San Francisco Bay Area Commercial Real Estate

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2009 | REAL ESTATE FORECAST

SAN FRANCISCO BAY AREA

Office

Industrial

Retail

Investment

SAN FRANCISCO BAY AREA

Meeting the needs of each client Grubb & Ellis Company pioneered sophisticated real estate market research, and today we continue to lead the industry in providing vital market information and insight on timely topics that may affect your real estate needs. Global economic trends, domestic legislative changes, corporate performance – these and other

Presented by Grubb & Ellis San Francisco 415.433.1050 Grubb & Ellis Walnut Creek 925.939.3500 Grubb & Ellis San Jose 408.425.5900 Grubb & Ellis Redwood City 650.596.2460

factors affect the demand for and value of commercial real estate. Our dedicated research staff, which spans major markets throughout North America, has developed a strong foundation upon which our professionals create innovative solutions for their clients. You can access this information by visiting our 2009 Forecast Web site: www.grubb-ellis.com/research/forecast2009. Download our national overview or zero in on specific property types in your markets of interest. Print a report for a single market, or customize a book to suit your needs. We recognize that each of our clients is unique, and are committed to delivering the information you need to achieve your business objectives.

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Please contact your local Grubb & Ellis office for further information about this regional forecast or see the list of contributors. Reproduction in whole or part is permitted only with the written consent of Grubb & Ellis Company. Some of the data in this report has been gathered from third party sources and has not been independently verified by Grubb & Ellis. Grubb & Ellis makes no warranties or representations as to the completeness or accuracy thereof. Note: Year-end 2008 numbers include estimates for the fourth quarter that were derived in November. Final published numbers may vary slightly. Totals may not add precisely due to rounding. © 2008 Grubb & Ellis

To Grubb & Ellis Clients and Colleagues:

As we end 2008, it is becoming extremely clear that we are in the midst of what could be a lengthy and prolonged recession. Actually, our outlook for the commercial real estate industry changed dramatically during the third quarter of 2008 as the credit market unrest that first gripped the national economy in August 2007 escalated into a full-blown global financial crisis. Although it is difficult to predict just how long and severe the current downturn will be, we believe that we have not seen the end of weakening consumer and business confidence, slowing manufacturing activity, and rising unemployment that is currently plaguing our economy. These are all factors that impact every aspect of the commercial real estate industry. Within the commercial real estate market, the investment sector was the first to feel the effects of the credit crisis, and as a result property sales were down by two-thirds during the first three quarters of 2008 as compared with the same period in 2007. As I write this, access to capital remains extremely limited, and the leasing market is starting to more severely feel the effects of the economic uncertainty. Needless to say, this is probably the most challenging market we have experienced since the early 1990s. I can say that it is certainly the most challenging time I’ve seen in my 30 years in the real estate industry. At this point we believe it most likely will be late 2010 before we begin to see a meaningful recovery throughout the commercial real estate industry. However, there are some bright spots. Low oil prices and interest rates will allow some commercial real estate sectors to recover quicker than others. And if you are a tenant with a requirement or an investor with cash, 2009 will offer considerable opportunity. At Grubb & Ellis Company, we believe that within a challenging market there are opportunities. Our goal, as always, is to help our clients take advantage of them. We look forward to discussing the specifics of our 2009 Forecast with you, and to helping you meet your real estate goals now and into the future. Sincerely,

Gary H. Hunt Interim Chief Executive Officer Grubb & Ellis Company Table of Contents

Grubb & Ellis goes above and beyond in-depth local market research and analysis. As our clients’

Office

2

needs have evolved from bricks and mortar requirements to encompass complex global real estate

Industrial

4

issues, our industry subject matter experts contribute focused, specialized expertise to the process.

Retail

6

Investment

7

This added layer of analysis gives clients a more complete picture of the environment in which they

Company Profile

9

operate and helps us leverage our market data to help owners, users and investors construct smart,

Grubb & Ellis Research

11

innovative solutions to today’s real estate needs.

Office Directory

12

Contributors and Sources

13

© 2008 Grubb & Ellis

San Francisco Bay Area l 1

SAN FRANCISCO BAY AREA Office Weakening tenant demand will result in a softer office market in 2009. Sublease space and vacancy rates are predicted to rise while absorption and rental rates will decline. Market fundamentals will deteriorate, albeit less dramatically than they did during the dot-com bust.

Vacancy Rates

Market Overview

Although the unique industry base inherent

Year-End 30%

Challenging economic conditions will trans-

to the Bay Area will prevent market funda-

late into a difficult year for owners of

mentals from deteriorating to the degree

20%

commercial real estate in the Bay Area.

other major markets will, the ailing economy

Oakland and San Mateo were the first

will result in a slowdown in real estate trans-

markets to show signs of deterioration,

actions. Tenants will take longer to evaluate

posting negative net absorption for 2008.

lease opportunities in the face of uncertain

The stronger markets of San Jose and San

revenue projections. Financing challenges

Francisco finished 2008 with positive

will hinder demand as well. As demand

absorption, but are forecasted to record

slows and sublease space increases, down-

negative net absorption in 2009. The slow-

ward pressure on rents will escalate. Average

down

and

Class A asking rents declined in all Bay Area

deteriorating job market, coupled with the

office markets during 2008 and steeper

evaporation of business loans is sure to

reductions are anticipated. Rents are

negatively impact businesses throughout

projected to decline by 12 percent for the

the Bay Area in 2009.

entire Bay Area in 2009. Landlords will

10% 0%

00 02 04 06 08P 09F ■ Oakland/ ■ San Francisco ■ San Jose/ ■ San Francisco/ Eastbay Mid-Peninsula Silicon Valley Source: Grubb & Ellis

