Mountain View office update Q2’09

Mountain View Q1 2009 Update

Vacancy Rate Increases

Mountain View remains one of the strongest markets in the Bay Area. Market softening has occurred across the region, with Silicon Valley and even traditionally sturdy markets like downtown Palo Alto seeing large vacancy increases. With that said, regardless of its relative submarket strength, overall Mountain View saw vacancy rise by 31% to an overall 8.26% availability.

The largest contributor to the increase in overall availability in Mountain View is the 48,595 sf of Downtown Mountain View sublease space, which increased by nearly six fold this quarter. A large portion of this is attributed to Ebay/Pay Pal’s new sublease at 303 Bryant. This 22,453 sf space is asking $4.25 full service with term through June 30, 2012. 17,589 sf of this sublease on the third floor is fully plug & play. Finding reasonably priced space for sub 3k start ups Downtown Mountain View remains difficult, while the opportunities for companies in the 7,000-11,000 sf range are more prevalent.

Asking Rates Decrease

Overall Mountain View rates were $3.13 in Q109, down over 10% from $3.48 in Q4 08. Downtown Mountain View rates dipped below the $4 mark for the first time since Q3 2007 quarters with average rates at $3.93. Companies are still willing to pay a premium of roughly 25% for the amenities, transportation and convenience of a downtown location.

 Of the transactions completed in the overall Mountain View market 73% were under 5,000 sf, 20% were 5-10,000 sf and only one transaction occurred above 10,000 sf. Most of the transactions in the market are renewals. The largest transaction in Downtown Mountain View this quarter was You Plus at Castro Station, 100 W. Evelyn.  The three year deal on 8,760 square feet was completed at a $4.20 Full Service starting rent with four months of free rent on a Plug & Play space and represents the largest positive market absorption in Mountain View this quarter.  As a signal of the market going forward, 650 Castro has a 3,000 sf pending sublease transaction at $2.50 NNN (plus $1 in estimated expenses) for a one year, as-is, plug & play deal 

Forecast

Availability is expected to increase in both Downtown and throughout Mountain View for the rest of 2009. Expect more aggressively priced subleases, as companies seek to off load their excess inventory. Overall asking rates will be dragged down by the increase in available subleases and direct vacancy.

How do you translate people to square feet?

Companies think of space in terms of people, but real estate leases think of space in terms of square feet. In a typical office property, each person translates to roughly 250 square feet. If you have 30 employees, you will need roughly 7,500 square feet of office space. I have seen start ups using an extremeley dense open environment get as low at 140 square feet per person, which would mean 30 people could fit like sardines into 4,200 square feet. The number can be adjusted up or down depending on how open the enviornment is, but as a general rule of thumb 250 square feet per person is good place to start.

A Tale of 3 Spaces

Why would a trophy asset downtown be priced lower than a brick building in SOMA? While the last downturn centered in SOMA, this financial crisis has most strongly impacted the financial district. Rents are dropping north to south in the city and a majority of the sublease space, which drives down rents, is in the financial district. Tech companies were hit later in this cycle and are starting to list subleases in SOMA (Yahoo, LiveJournal, Slide etc), which will continue to pull SOMA overall rents downward going forward. Through three spaces, let’s examine your pricing options today.

– Financial District Option: 101 California 19^th floor sublease through 10/31/12, trophy asset in the heart of downtown at California and Front, access to all forms of transportation and abundant amenities, high end build out with wood floors mostly open with conference rooms/private offices, all furniture included, asking $28 FS/square foot/yr. 101-california-sublease-flyer-19th-floor2

– South Financial District Option: 217 2nd Street 3^rd or 4^th floor, brick building near 2nd and Howard next to the CNET/now CBS building, First Round Capital a floor above, all open needs improvements, no furniture, asking low $30sFS/square foot/yr 217second-street1

– SOMA Option: 139 Townsend 5^th floor, brick building at Townsend and 2nd across from Tres Agaves in the heart of SOMA/SF tech community, mostly open with conference room/private offices, asking mid $30sFSE/square foot/yr 139-townsend-sublease-flyer

Based on the above comparison, if you decided to lease 101 Cal over 139 Townsend, you would save an estimated $57,000 per year in rent. The above amount does not even include the out of pocket expenses associated with buying furniture and cabling the SOMA alternative.  The above comparison can be found in smaller and larger spaces as well and demonstrates the point that teams should be evaluating if their location preference is a nice to have or need to have.

