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November 2, 2011 
 
 
 
Allen Matkins LTIle
NICE PLACE TO BE

 

That seemed the sentiment yesterday of top industry panelists at our first Bisnow event in San Francisco. And it didn’t have to do with the sunny weather—but the tech-driven good times for office leasing and sales. And those European crises? The region’s not immune, but debt’s still cheap, and the travails of other regions actually boost the Bay Area’s image as a winner.

 
Our 375 attendees at the City Club on Sansome listened intently as panelists told how 15 years ago typical tech engineers were in their mid-30s, had families, sought public schools, and liked living down in Mountain View and working nearby. Now the boom in 20-somethings wanting to live in the city is creating what Allen Matkins’ Lee Gotshall-Maxon dubbed the possibility of a “magic island.”
Swig Company CEO Jeanne Myerson says tech momentum has crossed north of SoMa to traditional corporate areas, especially if good transit is available, where some space is being re-designed to emulate its open look and feel. She says a combination of bigger tech companies seeking large blocks of space and smaller “gazelles” scaling fast is fueling growth. She recalled working in a tech company herself in the early '90s where Redwood City was about as far north as people would want to work. Now she’s excited to focus on leasing in the city for these tech firms, although as a potential buyer she smiled and said she’d let public REITS play in the “overpriced space.”

Boston Properties’ Rod Diehl says although the Bay Area lagged other areas like DC and NY in coming out of recession, those areas have slowed whereas the Bay area hasn’t. He says it’s been a fantastic year at his firm for leasing: 850k SF in 76 transactions (57 at Embarcadero Center alone), exceeding any metrics since ’07, with strong tour activity and rent growth pushing into the 60s at the high end. And that talk of a tech bubble? They haven’t seen many tenants pushing off decisions to lease space, and indeed his firm chose the Bay Area because of its high barriers to entry. Only downside? Given prices, harder hunting for more acquisitions.

Matt Field of TMG says he’s more comfortable about tech fundamentals this cycle: VC’s are more disciplined with funding than in the '90s, knowing not everyone will IPO. As a result, he no longer sees companies looking for large amounts of future expansion space with little cost sensitivity. Back then, he recalled there was a sense among young technology tenants that the money from VC’s would never end. He also sees the big technology companies—Dell, HP, Google, and Apple—as much more mature businesses this cycle. Nonetheless, due to lack of supply, companies that need space are making decisions and accepting current market conditions. As a result, TMG’s been trying to buy vacancy (2M SF in the last 12 months), which they’re now leasing up.
Mike Sanford of Kilroy says SoMa now gets higher rents (mid-40s) than the financial district in the low 40s. His firm, a behemoth in LA, arrived in SF just last year and has already picked up 2.2M SF in tech and media, largely in SoMa, and is looking to expand elsewhere in Northern California.
 
Stephen Van Dusen of investment sales giant Eastdil Secured, says last year the financial district was more active, whereas this year 75% of his firm’s sales volume has been in SoMa, Silicon Valley, and the Pacific Northwest. He sees values in San Francisco as rising 15% to 20% year-over-year after adjusting for different quality of building stock, rental and view profiles. He doesn’t see a bubble because rents are still 30% to 40% lower than replacement cost levels, and 20% below 2007 rental levels. His view is that core pricing has generally held over the past 60 to 90 days with transitional assets the most impacted, but this is very asset and somewhat submarket specific, especially for those deals requiring transitional debt financing.
 

Not to forget multifamily or retail, moderator Lee Gotshall-Maxon of Allen Matkins has been involved as a lawyer in 20 apartment deals in the last 12-18 months and is repping Taubman in a large portfolio acquisition of shopping centers. Half of the 220 attorneys in his firm’s seven offices do real estate—the West Coast’s largest such practice—and with SoCal also increasing in absorption and pricing, it’s a wonder Lee had time to help us out. But he flawlessly guided the conversation and we thank him. Now, just make sure to keep the magic on the island. 


Bisnow
 
The Allen Matkins Minute
 
 

Could "zen" be the word in this anxiety-ridden economy? Perhaps it's more like relaxed caution, as you will see in Allen Matkin's latest Real Estate Minute. Guest Victor Coleman, chairman and CEO of Hudson Properties, reflects on how investors are carefully taking their sweet time and not jumping as fast (or as high) to spend. He also reflects on the still-great opportunities in the Bay Area, thanks to technology. Learn more about our sponsor Allen Matkins here.

 
 
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