A Modern Story About Goldilocks

Post by Bill Wilson from his website – http://sfspaceadvocate.com/

You probably remember the story about the little girl that gets lost in the forest and finally spots a friendly-looking cottage. The three bears living there were out, while their porridge cooled. Goldilocks entered the cottage, ate the porridge, broke a chair and tried out the Three Bears’ beds. She sat down on Papa Bear’s bed but she found it “TOO HIGH”; Mama Bear’s bed was “TOO LOW” and the Baby Bear’s bed was “JUST RIGHT”.

Is this an analogy for our current leasing market? In 2014, the modern Goldilocks, trying to find affordable space, would discover that San Francisco’s Class A rents are “TOO HIGH” ($60); the rents in San Ramon were “TOO FAR” ($28) and the rents in Oakland/Walnut Creek are “JUST RIGHT”($36), for some tenants.

Many tenants today are facing the daunting task of renewing their leases. Back in 2009, when their leases were commencing, the market was plunging in the face of the “Credit Crisis”. Now they are facing a 50%-increase in most sub-markets in San Francisco. For many firms that is “TOO HIGH”!

Back in 1982, Bishop Ranch in San Ramon lured two of our major corporations, Chevron and Pacific Bell, to leave San Francisco to build there. Bishop Ranch is now roughly seven million square feet of buildings with Robert Half International and Bank of the West having large “back-office operations” located there. BART runs trains to Pleasanton where many riders transfer to the Bishop Ranch fleet of modern buses.  For Fortune 500 companies like PG&E and General Electric, having major operations there, is just fine; for others, it can be “TOO FAR”!

That leaves Oakland and Walnut Creek in the middle of the two extremes. In past cycles, when rents got too expensive in San Francisco, several major corporations left. For example, in 2000, CSE Insurance sold their 100,000-sq.ft. building at 6th & Market and relocated to Walnut Creek. They were followed in 2002 by PMI Insurance, which erected a 190,000-sq.ft. office structure in Walnut Creek;  and, in 2009, AAA Insurance sold their multi-building complex in S.F. and built a 250,000-sq.ft. Walnut Creek headquarters near the Pleasant Hill BART Station. The Class A rents could be “JUST RIGHT” at an average of $36/sq.ft./year.

Back in San Francisco, in the current business cycle, we haven’t experienced major corporate losses to the East Bay. The exception is Gordon & Rees, a major S.F. law firm, who removed 20,000-sq.ft. from their 90,000-sq.ft. offices at 275 Battery and transferred it to Oakland, reducing their rent by an estimated $25/sq.ft. (Most of the square footage contains support staff, but there are also some attorneys, practicing intellectual property law.)

So, what should we expect? Many S.F. tenants won’t move because they want to remain in physical proximity to valued clients and/ or for the educated labor supply. However, there is still some appeal to reducing Class A asking rents from $55-60/year to $32-38/year in the East Bay. Many homeowners or apartment dwellers in the East Bay would also welcome reduced commute time and reduced reliance on BART.

Ultimately, when it comes down to considering the alternatives to remain in S.F. versus enhanced profits, be sure to take the “JUST RIGHT” choice for you! Many S.F. tenants feel that they have no choice but to “tough it out” in San Francisco. In that event, follow the advice at the end of the story: “Goldilocks was so happy to see her mother (read “stakeholders”) that she promised to never wander through the forest alone again”.

Don’t go it alone: give me a call to explore your options today!

Bill Wilson – 415.268.2229

Bay Area Real Estate Deals of the Year Winners

Post by Tony Brettkelly

There are some truly staggering deals in the works. The winners for last year included over $2B in hospital projects with CPMC and the Google lease of 386K square feet at Halls Plaza worth $125MM.

This year is likely to top last year with the Salesforce lease up maybe reaching over $1MM square feet. With cranes everywhere and new ordinances coming into play to limit annual office construction, we may be starting to max out. 

See the 2013 Bay Area Winners


Want the best possible sales price for your property? Check off this “TOP 10” list first. – By Terrence Jones

Published in the SPOSFInews March 2014 edition

If you knew you were going to be selling your building in six months, what steps would you take to secure the highest possible sales price? The following is my “Top 10” list of items to assemble and to consider before putting your rental property on the market. They’re roughly in order of importance, but in some buildings the order may vary depending on specific conditions.