If your company has always been located in one area and you are contemplating a move. I would suggest doing an employee map. This will plot all of your management and employees by division on a map, so that you can understand where your employees come from and what type of transportation options they are using. We can provide this service to you. In these tough times, saving money is a strong priority for most companies, and being open to evaluating other submarkets can help you accomplish that goal.

Deciphering NNN, IG and FS

Below is a quick summary of the three main types of commercial leases: NNN, Industrial Gross (sometimes known as modified gross), and Full Service. Different submarkets and even different buildings in the same area use the three type of leases. The tenant is paying for the same thing at the end of the day, just paying in a different way. Here’s an explanation of each and how we can convert them to apples to apples to evaluate real estate alternatives.

 

 

• NNN (net lease): lease requiring tenant to pay in addition to the base rent, expenses of the property including taxes, insurance, maintenance, janitorial, etc separately.
• Industrial/Modified Gross: lease requiring tenant to pay part of the expenses of the property separately in addition to the base rent. Typically this includes electrical and janitorial expenses.
• Full Service: lease that includes all charges (base rent, electrical, janitorial, taxes). *However full service leases still have a base year, by which the tenant pays for building operating expenses and taxes above and beyond their lease’s base year.

 

 

The way to make everything apples to apples is by making every lease “full service equivalent”. This definition is when you add the additional separate expenses to the NNN and IG/MG leases to gross it up to the Full Service Equivalent. When you are evaluating options with different types of leases, you should ask what the estimated additional expenses are and add it back in to get the full service equivalent rent. A professional that has in depth market knowledge assessing options will be able to easily covert these numbers and give you back a digestible analysis. While buildings typically will not change how they write their leases, this will prepare your team and ensure there are not additional surprise payments.

Two S.F. office deals can’t wake market from slumber

There have only been 2 deals above 10,000 sf in the San Francisco financial district since the beginning of this year. Rates are estimated to have dropped 20% since Q408 numbers were published. In this market environment, no one really knows where the market is, since there are hardly any deals and comparable transactions. For most spaces in this market, it is essential that you push below the asking rates and that you ask for additional lease incentives like renewals, expansions etc to test the elasticity of the market. Landlords don’t know where the market is and are motivated to lease the space. See the below article on leasing activity.

Office leasing was downright comatose during the first half of the first quarter.

If you don’t count renewals, the central business district logged a total of two deals more than 10,000 square feet, according to CB Richard Ellis’ mid-quarter report. The larger of those two deals was Marriott’s 19,027-square-foot lease at 45 Fremont. The second biggest was a sublease by Bank of the West for 13,483 square feet at 88 Kearny St. After those two deals, the biggest non-renewal lease completed in the first six weeks of the year was Union Square Advisors’ 7,669-square-foot sublease agreement at 2 Embarcadero Center.

The total available space (direct and sublease) has jumped to 18 percent across the city. The financial district has vacancies of 16.7 percent and the south financial district is at 14.8 percent.

The CBRE report says “it appears as if the current recession will have a more significant effect on San Francisco than initially expected.”

SAN MATEO

Gaming software firm doubles its footprint

NR2B Research, a developer of multi-player online gaming software, has grabbed just under 50,000 square feet at 475 Concar St. in San Mateo.

The company more than doubled its footprint from its space at 2121 S. El Camino Real.