Historical Absorption Year-End (in Thousand SF) 5,000 0 -5,000 -10,000

00 02 04 06 08P 09F ■ Oakland/ ■ San Francisco ■ San Jose/ ■ San Francisco/ Eastbay Mid-Peninsula Silicon Valley Source: Grubb & Ellis

in

consumer

spending

In addition to the reduction in loan dollars available from struggling financial institu-

aggressively seek tenants by offering concessions such as free rent.

tions, an impending slowdown of venture

Confidence among developers has dissi-

capital investment will also adversely affect

pated and several speculative office

Asking Rental Rates

tenant demand, particularly in the Silicon

buildings have been scrapped. Construction

Year-End ($/SF/Yr. Full Service)

Valley. During 2009, venture capital invest-

activity, which was modest to begin with

ment levels will be driven significantly by the

due to geographical land constraints, will

cleantech sector, which according to the

decline to minimal levels in 2009. Market

National Venture Capital Association, “will

fundamentals will weaken as bankruptcies,

continue to grow despite economic woes

mergers and tenant contractions transpire.

and could become the top investment

Vacancy in the Bay Area office markets is

sector for the venture capital industry by

projected to rise throughout 2009. Although

2012.” Already the high-tech capital of the

Bay Area commercial real estate is in for a

world, the Bay Area will benefit in the long

rough ride in 2009, the anticipated down-

run as the global hub of the emerging clean-

turn is predicted to be less severe than the

tech and biotech industries. Revitalization of

one brought on by the dot-com collapse. A

San Francisco’s Mission Bay neighborhood

bottom in sales pricing and rents is antici-

has been led by the development of

pated to be reached in late 2009, paving the

biotechnology friendly office buildings in

way for a comeback as capital access returns

which UCSF, Phizer, FibroGen and Merck-

and economic recovery ensues.

$80

$40

$0

00 02 04 06 08P 09F ■ Oakland/ ■ San Francisco ■ San Jose/ ■ San Francisco/ Eastbay Mid-Peninsula Silicon Valley Source: Grubb & Ellis

owned Sirna Therapeutics have committed to space. 2 l San Francisco Bay Area

© 2008 Grubb & Ellis

San Francisco

vacancy to continue to rise as 1.5 million

them to shop the market for the best deals

Confidence in San Francisco’s office market

square feet slated for completion in 2009

and landlords to court tenants with more

has deteriorated in the face of a global

comes online. As the national government’s

concessions as well as continuing to offer

economic downturn. From a leasing perspec-

$740 billion bailout plan helps to free up

short-term deal options.

tive, the effects of the recession will

capital, tenants that have been sitting on the

materialize in increased sublease space, rising

sidelines will be able to benefit from quality

San Francisco/Mid-Peninsula

vacancy, lower tenant demand, deterioration

space at lower asking rates as landlords add

2008 was the first year since 2003 to show a

in rental rates and emptying of the develop-

more incentives to fill vacancies. Despite the

real pullback in the San Francisco/Mid-

ment pipeline. Capital access challenges are

negativity surrounding the economy, Silicon

Peninsula office market. While 2007 was a

expected to hinder business operations and

Valley has a silver lining when compared to

time for landlords to test tenants’ tolerance

office expansions substantially. Available

the rest of the nation.

for escalating rents, 2008 and 2009 will bring more opportunities and variety to the

sublease space, which increased in 2008, will flood the market in 2009 forcing landlords to

Oakland/East Bay

market. With a limited number of financial

lower rental rates on competitive space.

The mortgage meltdown coupled with the

tenants, and high-tech employment contin-

Although a downturn is expected, market

credit crisis weighed down the East Bay

uing to serve as the anchor for a large

fundamentals in San Francisco are predicted

office market throughout 2008. Many

portion of demand, the Peninsula office

to hold up better than in other major markets

companies

market will likely rebound ahead of the rest

due to the city’s unique tenant base and

regarding their real estate commitments

construction limitations.

and adopted a wait-and-see attitude which

remained

very

cautious

translated into four consecutive quarters of San Jose/Silicon Valley

increased vacancy and a softening of overall

Silicon Valley’s office market responded to

rents. As the national economic challenges

the economic challenges of 2008 with an

spill over into 2009, look for sublease space

increase in vacancy of approximately 50

to rise, asking rental rate erosion and

basis points per quarter, a shift from the

vacancy to continue its climb upward. As

downward trend that began the first quarter

tenants jump into the driver’s seat, watch for

of the Bay Area. With only one major construction project scheduled to complete in 2008, and a nearly empty pipeline, the San Francisco/MidPeninsula is positioned well to weather the current economic downturn. Expect rents to soften and vacancy to increase, however we should not see as deep a decline as in the previous down cycle.

of 2006. Going forward we anticipate

Key Leasing Transactions 2008 Lessee Robert Half Google Inc California State Automobile Association PG&E SF Public Utilities Commission Pfizer Inc Trend Micro Gunderson, Dettmer, Stough Rearden Commerce Inc Motorola Lab 126 Sony Ericsson © 2008 Grubb & Ellis

Lessor Sunset Land Company Prime Property Fund Equity Office Properties Trust Nearon Enterprises Metcalf Family Trust Alexandria Real Estate Blue Coat Systems Starwood Capital Harvest Properties Ariba Prometheus LBA Realty

Property 2613 Camino Ramon 345 Spear St 3055 Oak Rd (Station Landing) 3401 Crow Canyon Rd 1155 Market St 455 Mission Bay Blvd 10201 N De Anza Blvd 1200 Seaport Blvd 1001-1051 E Hillsdale Blvd 809 11th Ave 20450 Stevens Creek Blvd 100 Redwood Shores Pkwy

Submarket San Ramon South Financial Contra Costa Centre San Ramon Civic Center Mission Bay Cupertino Redwood City Foster City Sunnyvale Cupertino Redwood City

Size (SF) 236,000 195,654 166,204 140,000 140,000 105,000 104,990 98,022 91,363 91,000 70,000 62,721 San Francisco Bay Area l 3

SAN FRANCISCO BAY AREA Industrial Despite the challenges currently facing the economy, the Bay Area industrial market is poised to remain healthy throughout 2009. The market will experience demand but deal velocity will be slower than it has been over that past two years.

