairfield regions. These areas experienced 420.4% and 310.4% increases compared to the previous period.

East Bay Economy Slowly Coming Back...

Continuing a slow steady climb back, the East Bay economy continued to grow stronger, as the unemployment rate for the region notched down to 11% in May, from 11.4% in April (California's rate was 11.9 %, and the national unemployment rate was 9.3%).

East Bay home sales increased, with a total of 8,264 new and resale homes and condos closing escrow in May. This represents an 18% increase from April, and an 11% increase from May of 2009. May Median Home Sale Prices increased, up 10.8% versus April, and 20.1% versus May of 2009.

 So what does all of this mean? From my vantage point, I see economic fundamentals continuing to incrementally improve, commercial office rental rates and sale prices are still at bargain levels, and these factors are slowly enticing businesses who have been "hibernating" during this long winter, to venture out and  "test the waters". Ignore the doom and gloom from the media...time to get back to basics.

All graphs and figures courtesy of the East Bay Economic Development Alliance

Activity Increases...

Somebody turned on the spigot -- all of a sudden I'm running out of hours in the day. Not only are we busy on the furniture side, but I spoke with two leading providers of moving, and move coordinating services, and they confirmed to me all of a sudden they are running at or above capacity.

Primary driver of this burst of activity - I believe it is the rock-bottom commercial real estate prices and lease rates, and the belief that things may not go any lower. Clients may have finally come to the conclusion that the time to move (literally and figuratively) is now.

ABI ticks down

The Architectural Billing Index (ABI) ticked down three points after nearly three straight months of improvement. The American Institute of Architects (AIA) reported the May ABI at 45.8, down three points from the 48.4 reading from April. The ABI is a recognized leading economic indicator of construction activity.

The change in direction is a surprise, as it appeared that conditions were consistently improving. AIA Chief Economist Kermit Baker provided some insight, "The overriding issue affecting the entire real estate sector is unusual caution on the part of lending institutions to provide credit for construction projects that apparently would be successful in this economic environment.”

The regional averages showed continued weakness in the South and West (anything over 50 is expanding, anything below 50 is contracting):

• Northeast (50.6)
• Midwest (48.5)
• South (45.9)
• West (42.9)

On the micro-economic level, we have seen a pretty sharp increase in activity at all client sizes, over the past 4 weeks. A local commercial broker I spoke with today indicated he thought the increase could  be due to the falling rents finally enticing tenants to venture into the market.

East Bay Economic Update

Latest East Bay economic data is in from the East Bay Economic Development Alliance.

East Bay unemployment declined in April (latest complete figures) to 11.4% from 11.9%. California unemployment for the same time period was 12.3%, and the National unemployment rate was 9.5%.

East Bay Commercial building is still taking a pounding, down nearly 60.4% versus the same evaluation period last year. Permits fell most sharply in the Napa region (down 93.2%).

Leaving on some positive news, I was in a networking meeting last week, and a prominent east bay commercial banker remarked that he was aware of a development company beginning new home construction. This was the first real new home construction start that anyone in our group was aware of, and hopefully a sign of good things to come for this area.  

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.

Private Equity Fights Back

Not a lot of "grey area" regarding Private Equity investors these days.These "masters of the universe", are getting lumped in with the Investment Bankers, and Mortgage Brokers, as prime examples of everything that is broken in our current financial system.

In an effort to combat this image, the Private Equity Council issued a report claiming that companies backed by private equity investments provide jobs for more then six million Americans, or more the five percent of all private sector workers.

Specifically for California, the report cites:
•There are approximately 1,200 private equity-backed companies based in California.
•Private equity-backed companies based in California employ nearly 440,000 workers in the U.S.
•Currently, private equity firms have invested an estimated $125.54 billion in California-based companies.
•There are 140 private equity firms in California.
•The California Public Employees’ Retirement System had $22.7 billion, or 11.6 percent of total assets, invested in its Alternative Investment Management (AIM) Program as of October 31, 2009.
•The California State Teachers’ Retirement System had $16.86 billion, or 12.6 percent, invested in private equity as of December 31, 2009.

To Access Private Equity Employment by State Click (HERE)

Now, I'm the first to point out that the Private Equity Council's data may not be completely independent or unbiased...HOWEVER, at this point any positive additions to California's economy are welcome...

The Ax Falls for 925 in the East Bay

The Contra Costa Times reported this afternoon that Chevron Corporation is cutting 925 jobs in the East Bay. 620 positions will be eliminated from its San Ramon California head quarters, and 305 jobs from its Concord California facility. The cuts are part of a larger effort to eliminate 2,000 jobs worldwide.

Chevron Corporation Facility in Concord Ca.

The cuts represent 18% of the 3,500 employees in San Ramon, and 16% of the 1,900 employees in Concord.