Clarke Funkhouser and Mike Moran with NAI BT Commercial Burlingame represented landlord ARJAX Railroad Associates in the three-year lease. NR2B leased the entire second-floor office portion of the two-story mixed-use building, which has retail on the ground floor. 475 Concar contains high-tech interiors and is adjacent to the Hayward Park Caltrain Station.

“Every deal is a significant deal today,” said Funkhouser.

Graham Woodhall of Cornish & Carey represented the tenant.

FREMONT

Video equipment maker buys space for $2.5M

Some businesses are finding that purchasing their space makes more sense than leasing. Jaton Corp., a maker of video equipment, paid $2.5 million for five adjacent units totaling 14,510 square feet of industrial and office flex space in the Fremont Tech Center.

The 136,730-square-foot building, developed by Phoenix-based Opus West Corp. in the 4.4 million-square-foot Bayside Business Park, was completed last month.

Jaton plans to move its headquarters and manufacturing from its current facility in Milpitas next month. Other buyers include Telirite Technical Services Inc., a company that manufactures electronics on a contract basis. who took 12,580 square feet. Sunware Corp., a provider of information technology services, purchased 7,475 square feet.

“This latest deal underscores the continued need for small, yet high-quality research and development buildings in the Bay Area,” said Don Little, senior vice president of Opus West in Northern California.

Julie Ho, a broker with Wealth Realty Advisors who represented Jaton in the deal, said the company secured financing from its lender, China Trust, by putting down 30 percent and because the loan was for owner-occupied space.

Opus’ development is comprised of 26 units in 10 separate buildings. Each unit is flexible in size, ranging from approximately 2,500 to 12,500 square feet and designed to accommodate office, R&D and light industrial manufacturing. Brokers Tom Taylor, Scott Prosser and Benjamin Rojas of CB Richard Ellis represented Opus West Corp. Ho, president of Cupertino-based Wealth Realty Advisors, represented Jaton Corp.

NEED HQ SPACE?

Mervyn’s distribution center goes on market

A 366,000-square-foot, former Mervyn’s distribution center at 48200 Fremont Blvd. in Fremont is on the market. Colliers International listed the property, which it says is ideal for a corporate or regional headquarters. The site, built in 1990, sits on 32 acres and includes about 26,000 square feet of office space and close to 5 acres of vacant land.

Mervyn’s, a longtime Bay Area-based department store chain, went out of business in October when it was already in bankruptcy. The closure left a slew of properties including 175 stores nationwide, 10 of them in the Bay Area, and its Hayward headquarters building up for sale or lease. The retailer decided to outsource the distribution operations of the Fremont facility in April of last year as a cost-saving measure.

Brokers Greig Lagomarsino and Todd Severson of Colliers Oakland office are handling the listing.

Email J.K. Dineen at jkdineen@bizjournals.com / (415) 288-4971
Email Blanca Torres at btorres@bizjournals.com / (415) 288-4960

Quarter-million square feet added to S.F sublease glut

Rates have dropped about 20% since the beginning of the year. Sublease space affects asking rents, because subleases are typically priced about 15% below market and provide potential tenant furniture, wiring etc which limits their out of pocket expenses. As stated below, how much sublease space hits the market definitely provides a pulse of how businesses in the area are fairing and is a good indicator of future rent drops.

San Francisco tenants unloaded another 250,000 square feet of unwanted office space onto the market in January, as employers slashed
workers and pushed to generate sorely needed cash by subleasing floors in Class A downtown towers.

Companies adding to the avalanche of available sublease space include Charles Schwab, which said Jan. 30 that it would cut 500 to 600
jobs in the first quarter. Schwab is seeking a subtenant for 80,000 square feet at the 1 Montgomery Tower. Also in that building, Thomas
Weisel Partners Group is looking to sublease 20,000 square feet on the 35th floor, billed as a “high-end build out with panoramic
views.” Other chunks of sublease space coming available include 15,639 square feet of brand-new space at the just completed 555 Mission
St. being subleased for $48 a square foot by law firm DLA Piper, and the entire 22nd floor of 345 California St., former UBS space that
Cushman & Wakefield is looking to lease for five years at a rock-bottom $27 a square foot.