Vacancy Rates

Market Overview

a market driver in both the East Bay and

All Product Types, Year-End

Despite the negative national economic

Silicon Valley markets. This is in comparison

landscape, two major drivers helped main-

to the Peninsula where sublease space hit

tain

momentum

the market due to rising travel time and the

throughout 2008: clean technology activity

increased cost of fuel. Grubb & Ellis expect

and the decreasing dollar, which increased

warehouse vacancy on the Peninsula to

exports. This was in contrast to the office and

increase over the next couple of years while

retail sectors, which experienced increased

the East Bay and Silicon Valley markets

vacancy in the latter half of the year due to

remain steady.

20%

10%

0%

00 02 04 ■ Oakland/ ■ San Jose/ Eastbay Silicon Valley Source: Grubb & Ellis

06

08P 09F

positive

industrial

frozen credit markets, negative GDP and Moving forward into 2009 Grubb & Ellis

reductions in workforce.

Historical Absorption

anticipates asking rents will remain steady in

All Product Types, Year-End (in Thousand SF)

Clean technology company activity in Silicon

the East Bay and slightly decrease in Silicon

Valley and the East Bay not only maintained

Valley and Peninsula as landlords hold off on

positive market momentum but also helped

raising rates until the market regains its

to reduce any large general industrial and

balance. Tenants will remain cautious about

R&D/flex blocks of space that had been sitting

making moves until the government’s

vacant or given back to the market.

efforts begin freeing up credit, reassuring

Approximately two-thirds of the leases

them that it is time to come off the sidelines

completed in Silicon Valley in the third

and move forward with expansion plans.

quarter, over 750,000 square feet of gross

While there is still considerable uncertainty

Warehouse Asking Rental Rates

absorption, were done by clean technology

in the market, space options in the Bay Area

Year-End ($/SF/Yr. Triple Net) $12

tenants. Furthermore, two of the biggest

markets are extremely tight and landlords

deals inked in 2008 in the East Bay market

are advised to work with tenants that have

$8

were done by clean technology tenants.

upcoming lease expirations during these

$4

A weakening dollar that buoyed exports

10,000

-10,000

-30,000

00 02 04 06 ■ Oakland/Eastbay ■ San Jose/Silicon Valley

08P 09F

Source: Grubb & Ellis

$0

00 02 04 ■ Oakland/ ■ San Jose/ Eastbay Silicon Valley Source: Grubb & Ellis

06

08P 09F

overseas coupled with a desirable Bay Area

Limited industrial base inventory along with

location resulted in positive momentum in

almost no new construction coming online

warehouse/distribution space. A constrained

means there is little to compete with existing

product type, warehouse proved to be

inventory. No new construction is expected in the Silicon Valley or the East Bay in 2009 and

Key Leasing Transactions 2008 Lessee Fed Ex Coaster Super Micro BioRad Laboratories Optisolar

Lessor LBA Realty Prologis Pinole Point Sares Regis Group PNK, LLC

turbulent times.

the Peninsula expects to see 78,000 square Property 8333 Central Avenue 6753 Mowry Avenue 48350 Fremont Blvd 2100-2900 Atlas Rd 31164-31172 Huntwood Ave

Submarket Newark Newark Fremont Richmond Hayward

Size (SF) 320,875 268,538 246,450 116,500 60,000

feet. Going forward we anticipate a new economic playing field, new interest in sustaining U.S. jobs versus offshoring work, as well as continued technology innovation and environmental initiatives will help the Bay Area weather through the storm.

4 l San Francisco Bay Area

© 2008 Grubb & Ellis

San Jose/Silicon Valley

Oakland/East Bay

The Silicon Valley industrial market remained

Despite the national economic turmoil experi-

healthy throughout 2008 despite national

enced this year, the East Bay continued to post

economic challenges. Not since the last

positive market performance. This marks the

recession in 2001, which hit the technology

fourth consecutive year of positive net

sector hard and ultimately affected the

absorption in the East Bay. Although the trans-

R&D/flex product type, has industrial seen an

action volume was not as high as the previous

increase in vacancy. In this economic down-

years, it did help to push vacancy down 40

turn, real estate-related industries and the

basis points to 3.5 percent. The primary driver

office sector were affected, while technology

for this positive net absorption was ware-

companies kept market fundamentals

house space, which accounted for well over

strong in industrial.

50 percent of the positive net absorption in the market. Despite the fact that rental rates

Clean technology tenants actively leased space though at 2008 signing average lease terms of 52 months. This could mean that in the next three to four years as leases expire and these growing companies seek to

were escalating through the entire market in 2007, rents remained relatively flat in 2008. The construction pipeline, which has been empty for three consecutive years, will remain empty in 2009 as land continues to be scarce.

expand, landlords offering large blocks of space can benefit from the opportunity. But,

Watch for steady transactions and flat rental

they but will need to offer bigger tenant

rates

improvement packages to accommodate

The market will experience demand but deal

clean tech’s requirement of heavy power and

velocity will be slower than it has been over

large lab space. This trend coupled with no

the past two years. As we advance through

new developments projected to complete in

next year look for industrial investors to

the near future will offer nothing to compete

gravitate toward markets with consistent

with the already limited available inventory.

market performance, such as the East Bay, and

While this is positive for the industrial sector,

avoid more volatile markets thus eliminating

it is unlikely that it will totally escape the

unnecessary risk. Although the space options

downturn in the national and global

in the East Bay market are extremely tight,

economies. While industrial demand is often

landlords would be advised to work with their

said to be a lagging economic indicator, into

tenants that have upcoming lease expirations

2009 we expect to see slight vacancy

during these turbulent times. The Port of

increases and rental rates decreases

Oakland along with the Oakland Airport

although not to the degree experienced in

continue to identify this market as one of the

other commercial real estate sectors.

key global pathways, setting the East Bay

to

continue

throughout

2009.

apart as one of the most sought after industrial markets in the country.