This is very local for me, as the Concord Chevron facility is about 1/2 mile from my office. Not a whole lot more to say about this, other than for an area still struggling to recover from the residential real estate crash, this isn't exactly helping things...

Keep a Watch on China...

Headlines from China this evening (courtesy of Bloomberg.com):

• Retail sales grew 18.5% in April
• Property prices jumped 12.8%
• The Central Bank announced new lending of $113 Billion - exceeding all expectations

Can we all agree that we have seen this movie before, and it doesn't have a happy ending. Overheated economy grows and grows - until it stops growing - and the house of cards tumbles.

Why what happens in China is relevant to an East Bay Office Furniture dealer (amongst others):

1. Imports: A large percentage of our day-to-day furniture, and a healthy percentage of components used by our high-end furniture manufacturers, are imported or directly sourced from China. Low costs have allowed us to remain highly competitive in a brutal market. A disruption to the supply chain would be very ugly (and my industry is just one of many in the same boat).
2. Exports: Products manufactured in California, and leaving via the Port of Oakland for China and the Far East are currently helping to lead the East Bay (and California) out of the recession.
3. U.S. Economy: Mainland China is the largest holder of U.S. debt. The old saying goes if China sneezes, the U.S. may catch pneumonia.

I'm not a gloom and doom guy, but if China goes through anything similar to what the U.S. has endured over the past two years, things could get very interesting very quickly.

Mixed News...

Some good news - some bad news...

Good News: The Conference Board's Leading Economic Indicators show that the recovery is in full swing, led by improvements in financial and labor market indicators. Check out the V shape:

Bad News: The FDIC moved quickly on Friday closing and then immediately selling Innovative Bank of Oakland to Center Bank of Los Angeles, and Tamalpais Bank of San Rafael to Union Bank of San Francisco. While these closures are not shocking (the media has been rumbling for sometime), they reinforce the stress that small financial institutions (and businesses) continue to endure.

Another one bites the dust....

Anyone who has journeyed south from Walnut Creek past Pleasanton has passed the 5 building Stoneridge Corporate Plaza complex (off to the right of I-680 southbound). This iconic east bay office complex is the latest property to sink into default, a continuing sign of the on-going struggle of commercial real estate.

The owners of the complex, Teachers Insurance & Annuity Association, has decided to walk away from the loan, commenting "We have decided not to make any additional payments on an outstanding mortgage loan at Stoneridge Corporate Plaza...The decision to halt mortgage payments was "made in line with our responsibility to seek what we believe are the most attractive long-term investment opportunities for our clients" said Abby Cohen, a spokeswoman for the New York City based Association.

Stoneridge Corporate Plaza is just the latest in a number of "Marquee" east bay properties to fall into default. As documented in this blog, the current wave of defaults is a necessary "cleansing" process for the market. New ownership will allow the property to become competitive by providing lower asking rents, providing Tenant Improvement funds (TI's) to entice new tenants, and by moving off the unofficial "black-list" of properties. The "black-list", is made up of commercial properties which brokers steer their clients away from, because of concerns about the financial stability of  ownership.

Thanks to the Contra Costa Times for contributing to this posting.

Economy Recovering...Somewhere Else...

It certainly appears that the macro U.S. economy is in recovery mode. Bloomberg news reported today:

"Inventories in the U.S. rose 0.5 percent in February, the most since July 2008, as companies boosted orders to try to keep up with sales". The report went onto state: "Efforts to stabilize inventories contributed 3.8 percentage points to the U.S. economy’s 5.6 percent annual rate of expansion in the fourth quarter of 2009. Last quarter’s growth rate was the strongest in six years."

Great -- unfortunately when I look at my backlog and sales forecast I don't see it yet. When I speak to an office furniture colleague in Florida, he echoes my experiences of declining sales and gross margins, with an uncertain sales funnel. When I speak to a local east bay commercial broker, he tells me things are as slow as they have been in months...

This is what golfers call "grinding"...

More Signs that the Economy is Stabilizing

The February 2010 numbers for the East Bay economy are in - and stabilization seems to be the theme.

Unemployment: East Bay unemployment was down to 11.6% in February from 12.0% in January. This compares with an overall unemployment rate for California of 12.8%.
Summary: A good start - lets see if the trend continues into the 2nd quarter. Then it might be time to get excited...

Median Home Sale Values: The median sale price increased for the fifth consecutive month due to fewer foreclosures being sold and more higher-end homes being turned over this year.
Summary: Housing market appears to have bottomed. Not sure how long we will continue to scrape and bounce along (could be years)... but it doesn't appear its going to get materially worse.