The onslaught of new leasing opportunities for tenants is depressing leasing rates, according to Studley, a tenant representative
brokerage. After years when average Class A space hovered around $50 a square foot, $40 a square foot is becoming the new “high water
mark” with $30s the “norm,” and some top-quality sublease dipping into the $20s. Studley says the central business district could see
another 1 million to 2 million square feet of sublease space on the market this year, added to the 1.2 million that came on in the second
half of 2008.

“I can’t imagine things getting markedly better this year,” said Steve Barker, an executive vice president at Studley.

Unemployment up
The number of unemployed San Francisco residents grew by 10,300 in the fourth quarter of 2008 to 29,500, according to Ted Egan, chief
economist for the City of San Francisco. In spite of the fourth-quarter increase, Egan pointed out that the 10,000 jobs eliminated during
the final three months of 2008 came in dribs and drabs rather than the sort of en masse layoffs announced in recent days by Charles
Schwab and Macy’s, which announced 1,400 San Francisco layoffs on Feb. 1. A loss of 2 million square feet of occupied space equals about
10,000 workers.

“Now we are starting to see major layoffs from major employers,” said Egan. “This is the sign of the recession coming to San Francisco.”
Daniel Cressman, an executive vice president with Grubb & Ellis, said the overall sublease activity pales in comparison to the last
downturn of 2001 and 2002, when 6 million square feet of space hit the central business district. Still, he expects several more quarters of
negative absorption, which occurs when more companies are giving up space that leasing it.

“For the commercial real estate community, sublease space is the canary in the coal mine that tells you the general health of the San
Francisco economy,” said Cressman. “Things are not great right now, but they are not that bad.”

Leading the group of firms cutting their footprints are financial services firms and banks, including UBS, Citigroup, Thomas Weisel,
Bank of America and Charles Schwab. The other top group is law firms, which have given up some 500,000 square feet of space. Failed
firms Heller Ehrman and Thelen Reid accounted for 350,000 square feet at 333 Bush St. and 101 Second St. combined. Meanwhile, other
law firms expected to join the hunt for subtenants include Dewey & LeBoeuf, which announced plans Feb. 3 to close its San Francisco
office at One Embarcadero Center.

Thus far, San Francisco tech companies have been mostly absent from the sublease parade, although H5, a company that provides
information retrieval for the legal industry, recently put a floor up for sublease at 71 Stevenson St. And brokers say Slide will put the
fourth floor of 301 Brannan St. on the market shortly, asking in the low $30’s for an 18-to-24-month term.

Anton Qiu of TRI Commercial, who leases 71 Stevenson, characterized the space H5 is seeking to sublet as an “expansion floor” and said
he is not concerned.

“We are 99 percent leased, and all our tenants are doing well and have long-term leases,” he said. “Obviously, we don’t like to see it, but
overall H5 is doing well.”

Much of the damage is yet to come, according to brokers. A Macy’s spokesman said it would probably be months before it figured out
what to do with its San Francisco offices, which includes 100,000 square feet at 22 Fourth St. Macys.com, which inked a 70,000-squarefoot
expansion at 685 market St. in 2008, was not included in the Macy’s layoffs, the spokesman said. Scott Harper of Colliers
International, who leases 685 Market St. for owner Prudential, said the Macys.com expansion just closed in December.

“We don’t think it’s going to impact our space at 685 Market, but we don’t know for sure,” said Harper.

Charles Schwab CEO Walter Bettinger said Jan. 30 that the company expects “with almost certainty” another round of layoffs this year.
“We are taking a balanced approach to the near term and the long term and we’re simply not going to allow ourselves to become
uncompetitive,” Bettinger said.

The new subleases are creating opportunities for tenants looking for swank offices already built out with sleek furniture and wired for the
latest technology. Many of the chunks of sublease space available are in San Francisco’s best buildings, including Four Embarcadero
Center, 101 California St., 555 California St. and Tishman Speyer’s new highrise at 555 Mission St.