© 2008 Grubb & Ellis

San Francisco Bay Area l 5

SAN FRANCISCO BAY AREA Retail Brace for a rough retail year in 2009 throughout the Bay Area - consumer confidence that is in the dumps as well as diminished consumer demand and the credit crisis coupled with a challenged housing market will put pressure on tenants as well as landlords.

Median Household Income

The wave of growth that Bay Area retail has

With stringent lending requirements and a

2008 (in Thousands)

been enjoying over the past few years came

weakened dollar, retail is in store for a rough

crashing down in 2008. The mortgage melt-

road ahead. As a result of these turbulent

down coupled with the financial crisis that

times some retailers have already filed for

the nation is wrestling with has stifled

bankruptcy protection. Examples include

consumer

confidence.

Circuit City, Mervyn’s and Sharper Image.

Consumers have clamped down on

While other companies, such as the Gap

spending in reaction to tightening credit,

have announced plans to significantly

mounting layoffs and stock market losses.

reduce the number of stores nationally.

Backing this up is the International Council

This will put additional pressure on

of Shopping Centers Chain Stores report

landlords who are already feeling the

noting the weakest retail comparable-store

pain in the market.

U.S. Average San Francisco/ Oakland/ East Bay San Jose/ Silicon Valley $0

$40

$80

Source: Claritas

Typical Rent In-line Shop Space, 2008 ($/SF/Yr. Triple Net)

demand

and

sales performance in more than 35 years.

U.S. Average

Additionally

the

Conference

Board

San Francisco

Consumer Confidence Index plummeted to

Oakland

its lowest level in the 40-year history of the

San Jose/ Silicon Valley

survey. Another market indicator to watch is $0

$40

$80

Mortgage Equity Withdrawals (MEW), which measures the availability of home equity

Source: Grubb & Ellis

through borrowing and when plotted against retail expenditures, it is evident these

Retail Square Feet Per Capita 2008

activities are in lockstep with one another. Harder to attain credit and reduced net

U.S. Average

equity values have translated into less

San Francisco

availability of MEW credit and a reduction in

Oakland

retail sales. The more discretionary in nature

San Jose/ Silicon Valley

the items seem to be, the less people will 40

44

48

spend on them in times of stress and especially in periods where one has

Source: Grubb & Ellis, CoStar, Claritas

difficulties extracting their home equity.

The Bay Area retail market will remain challenged throughout 2009. Watch for retail consolidation to continue. Rents will continue to decline as vacancies climb upward.

Landlords

will

give

more

concessions to tenants either in the form of higher tenant improvement allowances or free rent. As people still need essentials, neighborhood

centers

with

grocery

and drug stores should fare best during this time. Neighborhood shopping centers located near high-income areas are also expected to weather the storm in 2009. All signs point to another rough year for retail, but these vacancies will provide better real

estate

opportunities

and

less

competition for some retailers.

The difficult mortgage environment and the

Tenants Expanding or Downsizing 2009 Expanding or New to Market Cellular & Accessory Stores Casual Dining Restaurants Health & Personal Care Wholesale Clubs Building Materials, Garden & Supply

6 l San Francisco Bay Area

Downsizing Auto Dealerships Department Stores High End Restaurant Home Furnishings Clothing & Accessory Stores

substantial reduction in home values combined to greatly curtail borrowing and as a result, discretionary spending.

© 2008 Grubb & Ellis

SAN FRANCISCO BAY AREA Investment The credit crunch effectively ended an incredible five-year run in pricing and activity. With capital availability likely to remain limited in 2009, look for heavily leveraged investors to unload properties to cash rich buyers at reduced prices.

Average Capitalization Rates

Market Overview

property sectors. Fallout from home foreclo-

Closed Sales (2008)

Upheaval in the financial markets has

sures in the Bay Area should remain

8%

greatly disrupted commercial real estate

relatively restrained compared to some

6%

investment throughout the Bay Area,

overbuilt Southern California markets.

4%

creating a bleak outlook for 2009. The credit

2%

crisis put an end to the record pace of deal velocity achieved in 2007. Investment

0%

Office

Industrial

Retail

Apartment

Hotel

transactions totaling approximately $5 billion closed in 2008, an 82 percent decline

Source: Real Capital Analytics

in dollar volume from 2007. Marketed

Property Sales Volume (in Billions) $40,000

investment

opportunities

are

scarce

heading into 2009 as uncertainty with regards to pricing runs wild. Lack of credit

$30,000

availability in the foreseeable future will

$20,000

result in a significant slowing of capital into real estate, keeping the flow of new acqui-

$10,000

sitions $0

02 04 06 08P 09F ■ Office ■ Industrial ■ Retail ■ Apartment ■ Hotel

Source: Real Capital Analytics

minimal

throughout

2009.

Leveraged buyers are expected to reemerge in 2010 when capital access improves. Even cash-rich public pensions will have limited capacity for new invest-

Sales by Property Type 2008

Apartment Hotel Industrial Office Retail

21.3% ■ 0.4% ■ 8.9% ■ 57.7% ■ 11.7% ■

ments in 2009 as plunging stock and bond

Perspective buyers can be assured that investing in Bay Area real estate represents a tremendous long-term opportunity. San Francisco is considered the West Coast’s premier office market and one of the most dynamic real estate investment markets in the world. Technology companies continue to drive demand in San Jose where employment and income growth are robust. Oakland/East Bay remains a vital Bay Area hub housing the fourth largest port in the nation. Beyond local economic strength, investment properties are situated to benefit from the Bay Area’s standing as a coastal global pathway. Large familiar markets like San Francisco are favored in the typical flight-toquality that occurs during a downturn.

