Posted by: BayAreaComRE | November 22, 2010

The Bifurcated Bay Area – 3Q10 Wrap Up and Year-End

Here is an excerpt of the letter that went out to our clients at the end of Q3 2010.

San Francisco Giants win the 2010 World Series

If you talk to a tenant, landlord, investor, broker or the like on the current state of the market you’re going to hear about two markets. It can happen in any asset class when volatility persists and experts cannot agree.  Tenants and Landlords in San Francisco, down the Peninsula, in Silicon Valley around and up through the East Bay cannot seem to put a finger on exactly where the market is headed.  Headlines mention outlier markets like Downtown Palo Alto office product demanding an average of $4.00 per square foot and up on a monthly basis (excluding expenses) with vacancy at historical lows below 5%. Conversely parts of the Hayward industrial product market demand $0.55 per square foot on a monthly basis (excluding expenses) with vacancy soaring above 20%. With stories like these it’s hard to see where the middle ground is, and what the market is made of.

The facts remain, however; the San Francisco Bay Area continues to be a leader at the forefront of the U.S. economic recovery, and with so much intellectual capital based here, it’s truly a market leader.  We track a portfolio of 43 of the largest and brightest publicly traded companies headquartered in the Bay Area and it’s no surprise that this group outpaced the S&P 500 by more than 29% since the beginning of 2010.  On the private side, the oil of the Bay Area’s growth engine – venture capital –  has grown its largest amount since 2008 in the last two quarters.  This is great news for start-ups in the technology world who have been stealing the majority of headlines these days and fueling a lot of the leasing activity around the Bay Area.

The largest counter-trend in the Bay Area is the return of institutional investments as well as foreign capital.  As debt opportunities dried up in this last downturn with the disappearance of the traditional financing mechanisms, those sitting on the sidelines with cash were best positioned to acquire world-class properties at near-bottom pricing albeit with thin to flat return expectations.  The firming up of pricing in core markets more recently (due to increased sales volume and general improvement of the economy) has allowed investors to more accurately benchmark potential acquisitions.  The capital markets are experiencing a “barbell effect”, however, which echoes the trend of the bifurcated leasing market.  On one side of the barbell you have best in class assets that receive the most attention and an appreciation in pricing, and on the other side you have the more lackluster product getting unnecessarily punished due to the general economy. In between that, there’s little to no transaction volume.

The Bay Area economy is continually changing and evolving and this last quarter was no exception.  As the unemployment rate for California hovers around 12% currently and midterm elections are right around the corner (at the time of writing), it’s no secret that more change is on the horizon.  The commercial real estate market is no different, but it’s now more important than ever to ignore the headlines and pay attention to the fundamentals.  What’s this asset truly worth?  Why are we renewing a lease at this location?  Does relocation make sense for our balance sheet right now?  Where are our employees located as it relates to our real estate and why?  Answers to these questions should be carefully crafted, now more than ever.

Recent Sales
City Center (1.5 million square feet) for $356 Million to CBRE Investors
333 Market Street in San Francisco (600,000 sf) for $333 Million to the Korean Teachers Fund
San Francisco’s Market Center (764,000 sf) for $265 Million to Manulife Financial
303 Second in San Francisco (680,000 sf) for $237 Million to Kilroy Realty

Recent Leases
nVidia – 2777 San Tomas Expressway, Santa Clara – 500,000 square feet (renewal)
Affinia – 1701 Keystone West Business Park, Modesto – 394,000 square feet (new)
AOL – 395 Page Mill Road, Palo Alto – 225,000 square feet (new)
Deloitte & Touche – 555 Mission Street, San Francisco – 160,000 square feet

Major Tenants in the Market
South Bay – Motorola, RIM, Dell, Apple, Facebook
Oakland/ East Bay – Sutter Health, FBI, Webcore Builders
San Francisco – Environmental Protection Agency, Dolby, Farallon Capital Management, Twitter, Morgan Stanley, Riverbed Technologies

Below you can find links to each respective market in the Bay Area.

Market Reports
San Francisco Office
Oakland / East Bay Office
Oakland / East Bay Industrial
San Francisco Peninsula Office
San Francisco Peninsula Industrial
Silicon Valley Office
Silicon Valley Industrial
Global Market Reports

Top posts from BayAreaComRE.com last quarter

Why San Francisco’s Tech Surge is NOT the Dot.com BOOM (and why that’s a good thing)
Education: BOMA Standards, Square Feet Measurements and Class Designations
Tracking the Trends: Is Social Gaming the Next Big Thing? Ask Steve Jobs…

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