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Posted Nov 4, 2007, 5:25 PM
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Green Berniecrat
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Join Date: Oct 2006
Location: Richmond/Eureka, CA
Posts: 1,689
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I'm not sure if anyone has posted this before, but this article comes up on some interesting office space notes:
Quote:
Speculation frenzy - Building offices without tenants already in hand has reached a level not seen in the Bay Area since the Reagan era
San Francisco Business Times - by J.K. Dineen
Friday, October 26, 2007
With building crews setting up on sites from Mission Street to Mission Bay, San Francisco is in the midst of a speculative commercial development boom unmatched since the 1980s.
Construction has started -- or is expected to start shortly -- on some 1.9 million square feet of new building.
At 555 Mission St., Turner Construction is pouring a floor a week on Tishman Speyer's 550,000-square-foot development. At 500 Terry Francois Blvd., Swinerton Builders recently topped off Lowe Enterprises' 300,000-square-foot office building. Deeper into Mission Bay, Alexandria Real Estate Equities has finished driving piles on its next Owens Street building, a 160,000-square-foot structure that could either house biotech or traditional technology.
Meanwhile, Beacon Capital Partners is pulling permits for its 535 Mission St., a 300,000-square-foot building and could begin construction in December.
And the activity is not limited to the city. Bay Area wide, some 9.7 million square feet of new office space is set to come online over the next three years, according to Mike Kamm, CEO of NAI BT Commercial.
In downtown Oakland, Shorenstein and financial partner MetLife recently said they would build a 500,000-square-foot speculative building. And in South San Francisco, construction has started on Myers Development's 697,000-square-foot Centennial campus.
An analysis by Frank Fudem of NAI BT Commercial found 1.5 million square feet will be delivered in San Francisco in 2008, although two of the developments, Wilson Meany Sullivan's Foundry Square 1 and Shorenstein's 499 Illinois St., already have tenants.
In addition, some 1.8 million of fully renovated space will be added in the city next year, including some 800,000 square feet at the SF Mart building and 400,000 square feet at TMG Partners' 680 Folsom St.
"I say bring it on," said Fudem. "When you look at the past at speculative building, they do eventually lease up and do contribute to the economy. San Francisco's economy and tax base can't grow if our ability to house job providers doesn't grow."
The construction activity has sparked a debate in commercial real estate circles over the strength of demand for new office space. Most brokerages are tracking about 2.5 million square feet of tenant demand in the city. Contrast that with the 5.6 million square feet now available in downtown San Francisco (including 700,000 of sublease space), and it appears that there are ample options for most average city tenants.
New space also tends to be more expensive, especially highrise, which costs upwards of $650 a square foot to build. Tishman Speyer and Beacon are both expecting to fetch an average of $65 a square foot for their Mission Street highrises. Since it's the first out of the ground, many brokers expect 555 Mission St. to attract a big name law firm or bank before the end of 2008, when it will be delivered.
While mid-level space at Embarcadero Center is leasing in the $60s, and higher space for $75 a square foot, asking rates in the central business district average about $50.
Studley executive vice president and co-branch manager Steve Barker said the $60 a square foot is the "minimum average rent any new building needs to get to have a fighting chance."
Add to that the cost of high-end corporate tenant improvements, and companies will pay a premium to be in new space. Much existing empty space has been recently improved and thus would be cheaper to build out.
"How are they going to lease space in the $60s, $70s, and $80s when there is so much space, with residual (tenant improvements) in the $40s and $50s?" asked Barker, who represents tenants exclusively. "Something has to be driving new buildings going up other than the age-old test of supply and demand."
Kevin Brennan, also a Studley executive VP, said there has to be a compelling reason to shell out an extra 20 percent a month in rents.
"Why would you go to a new building for higher rents? Either you're the type of tenant that really wants to be in a new, sexy building, or you can't find enough space elsewhere. Meaning you're a big tenant, need a 100,000 square feet and don't have other options."
Jones Lang LaSalle Managing Director Wes Powell said with a 9.3 percent vacancy and four years of positive absorption, "the market is healthy and the market could use these buildings."
"There are a number of large tenants having trouble finding headquarters blocks of space with built-in expansion opportunities," said Powell.
In addition to the banks and law firms who are typically drawn to the most prestigious buildings, tech firms may be increasingly looking for better city space. Thus far, 2007 has been defined by accelerated interest in San Francisco from the tech firms that have traditionally grown at suburban-style campuses in Silicon Valley.
Fox Interactive recently took 35,000 square feet for MySpace, joining Google, Cisco, Microsoft, Yahoo and Autodesk on the list of tech firms that have taken significant chunks of space this year.
"To be clear, these are not dot-com losers, these are successful, profitable, growing companies," said Powell.
While tech companies historically prefer low-rise buildings with big floorplates, well established companies like Google and Microsoft may be interested in establishing a downtown presence as they mature, according to economist Peter Linneman, professor of real estate at Wharton School of Business and editor of the Linneman Letter, an industry report.
While tech companies historically prefer low-rise buildings with big floorplates, well established companies like Google and Microsoft may be interested in establishing a downtown presence as they mature, according to economist Peter Linneman, professor of real estate at Wharton School of Business and editor of the Linneman Letter, an industry report.
"The great companies of the day tend to drift to the great addresses," said Linneman.
The question may be how much firms are willing to pay for downtown views and pedigree. A recent report by Jones Lang LaSalle found that rents in San Francisco, more than any major market, have the furthest to climb to equal dot-com highs. While Chicago and Boston are already approaching their 2000 peaks, San Francisco rents are just 57 percent of what they were at the dot-com apex.
As a top broker for building owners, Powell said tenant demand is robust.
"What I'm seeing across a large cross section of the market is that small and medium-sized tenants are growing," said Powell. "The 7,000-square-foot tenant needs 10,000. The 12,000-square-foot tenant needs 16,000. This is organic growth."
Still, speculative commercial development is risky and the seven-year deals mean that landlords are stuck with low rents for a while if they time the market wrong. Linneman said he expects a recession starting in 2009 and going into 2010.
"We think 2009 and 2010 will be a very risky time to be bringing on speculative office space. I would be wary," he said.
Buildings completed in this time, he said, "may take three or four years to lease."
Architect Jeffrey Heller of HellerManus, who worked on several of the new office buildings under construction, said the number of developers interested in doing commercial spec projects has continued to jump as the national housing woes have caused uncertainty in the condo market.
"The office market is still toasty," he said.
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Reject the lesser evil and fight for the greater good like our lives depend on it, because they do!
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