values have significantly reduced their

An upheaval among highly leveraged

asset bases. Across the board, companies

investors will create opportunities moving

have geared up for recession by reserving

forward. Cash investors will be afforded open-

cash. This new focus on solvency and cash

ings to purchase distressed properties at

management

acquisition

market lows. Ultimately prices are expected

activity for many investment companies in

to decline 20 to 30 percent from the highs

the near term.

achieved in 2007. Investors willing and able to

will

hinder

Source: Real Capital Analytics

While financial crisis grips the nation and negatively affects real estate investment nationwide, the strength of the local

take a risk by acquiring property at reduced prices in 2009 will likely position themselves to benefit greatly when recovery ensues.

economy should help Bay Area properties withstand a difficult period. The region’s uniquely diversified economy is predicted to outperform the national average, helping all

© 2008 Grubb & Ellis

San Francisco Bay Area l 7

SAN FRANCISCO BAY AREA Investment continued

San Francisco

San Jose/Silicon Valley

investment levels enjoyed just last year.

The Urban Land Institute ranks San Francisco

Overall commercial property sales in 2008

Looking toward 2009, values will continue to

as the premier city for development and the

continued to fall with transaction volume

adjust downward as a result of the credit

second-best city for commercial investment

through August off 75 percent compared to

debacle; cap rates will continue to climb by

in its Emerging Trends in Real Estate 2009

the same period in 2007. Towards the end of

at least 25 to 50 basis points creating the

report, noting, “The City by the Bay never

2008, buyers and sellers hadn’t yet settled on

opportunity for better returns and the ability

strays far from the top of the survey,

a new price level and the gap between

to acquire properties at below current

featuring a Pacific gateway with barriers to

offers and actual pricing remained wide. Into

replacement costs. Both regional and institu-

entry and quality of life, comparing favorably

2009, the investment market should begin

tional investors that have been sitting on the

to any other 24-hour market.” While property

to see slight improvement as the govern-

sidelines in the latter half of 2008 and begin-

values did fall in 2008, the ultimate decline is

ment helps to free up capital and property

ning of 2009 will take the lead in those

not expected to be as dramatic as it was

values should decrease allowing opportu-

opportunities. Back are the days of lower

during the 2000-2001 tech bust. Values are

nity for buyers with cash on hand to pick up

loan-to-value ratios, higher debt coverage

predicted to find a bottom approximately 20

quality space. Owners should continue to

ratios and stronger tenant evaluation.

to 30 percent below highs reached in 2007.

hold onto investments in 2009. San Francisco/Mid-Peninsula

Land constraints create a barrier to new construction; helping maintain the value of

Oakland/East Bay

The San Francisco/Mid-Peninsula investment

existing investment quality properties.

What a difference a year makes with 2008

market has been hit significantly by a much

investment transaction volumes down

tighter credit market and an economic

significantly compared to the robust

decline. Only a handful of properties traded hands in 2008, and with rents on the decline

Key Investment Transactions

buyers and sellers alike will likely adopt a

2008 Buyer CIM Group LaSalle Bank JV Harvest Properties JV INVESCO Legacy Partners CBRE Investors Thor Equities PNC Realty Investors VNO Patson Van Ness Holdings United Dominion Realty Trust Shorenstein Properties JV SKS Development Angelo Gordon JV Centrum Properties LBA Realty Eden Township Healthcare District Prado Group JV Felson Cos Nearon Enterprises Sares-Regis Group Intuitive Surgical Nearon Enterprises

8 l San Francisco Bay Area

Property Type

Property Name

City

Size (SF)

Price (millions)

Office Retail Office Office Office Office Office Office Apartment

CIM Group Portfolio Bay Street Emeryville Parkside Towers Ygnacio Center 500 Terry Francois Phelan Bldg 199 Freemont St CSAA Portfolio Edgewater Luxury Apts

Oakland Emeryville Foster City Walnut Creek San Francisco San Francisco San Francisco San Francisco San Francisco

1,739,125 383,055 398,000 499,231 291,000 267,446 396,200 597,574 157,135

$412.5 $234.0 $179.8 $174.3 $149.0 $130.0 $127.4 $118.5 $115.0

Industrial

Oyster Point Bus Park

South San Francisco

404,215

$84.0

Industrial Office

SFO Logistics Center 4900 Johnson Dr

South San Francisco Pleasanton

568,823 288,000

$80.0 $66.5

Office Apartment General Industrial Warehouse R&D/Flex Warehouse

Dublin Gateway Medical Center Nob Hill Tower Sycamore Drive 48350 Fremont Blvd 950 Kifer Rd 940 Remillard Ct

Dublin San Francisco Milpitas Fremont Sunnyvale San Jose

115,000 108,000 197,604 246,500 163,286 166,600

$60.0 $37.2 $22.0 $21.0 $16.5 $16.0

wait-and-see stance. Watch for the gap between asking and offering prices to close in 2009 and for cap rates to shift upward. Considering the ongoing turbulence among U.S. capital markets, it is anticipated that property values and velocity will fall in the near-term future. As capital access returns and the economy begins a slow recovery cycle, the Mid-Peninsula investment market will be well positioned for a comeback.

© 2008 Grubb & Ellis

COMPANY PROFILE

Grubb & Ellis is a real estate services and investment firm committed to identifying and creating business and investment opportunities through real estate, uniquely tailored to our clients’ individual needs.