“There are plenty of options out there for high-end sublease space in trophy buildings,” said Barker. “Off the top of your head you can
name eight or 10 of them.”

The trend does not bode well for landlords attempting to lease out shell space. Barker said no tenants are interested in “funding a buildout.”
“There are too many built-out options to consider,” he said.

Despite the lower costs, deals are few and far between. Studley Executive Vice President Kevin Brennan said many building owners have
yet to lower prices enough to make deals happen.

“As the landlord community starts to capitulate, you’ll see more transaction velocity,” said Brennan. “As of now, they have not capitulated
yet.”

San Francisco Business Times – by J.K. Dineen jkdineen@bizjournals.com / (415) 288-4971

Survey: Silicon Valley’s commercial real estate market won’t improve until 2011

A survey of commercial real estate released Wednesday by Allen Matkins/UCLA Anderson Forecast predicts Silicon Valley’s market will not improve until 2011.

The valley’s market will lag in Los Angeles and San Francisco, both of which are expected to turn by the end of 2010.

“For the Silicon Valley it appears that 2011 is a turning point, but the data is less clear,” said Jerry Nickelsburg, a senior economist and author of the survey, in a prepared statement.

Nickelsburg said surveying all three Bay Area markets – San Francisco, the East Bay and Silicon Valley – showed that each will show a decline in occupancy and rental rates for the next three years.

In the South Bay, vacancy rates will rise to 17.5 percent by the end of 2010 and rental rates will rise at the rate of inflation, according to models used by the economic outlooks.

Even as the picture improves in 2011 though, the forecast does not predict a return to the “relatively low vacancy rates of early 2007, nor much growth in rental rates.”

The East Bay will fare slightly worse than the rest of the region because it was more exposed to the housing downturn and more reliant on finance and professional service jobs, both of which have suffered losses.

“The panel and the model are both gloomy about the near term in the East Bay,” according to the report.

Katherine Conrad can be reached at 408.299.1820 or kconrad@bizjournals.com.

Tesla opts for Federal Loans and Brownfield Location

Tesla Motors Inc.’s plans to locate its headquarters and a manufacturing plant in San Jose have stalled.

The intended location, an 89-acre strip of land between Highway 237 and Zanker Road, no longer works because Tesla wasn’t able to raise the $100 million in venture capital funding it had counted on to finance the facility.

The San Carlos-based automaker — known for its two-seater, convertible electric Roadster — announced in September it would move its headquarters to the city. The company also planned to build a $250 million Model S manufacturing facility on the consolidated 600,000-square-foot planned campus.

“We abandoned (the VC route) because the VC financing environment became so tight and difficult,” company spokesperson Rachel Konrad told the Business Journal on Wednesday.

Instead, Konrad said Tesla has applied for about $400 million in two federal, low-interest loans through the Advanced Technology Vehicle Manufacturing Program. It is seeking $250 million for the Model S manufacturing facility and $150 million for an advanced battery and powertrain facility.

The Zanker Road location no longer works because it’s an undeveloped “greenfield site,” and Tesla would build on it from scratch. The federal loan program favors “brownfields,” sites on which factories or plants closed years ago and need to be rehabilitated.

San Jose officials still hope to lure Tesla’s headquarters to the Zanker site.

“We’re very optimistic, even with Zanker Road,” said Michelle McGurk, senior policy adviser to San Jose Mayor Chuck Reed. “We know all the reasons Zanker Road made sense, and it still might make sense depending on how things shake out.”

McGurk added that if it doesn’t work out for Tesla, there are other companies that would be interested in the site, and city officials have been talking to those companies.

Tesla is competing for the $25 billion in federal funds available through the loan program, as are more than 75 companies, automakers and suppliers, both large and small. They include Detroit automakers that have access to many brown sites in the Midwest. Tesla would be at an immediate disadvantage if it applied for funding for a greenfield site.

