Despite Sector Decline, Local Developers Have Hope

Part 2 of 2-part series

SAN FRANCISCO-Although it is difficult to predict just how long and severe the current downturn will be, one thing we do know is that any economic times such as these become a test of sector resilience. And as discussed in part one of the two-part Bay Area market overview on GlobeSt.com, the technology market is faring well, and is expected to lead the recovery out of the current recession. The same cannot be said for other sectors in the Bay Area.

Office SlowdownSublease is a word we are hearing more and more in the Bay area’s office sector, as the amount of available space is becoming a major factor in the local leasing market. Since this time last year, the ratio of available direct space to available sublease space has increased from 15% to nearly 30%, a CBRE report states. “As this ratio continues to increase, overall asking rates will fall as well in order to compete.”

Centennial Towers project

In Palo Alto, Google’s sublease at 395 Page Mill Rd. represented nearly 225,000 square feet of newly available space in Q4 alone, as the company consolidated Googlers into existing office.

Also, three construction projects were completed in the quarter and contributed to the increase in overall vacancy of 180 basis points, according to the report. The largest was the completion of the South tower of the Centennial Towers project, totaling more than 300,000 square feet of available space in South San Francisco. The five-building project at Clearview Way in San Mateo was also completed, with roughly 75% of the 270,000-square-foot project available for lease.

555 Mission St.

New product delivery in 2008 also included Tishman Speyer/Morgan Stanley’s speculative 552,000-square-foot office building at 555 Mission St.; Morgan Stanley’s 335,000-square-foot office building at 400 Howard St. that was 100% pre-leased to Barclay’s Global Investors; and RREEF/McCarthy Cook’s 175,000-square-foot addition to185 Berry St.

400 Howard St.

Not all projects reached the completion stage. Beacon Capital Partners broke ground and then immediately halted construction of a 290,000-square-foot speculative office building located at 535 Mission St., and RREEF/TMG delayed delivery of a 500,000-square-foot office renovation/addition located at 680 Folsom St. Also, Broadway Partners were scheduled to deliver vertical expansion to two properties, 100 California St. and 120 Howard St., however neither project will move forward as planned, according to Jay Sternberg, a senior vice president in the San Francisco office of Colliers International.

185 Berry St.

On the transaction side, the market has come to a screeching halt with no significant acquisitions being transacted in the area. Tomas Schoenberg, a senior vice president of investments at the Swig Co., a San Francisco-based private real estate investment firm, attributes this to several factors: the wide gap between sellers and buyers expectations combined with the lack of acquisitions data points on which to determine fair market value which has created a pricing imbalance; a lack of debt financing; the focus on distressed assets on the part of equity capital; and risk aversion. “The institutions that historically provided capital for acquisitions and development are either unable or unwilling to commit capital to new transactions,” he says. “The result of all the above has been capital markets paralysis,” he adds that “Until the downward spiral of the banking and financial services industries can be stopped and a gradual return to stability can be reached, the real estate investment market will continue to stagnate.”

Sternberg

Sternberg’s comments can be backed up by these examples, where properties brought to market in 2008 failed to close. Examples include: One Sansome St. and 50 Beale St., owned by Broadway Partners; 555-575 Market St., owned by RREEF, and interests in high-profile assets 101 California St. and 120 Kearney St. Sternberg did note, however, that he foresees an increase in sales velocity in 2010 as the bid-ask spread tightens and the equity markets begin to cycle equity through the system.

There is still some hope from local developers. In a recent interview with GlobeSt.com, San Francisco-based Myers Development Co. chairman and CEO Jack Myers said that “we think that the worst of all that’s been going on is behind us, and [we] have an abiding belief and respect for the Peninsula market. While these are disappointing times when it comes to leasing the market, the fundamentals over time are pretty solid.” (To read the full story, visit http://www.globest.com/news/1316_1316/sanfrancisco/176030-1.html).