Grubb & Ellis is one of the largest and most

Grubb & Ellis has the people, platform and

Structured Around the Needs of Our Clients

respected commercial real estate services

best-in-class processes to deliver superior

Our unique, comprehensive platform includes

and investment companies. With more than

service whether a client needs help with a

transaction services, management services,

130 owned and affiliate offices worldwide,

single investment property or multiple

corporate services and a wide range of

Grubb & Ellis offers property owners, corpo-

global facilities. Our consistent performance

investment programs.

rate occupants and investors comprehensive

grounded in keen market insight plays a role

integrated real estate solutions, including

in our success and is recognized by our

transaction, management, consulting and

clients. For example, in 2008, Grubb & Ellis

investment services supported by propri-

was honored with Microsoft Corporation’s

etary market research and extensive local

Environmental Award for our successful

market expertise. Grubb & Ellis and its

efforts to reduce the company’s impact on

subsidiaries are leading sponsors of real

the environment. This commitment to

estate investment programs that provide

continuous improvement and the develop-

individuals and institutions the opportunity

ment of programs and initiatives designed to

to invest in a broad range of real estate

meet a client’s individual needs are the

investment vehicles, including tax-deferred

driving forces behind our more than 50 years

1031 tenant-in-common exchanges, public

of service excellence.

non-traded real estate investment trusts and

Transaction Services

Grubb & Ellis has one of the largest and most experienced real estate brokerage sales forces in the country. Our teams of specialists cover all aspects of commercial real estate and work closely with owners, occupants and investors to assess the ways in which real estate issues relate to – and contribute to – an organization's strategic business objectives. Last year, Grubb & Ellis and its affiliates completed 16,250 transactions valued at more than $22 billion.

real estate investment funds.

Seamless Integration of Real Estate Products and Services

Transaction services include:

Research plays an integral role in our busi-

Grubb & Ellis is a unique company that

• Agency leasing

ness, and our professionals have earned a

brings together traditional transaction and

reputation for providing informed solutions

management real estate services with inno-

that combine local market knowledge with

vative investment programs offered through

detailed analysis. Strong knowledge about

Grubb & Ellis Realty Investors. Our brokerage

• Valuation consulting

general economic issues and global trends –

network offers insight into the pool of assets

• Retail services

combined with specialized expertise for

nationwide, maximizing investment oppor-

• Institutional investment services

property types such as office, industrial, retail,

tunities for program investors. In turn, the

land, medical office, multifamily and hospi-

property and asset management services of

tality – provides our clients the information

the company seek to drive value to each

they need to achieve their corporate and

property, capitalizing on opportunities from

investment goals.

acquisition to disposition – whether it be for

• Tenant representation • Consulting services

• Private capital investment services • Site selection

our own portfolio or on behalf of our clients.

© 2008 Grubb & Ellis

San Francisco Bay Area l 9

COMPANY PROFILE continued

Grubb & Ellis was the recipient of Microsoft’s Environmental Award in 2008

Global Client Services

Corporate services include:

Investment programs include:

As one of the nation’s largest full-service

• Consulting services

• 1031 tenant-in-common exchanges

• Real property and lease administration

• Public non-traded real estate

commercial real estate firms, Grubb & Ellis delivers integrated property, facility and asset management services focused on cost-effi-

investment trusts (REITs)

• Retail services

cient operations, tenant retention and

• Strategic planning

• Limited liability companies

increasing property values to a host of corpo-

• Tenant representation

• Wealth management

rate and institutional clients. The company

• Valuation services

• Institutional investments

• Site selection

• Mutual funds

• Project management

• Securities separate accounts and funds

and its affiliates manage a diverse portfolio totaling more than 275 million square feet of space. This portfolio includes headquarters,

This is neither an offer to sell nor a solicitation of an offer to buy any security. Such an offer may be made only by means of an offering document. Investors should read the offering materials and review the risks associated with any offering prior to making an investment and should be able to afford the loss of their entire investment. Securities offered through Grubb & Ellis Securities, Inc. member FINRA/SIPC.

facilities and Class A office space for major

• Portfolio rationalization

corporations, as well as industrial, manufac-

• Disposition services

turing and warehouse facilities, data centers,

Investment Programs

retail properties, medical buildings and

Grubb & Ellis is one of the nation’s leading

multifamily assets for real estate occupants

sponsors of innovative commercial real

Our Commitment

and investors. Additionally, Grubb & Ellis

estate investment programs. Grubb & Ellis

A strong, integrated delivery platform

provides consulting services that help clients

Realty Investors, the company’s real estate

combined with the expertise of our profes-

better understand their real estate portfolio,

investment

management

sionals offers our clients a partnership unlike

the current operating environment, and

subsidiary, structures, acquires, manages and

any other in the industry. We bring strategic

future opportunities that exist through smart,

disposes of real estate for its clients. Through

thinking and exceptional service to each and

strategic planning.

Private Client Accounts, the firm offers high

every engagement. We deliver perspective,

net worth investors a comprehensive

insight and innovation to help our clients

program to build or expand their commercial

achieve their desired outcomes. And we

real estate portfolio to meet their investment

execute effectively and efficiently, enabling

• Facility management

objectives. In total, Grubb & Ellis Realty

us to form long-lasting collaborative relation-

• Asset management

Investors oversees a portfolio of assets valued

ships with property owners, investors and

• Business and fulfillment services

in excess of $6.5 billion located throughout

corporate users of real estate.

Management services include: • Property management

• Consulting services • Project/construction management • Engineering services

10 l San Francisco Bay Area

and

asset

more than 30 states, and has completed acquisition and disposition volume totaling more than $11 billion on behalf of program

To locate a Grubb & Ellis office near you, please visit www.grubb-ellis.com/offices.

investors since its founding in 1998.

© 2008 Grubb & Ellis

GRUBB & ELLIS RESEARCH

Grubb & Ellis is one of the most widely quoted sources when it comes to real estate market trends and their implications.

For more than 50 years, Grubb & Ellis has

professional research managers to direct

that analyze local and national market

made real estate market research a corner-

the company’s research function, which is

conditions throughout North America by

stone of its business. The company has built

widely viewed as having the most accu-

product type, a Weekly Market Insight

a reputation for consistently delivering some

rate grass-roots level data in the industry.

electronic communication on a timely

of the highest quality research reports in the

Incoming research analysts and brokers

economic or real estate-related topic,

industry and regularly provides expert

are trained to understand the nuances of

quarterly capital markets reports and

commentary on the forces shaping the

the real estate cycle, inflection points in

white papers on issues that are important

commercial real estate landscape. As the

the cycle, leading indicators, and the

to our clients.

issues facing real estate owners, corporate

actions and advice that are appropriate for

users and investors grow increasingly

each phase of the cycle.