“We can’t afford to do anything that would jeopardize our ability to get the federal loan,” Konrad said.

Instead, Konrad said Tesla is now looking and in negotiations for potential brownfields throughout the state, from those left over in Southern California by the aeronautics industry to Silicon Valley sites that housed chip plants, wafer fabrication and technology factories.

“Our thinking is now we want to keep the headquarters in Silicon Valley and the Model S assembly plant wherever it is most cost-effective and most expedient to get the car to market as fast as possible for the lowest cost,” she said.

Konrad said the battery and powertrain facility would also likely stay in the Bay Area, and the company is looking at sites including San Jose for that.

If Tesla gets its loans, it would take roughly two years to begin production of the Model S sedan, a plug-in zero emissions vehicle. They are planning to unveil the vehicle in March.

If it doesn’t get the federal funding, Konrad said the company intends to go back to the VC markets, which are pretty volatile and likely to stay that way for the next couple quarters, thus causing additional delays.

Konrad said when Tesla switched from its VC route to the federal sector, San Jose officials were incredibly helpful and responsive to the company’s needs.

“They definitely walk the walk and have courted Tesla heavily and persuasively and have shown they will do whatever it takes,” she said.

McGurk highlighted how hard Reed has worked on behalf of companies like Tesla, and said the city will actively continue to work with the company to ensure it is part of the growing cleantech economy.

“San Jose is open for business, and we are eager to work with these companies,” she said. “The challenge is this is a new industry and a new area and some of these technologies are untried, but like other famous San Jose startups like Cisco and eBay, these companies offer a future-changing paradigm.”

Lisa Sibley can be reached at 408.299.1841 or lsibley@bizjournals.com.

Yahoo vacates 400,000 sf

Yahoo plans to vacate 400,00 sf of Class A Santa Clara office space. The asking rate is $1/sf and term is through July of 2010. While the rate is adjusted for a short term, to provide some context the average Class A asking rent in Santa Clara Q4 2008 was $3.21/sf. Since real estate decisions lag behind layoffs and general economic malaise, expect this trend to continue. See below article for more information.

Yahoo Vacating 400,000 sf in Santa Clara

Silicon Valley / San Jose Business Journal – by Katherine Conrad

Yahoo Inc. is vacating almost 400,000 square feet in two shiny eight-story towers visible from U.S. Highway 101 in Santa Clara.

The troubled search engine company is offering the prime Class A space on Mission College Boulevard to the market for a paltry $1 a square foot.

“These buildings are as good as it gets,” said Mike Field, director of real estate for the Sobrato Organization, which owns the two structures built in 2000.

“This is plug and play,” he added, using the real estate term for move-in ready.

Yahoo plans to vacate by May. Because the remaining time left on the lease is so short – it expires in July 2010 – Field said the Sobrato Organization will be involved in negotiations with a new tenant.

The addresses of the buildings hitting the market are 2811 Mission College Blvd., a 200,500-square-foot building, and 2821 Mission College, a 184,000-square-foot building, and they include a cafeteria and gym.

Field said Yahoo plans to consolidate in the remaining buildings in Santa Clara, also owned by Sobrato, and in their Sunnyvale campus, which the company owns.

Yahoo (NASDAQ:YHOO) didn’t immediately respond to requests for comment.

The company on Tuesday reported a $303 million, or 22 cent per-share fourth quarter loss, compared to net income of $206 million, or 15 cents a share in the same period last year.

Yahoo had $1.8 billion in revenue, down slightly from the year-ago quarter’s $1.83 billion.

Analysts expected, on average, earnings of 13 cents a share on $1.37 billion in revenue.

The quarter was former CEO and co-founder Jerry Yang’s last full reporting period. Carol Bartz, the former CEO of San Rafael-based Autodesk Inc., was named CEO earlier this month.

Katherine Conrad can be reached at 408.299.1820 or kconrad@bizjournals.com.