Commercial Construction Permit Values: Commercial Construction Permit Values continue to fall dramatically: -60.7% in the East Bay and -74.8% in San Francisco.
Summary: This is the toughest statistic for our industry, because no permits means no work. This number will trail everything else, time to keep holding our breath...

All statistics are courtesy of the East Bay Economic Development Alliance's Monthly Analysis. To see the actual report, click (HERE).

Bay Area Solar Company Flaming Out?

Bay Area solar panel manufacturer, Solyndra, recipient of a $535 Million U.S. Department of Energy loan, received a failing grade from its auditor PricewaterhouseCoopers LLP about its future prospects for survival. All of this taking place as Solyndra prepares for an upcoming IPO.

Courtesy of Google Earth

Having already raised $970 Million in equity financing (in addition to the US Department of Energy Loan), Solyndra reported a net loss for 2009 of $172.5 Million on $100.5 Million of revenue. In its report, PWC noted that recurring operating losses, negative cash flows, $532.3 million stockholder deficit and other factors "raise substantial doubt about...[Solyndra's] ability to continue as a going concern."

With highly visible facilities located off I-880 in Fremont, Solyndra was (and is) a bright hope for the East Bay's Clean / Green Tech future... Hopefully this is not a sign of things to come...

East Bay Economy Sputters Forward...

News of the recovery may be slightly premature, at least in the San Francisco East Bay Area... Proving that this recession is nothing, if not stubborn, most economic indicators continued to go south according to the most recent January 2010 numbers released by the East Bay Economic Development Alliance.

Unemployment: East Bay unemployment increased from 11.0% in December 2009 to 11.9% for January 2010. This does remain under the California unemployment rate of 13.2%.

Labor Force: Some good news... The Labor Force (which is the number of individuals currently employed or actively seeking employment), increased by 4,900 workers, between December 2009 and January 2010, growing to 1,276,100. However, when looking at a year-over-year comparison (January 2009 to January 2010), the East Bay actually lost 20,200 workers.

Commercial Permits: Finally in an important measure for the commercial interiors segment, Commercial Permits fell 61.5% in the East Bay, and are down over 90% in the San Francisco region.

Anecdotally: we are continuing to see a small but consistent trend of small business coming into our showroom and buying. Projects are small, but immediate -- our corporate and government clients continue to follow the trends outlined above, with projects delayed or canceled.

Economists report: East Bay Economy is getting warmed up...

A recent report, East Bay 2010 Q1 Economic Outlook, noted that the East Bay economy, "will grow slightly faster than the state as a whole, but will not see rapid growth until the latter part of 2010". The report authored by Jerry Nickelsburg, Senior Economist for the UCLA Anderson Forecast, pointed out that:

• Strong exports through the Port of Oakland will continue as the world economy recovers
• The East Bay's manufacturing base will benefit from the National "re-stocking" of inventories as the U.S. recovery continues
• The pattern of job loss is slowing, and is suggestive of job increases in early 2010

The report also pointed out some of the "challenges" facing the East Bay, including the devastated housing market (specifically in the west county region), and the continuing fiscal problems of our state and local government.

The complete report can be downloaded (HERE).

SF Bay Area Economy Stabilizing...

The Association of Bay Area Governments (ABAG), called the economic bottom today (at least for Northern California). This "gutsy" call came during ABAG's 22nd annual Bay Area Economic Outlook Conference, with economists forecasting stabilization in 2010, with slight growth in 2011.

Published reports detail that ABAG is forecasting an additional 20,000 jobs lost in 2010, but a gain of 8,000 jobs in 2011. Income growth will be negligible in 2010, however is forecast to grow 2.5% in 2011. Finally, sales growth is forecast for a tepid 1.0% in 2010, increasing to 1.9% in 2011.

Ok, this forecast isn't setting the world on fire - but at this point 0 growth is better than negative growth.

Unemployment & Construction Permits... Still looking for good news

No doom and gloom - just the facts... Here are the latest unemployment numbers and construction permit numbers for the East Bay area of Northern California:

UNEMPLOYMENT NUMBERS: East Bay unemployment was 11.5% for both Alameda and Contra Costa Counties for October of 2009, up from a revised 11.3% in September of 2009. This rate is under the overall state unemployment rate of 12.3%, but above San Francisco's rate of 9.3% and above the national rate of 9.5% for the same period.

COMMERCIAL CONSTRUCTION PERMITS: The value of commercial construction permits issued in the East Bay fell 63.8% when compared to the previous time period. Commercial permits fell throughout the region, most steeply in San Francisco, falling 86.5%.

What does all this mean... Remember these are trailing numbers, however based on everything we are seeing, and all my "informants"... we can expect more of the same at least through the 1st quarter of 2010. Not a whole lot cooking right now...

All information provided by the East Bay Economic Development Alliance.

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...