Bay Area Office Brokers: Markets Still Look Good

By Sharon Simonson

Despite the nation’s itinerant recovery, investors remain interested in Silicon Valley and San Francisco commercial property, while downtown Oakland seems on the cusp of capturing technology-tenant overflow, brokers told an East Bay audience Aug. 14. “I don’t sense a slowdown at all,” said Ken Meyersieck, a senior vice president for Colliers in Oakland.

“Two years ago no one wanted to buy vacant buildings in markets east of Sunnyvale or Mountain View. Now there is equity and debt for those vacant buildings,” said Nate Jones, a senior associate in the Colliers Silicon Valley Investment Services Group. Buildings in markets like Milpitas and Fremont that no one would touch in 2010, investors are now buying.

In downtown Oakland, beginning in the first quarter of the year, more tenants began touring, scouring spaces as large as 60,000 square feet. “That is a big deal in our market,” Meyersieck said.

In Bay Area real estate’s last two upcycles, during the dot-com boom in the late 1990s and early 2000s and again in 2005 and 2006, technology companies pushed out of San Francisco to come to the East Bay. In this cycle, he believes workers and companies that want San Francisco’s Mid-Market and Tenderloin districts will naturally gravitate to downtown Oakland before they will go to suburban East Bay locations.

“When you look at where we think jobs are going to be created in our markets, they are not going to be the back-office, commodity-space jobs—Dilbertville. We are entering this world of creative jobs and edgy urban living. Employees want live, work, play. They’re hipsters,” he said.

In San Francisco, occupancy this year is expected to grow another one-and-a-half million square feet to two million square feet, while rents are anticipated to rise as much as 20 percent, said Scott Harper, director of the West Coast Urban Landlord Partners Practice Group for Colliers in San Francisco.

“We are still seeing Silicon Valley tenants come to San Francisco for the labor. If you want to attract a younger creative employee, you need a San Francisco presence,” he said. And investors still want to be in the city.

Going forward, besides global worries such as Europe, possible clouds on the local horizon include the supply of workers qualified for the positions available. The search for technical talent including engineers is bound to intensify as companies such as Salesforce.com Inc. and others move to the spaces they have leased. “A lot of the big users haven’t occupied their spaces yet,” Harper said.

In the next year to 18 months, as they do, landlords and other tenants will watch to see how the employment market behaves. He has no expectation for how that will go, Harper said: “It is a function of the cost of living in San Francisco and the cost of labor.”

In the first quarter of this year, Salesforce.com signed a 400,000 square foot lease for 50 Fremont St., the largest lease in more than a decade in San Francisco, according to CBRE Inc. That contributed to nearly 900,000 square feet of occupancy gains in the first quarter alone.

Based on a ratio of one employee for every 200 square feet of space, companies need to recruit 10,000 workers to establish two million square feet of new occupancy.

Colliers does expect the pace of growth in San Francisco to abate next year, he said.

Harper, Jones and Meyersieck spoke as a panel at the monthly meeting of the East Bay’s Certified Commercial Investment Members. Eric Erickson, a senior vice president at Colliers in Walnut Creek and a CCIM, moderated the session at Oakland’s Sequoyah Country Club. The purpose was to provide an update on Bay Area office markets.

“I don’t think it is a bubble,” Jones said. While Colliers is tracking 53 proposed office developments involving 26 million square feet in Silicon Valley alone, financing for new construction remains “very difficult,” particularly with no tenant in tow.

At present, two deep-pocketed private developers with the ability to self-finance are building the most high profile campuses—The Irvine Co.’s Santa Clara Gateway in Santa Clara and The Sobrato Organization’s Lawson Lane office buildings, also in Santa Clara.

According to Colliers research, markets like Mountain View have a direct vacancy rate of less than 6 percent while downtown Mountain View is drawing rents of $5 a foot a month with tenants picking up the tab for expenses such as property taxes and common-area maintenance.

Cupertino has had no research and development space available for lease since February and only a sliver of office space. Last year Apple Inc. leased not quite 491,000 square feet of R&D space in Cupertino.

At the same time, the consumer electronics and personal computer maker began leasing space in neighboring Sunnyvale at the end of last year and has already committed to more than 1.1 million square feet there. It also has deals in process to lease approximately 150,000 square feet more on Arques Avenue and Deguigne Drive.

Meanwhile, markets such as Santa Clara and North San Jose, which typically see recovery after those on the Peninsula, are experiencing renewed life. In North San Jose’s research and development market, starting rents are up more than 20 percent since the beginning of last year, and space availability is as low as it was in the dot.com era and falling.

West Coast Commercial Real Estate News