• Our real estate professionals, whose famil-

iarity with the people and the property in

complex, sound research and analysis

• Our systems used to compile, maintain,

their submarkets yields a daily, in-the-

become even more vital, and our research is

analyze and disseminate our research.

trenches grasp of changing market

a tool our professionals rely on to help their

Grubb & Ellis was a pioneer in the field of

conditions. The creation of market intelli-

clients solve real estate issues, uncover

computerized market research and

gence is a team effort, with knowledge

opportunities and achieve larger organiza-

analysis and continues to make invest-

flowing constantly between our research

tional objectives.

ments to improve and enhance the

teams, sales professionals and investment

information available. Most of the

specialists. This knowledge is integrated

company’s offices have been tracking

with our professionals’ insight and experi-

data for more than two decades. In addi-

ence, forming a solid foundation from

tion to subscribing to the top property

which to advise clients, and giving Grubb

databases in the industry, Grubb & Ellis has

& Ellis and its clients a competitive edge.

built a proprietary, centralized Web-resi-

Among our clients, we have seen an

dent data warehouse to track its

increased demand for more accurate data

property-specific data, including property

and sharper analysis fueled by increased

details, images, available space, leasing

market transparency and a strong need for

and sales comparables, and tenant infor-

accountability. Real estate investors as well

mation, all in an easy-to-use format. This

as corporations in all sectors of the economy

sophisticated system is based on a

are closely examining their real estate strate-

Grubb & Ellis leverages four integrated

rigorous set of research standards

gies and searching for timely and smart

components to create our unique and

designed to ensure that data are consis-

market research that will help guide and

comprehensive insights:

tent across markets.

support their decisions. Providing this infor-

Grubb & Ellis research reports span from coast to coast and around the globe. We cover big-picture economic trends as well as specific drivers of local market demand for space. We provide standard real estate statistics and also respond to significant developments, such as the credit crisis of 2008. Our research is used by our clients, the media and the industry at large to help explain current conditions and predict what the future has in store.

• Our professional research managers and

their staff, whose critical function it is to build the base of market intelligence in each office and provide published reports and custom analyses to our clients. Grubb & Ellis pioneered the concept of hiring

• Our reports and publications through

which we translate our extensive databases

into

analysis,

insights

mation is one of the things Grubb & Ellis does best.

and

actionable recommendations for our clients. In addition to our annual national and local forecast reports, Grubb & Ellis

To keep abreast of research disseminated by

Grubb

&

Ellis,

please

visit

www.grubb-ellis.com/research.

produces quarterly Market Trends reports © 2008 Grubb & Ellis

San Francisco Bay Area l 11

OFFICE DIRECTORY Corporate Headquarters Santa Ana California 714.667.8252 Alabama Mobile Peebles & Cameron, LLC 251.438.4312 Arizona Phoenix BRE Commercial, LLC 602.954.9000 Tucson 520.321.3330 Arkansas Bentonville Solomon Partners 479.271.6118 North Little Rock Solomon Partners 501.975.0547 California Anaheim 714.939.6000 Bakersfield ASU & Associates 661.862.5454 Carlsbad BRE Commercial 760.431.4200 El Cajon BRE Commercial 619.462.3100 Fresno Pearson Commercial 559.432.6200 LA Downtown 213.596.2222 LA East (San Gabriel) 562.364.2000 LA North (Sherman Oaks) 818.332.2000 LA South Bay (Torrance) 310.491.2000 LA West 310.477.3800 Newport Beach 949.608.2000 Ontario 909.605.1100 Pleasanton 925.218.3388 Redwood City 650.596.2460 Riverside 951.530.1700 Roseville 916.770.8900 Sacramento 916.418.6000 San Diego Downtown BRE Commercial 619.515.0017 San Diego (Otay Mesa) BRE Commercial 619.661.0657 San Diego UTC BRE Commercial 858.546.5400 San Francisco 415.433.1050 12 l San Francisco Bay Area

San Jose 408.452.5900 San Luis Obispo Central Coast Commercial 805.541.5000 Santa Barbara 805.564.3366 Temecula WestMar 951.491.6300 Visalia Pearson Commercial 559.732.7300 Walnut Creek 925.939.3500 Colorado Colorado Springs Quantum Commercial Group 719.590.1717 Denver 303.572.7700

Indiana Indianapolis Harding Dahm & Company 317.844.2700 Mishawaka/South Bend Cressy & Everett 574.271.4060 Iowa Des Moines Mid-America Commercial 515.222.0605 Kansas Lawrence The Winbury Group 785.865.5100 Wichita Martens Commercial Group, LLC 316.262.0000

Connecticut Stamford 203.406.9899

Maryland Baltimore 410.625.4200 Bethesda 301.530.8200

Delaware Wilmington 302.888.4500

Massachusetts Boston 617.772.7200

District of Columbia Washington, D.C. 202.312.5400

Michigan Detroit 248.350.9500 Grand Haven Paramount Commerce 616.296.0604 Grand Rapids Paramount Commerce 616.774.3500 Holland Focus Properties 616.394.4500 Kalamazoo Paramount Commerce 269.978.0245

Florida Boca Raton 561.995.5150 Fort Myers 1st Commercial 239.210.7600 Jacksonville Phoenix Realty Group 904.399.5222 Melbourne Commercial Florida 321.984.1957 Miami 305.982.4100 Orlando Commercial Florida 407.423.1200 Tampa Commercial Florida 813.639.1111 Georgia Atlanta 770.552.2400 Hawaii Honolulu CBI, Inc. 808.942.7100 Idaho Boise Idaho Commercial Group 208.287.9500 Illinois Chicago 312.698.6700 Columbia Gundaker Commercial 618.281.8800 Rosemont (O’Hare) 847.390.8040t

Minnesota Minneapolis Northco Real Estate Services 952.820.1600 Mississippi Gulfport Sawyer Commercial 228.863.0232 Missouri Chesterfield Gundaker Commercial 636.728.5100 Kansas City The Winbury Group 816.531.5303 St. Louis (Clayton) Gundaker Commercial 314.719.2000 Montana Bozeman Montana Commercial, LLP 406.587.8700 Kalispell Montana Commercial, LLP 406.755.8485

Nebraska Lincoln Pacific Realty 402.467.1234 Omaha Pacific Realty 402.345.5866 Nevada Las Vegas Las Vegas Commercial Brokerage, LLC 702.733.7500 Reno NCG 775.332.2800 New Hampshire Bedford Coldstream Real Estate Advisors, Inc. 603.623.0100 Portsmouth Coldstream Real Estate Advisors, Inc. 603.433.7100 New Jersey Edison 732.225.0433 Fairfield 973.486.2500 Marlton 856.334.2100 New Mexico Albuquerque New Mexico 505.883.7676 Las Cruces New Mexico 505.523.6000 Santa Fe New Mexico 505.989.3900 New York New York (Midtown) 212.759.9700 Wappinger Falls Facility Resource Group 845.296.3200 North Carolina Chapel Hill Thomas Linderman Graham 919.968.4017 Raleigh Thomas Linderman Graham 919.785.3434 North Dakota Fargo Marc C. Johnson & Campbell, LLC 701.281.5200 Ohio Cincinnati West Shell Commercial 513.721.4200 Cleveland 216.861.3040 Columbus Adena Realty Advisors 614.436.9800

Oklahoma Oklahoma City Levy Beffort 405.840.1500 Oregon Portland 503.241.1155 Pennsylvania King of Prussia 610.337.1010 Philadelphia 215.561.8300 Pittsburgh 412.281.0100 South Carolina Charleston Barkley Fraser 843.725.7200 Columbia Wilson Kibler 803.779.8600 Greenville The Furman Co. 864.242.5151 Myrtle Beach Wilson Kibler 843.946.7100 Tennessee Chattanooga Hudson 423.698.8660 Memphis Memphis, LLC 901.761.1717 Nashville Centennial, Inc. 615.320.7500 Texas Austin 512.349.1000 Corpus Christi Coastal Bend 361.994.0649 Dallas 972.450.3300 El Paso Best/White LLC 915.772.9082 Houston 713.626.8888 Mission/McAllen Select Regional Solutions 956.630.4300 San Antonio 210.828.5050 Virginia Charlottesville Real Estate III Commercial 434.817.1240 Richmond Harrison & Bates 804.788.1000 Tysons Corner 703.448.2000

Washington Seattle 206.388.3000 Wisconsin Appleton Pfefferle 920.968.4700 Green Bay Pfefferle 920.884.5000 Madison Oakbrook Corporation 608.238.2600 Milwaukee Apex Commercial 262.784.7500 Waupaca Pfefferle 715.258.8000 Wausau Pfefferle 715.355.6060 Wyoming Cheyenne Wyoming Commercial 307.432.4070 Canada Avison Young Calgary 403.262.3082 Edmonton 780.428.7850 Halifax, Nova Scotia 902.442.4050 Mississauga 905.712.2100 Montreal 514.940.5330 Ottawa 613.567.2680 Quebec City 418.694.3330 Regina 306.359.9799 Toronto 416.955.0000 Vancouver 604.687.7331 Winnipeg 204.947.2242 Mexico Ciudad Juarez Best/White de Mexico 011.52.656.629.1111 Monterrey Select Regional Solutions 877.445.4070 Reynosa Select Regional Solutions 899.929.3830 San Luis Potosi Select Regional Solutions 444.811.1771 © 2008 Grubb & Ellis

CONTRIBUTORS AND SOURCES

Grubb & Ellis research teams across the U.S. work together to ensure our clients have the most up-to-date market knowledge.

Contributors

San Francisco

Erin Proto, Assistant Vice President Client Services Manager – Bay Area Jesse Gundersheim, Senior Research Analyst Asa Flynn, Research Analyst San Jose

Dina Simoni, Research Services Manager Walnut Creek

Erin Proto, Assistant Vice President Client Services Manager – Bay Area Katie Burton, Senior Database Coordinator Redwood City

Asa Flynn, Research Analyst Sources

IREN, Real Capital Analytics, State of California, Claritas, CoStar Group, Crittenden, The Conference Board, Urban Land Institute, PricewaterhouseCoopers, U.S. Census Bureau, National Venture Capital Association, International Council of Shopping Centers, U.S. Department of Commerce, Mercury News, San Francisco Business Times, San Jose Business Journal

© 2008 Grubb & Ellis

San Francisco Bay Area l 13

Grubb & Ellis offers its clients an integrated platform of real estate services and investment programs. We strive to meet the evolving needs and investment objectives of corporate owners and occupants as well as institutional and private investors. Transaction Services

• Agency leasing • Tenant representation • Consulting services • Valuation consulting • Retail services • Institutional investment services • Private capital investment services • Site selection Management Services

• Property management • Facility management • Asset management • Business and fulfillment services • Consulting services • Project/construction management • Engineering services Corporate Services

• Consulting services • Real property and lease administration • Retail services • Strategic planning • Tenant representation • Valuation services • Site selection • Project management • Portfolio rationalization • Disposition services Investment Programs

• 1031 tenant-in-common exchanges • Public non-traded real estate

investment trusts (REITs) • Limited liability companies • Wealth management • Institutional investments • Mutual funds • Securities separate accounts and funds

The direct or indirect purchase of real property involves significant risks. Investors should consult their own tax advisors and legal counsel. Always remember that each property is unique and past performance is no guarantee of future results.

WWW.GRUBB-ELLIS.COM

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