Assembling supporting documents

1. Leases: By far the most important documents you can have are copies of leases for all tenants. Without a written lease for all tenants, the value of your building is significantly reduced. In San Francisco, tenants can make insane claims of supposed rights. Unless you have a written lease that specifically states what those rights are, a tenant’s spurious claims can decrease the value of a sale and scare off potential buyers.

2. Estoppel Certificate: This document gives the buyer critical information on the relationship between the owner and a tenant. Without it, the first time many new owners discover that one or more of their inherited tenants is “protected” (with all the attendant rights) is after it’s too late to do anything about it. Protected tenants can decrease the value of a building by $50,000 or $100,000. If you have these certificates in hand before the sale, indicating that none of the tenants are protected, you are far more likely to get the highest price for the building.

3. Building plans: Go to the Department of Building Inspection (DBI), 1660 Mission Street, and check the microfiche files on your property. If plans for the property exist, it’s a good idea to go through the slow process of getting copies for your own records. In some sales, I’ve found that these building plans have uncovered opportunities to exploit unrented space that the current owner did not know was possible.

4. The 3R Report: The Report of Residential Building Record is generally considered the definitive source for the number of allowable units in a building. It also lists incomplete permits that can devalue a building at the time of sale. It’s an essential disclosure form and can be ordered online through DBI. It’s also a good idea to know what the city has on record about your building.

5. UST Clearance: Article 21 of the S.F. Health Code requires owners of real property in San Francisco with underground storage tanks to remove them at their expense. Back in the day, such tanks were often used to store oil for heating buildings. If you purchased your building after July 1992, this would have been covered in the sale. In any case, proof of UST clearance is a good investment.

6. Expense documentation: If you can document historical expenses, your agent can identify areas for various passthroughs that a new owner may be able to take advantage of to increase rents.

7. Inspection reports: The most helpful ones are contractor’s, termite, and sewer inspections. Keep in mind, however, that inspections may uncover and document problems you may not want or cannot afford to address. Of particular concern is the termite inspection, which must be filed with the state, and once done becomes public record.

8. Record of complaints with DBI: Often, a building has a significant history of DBI complaints on record. If so, it’s far better that you, the seller, find out what the complaints are before the buyer does. Fortunately, there is a simple way to see what’s on record by going online. Review the complaints, determine if they are valid, then take the appropriate steps.

Other considerations

9. Should I do a tenant buyout? A vacant unit is nearly always a positive for the sale of a building. Given that a unit delivered vacant is generally worth far more than one with a long-term or protected tenant, it may be worthwhile to consider a tenant buyout. But tenant buyouts can be tricky, and are best approached with the guidance of an attorney.

10. What, if any, improvements should I make? The most frequent question I get is, “What improvement will give me the greatest return on my investment?” The answer varies according to the building and one’s budget, but there’s no question that wisely considered improvements can make a big difference in both a building’s appeal and ultimate sales price.

By attending to these 10 things well before putting your property on the market, you’ll be in a stronger position to get the best sales price possible.

Terrence Jones is a Senior Broker Associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent-controlled apartments. He has extensive experience with properties with special circumstances.

For a no-cost, no-obligation comprehensive valuation of your apartment building, contact Terrence at (415) 786-2216 or by email at tjones@tricommercial.com.

Pruning Back the Hedge – Terrence Jones

Pruning Back the Hedge – Terrence Jones

Even though I trained to be an economist at Berkeley, back when the bubble burst in the early 2000s, I was drawn into San Francisco apartment sales and investment. Working in the business seemed to be one of the best pathways to gaining a competitive advantage in ownership. When I first started, one of my early mentors was very successful at investing in apartment buildings. He began by buying a small multifamily building when he was only 30 years old; by the time he was 80, he and his partners owned more than 2,000 units. When I asked him about investing in San Francisco apartments, his advice was firm. He said, “No one should ever invest in a rent control market because the business of owning real estate is sensitive to inflation…and rent control does not allow you to keep pace with inflation.”

Fast forward to today and, ironically, here I am, still helping investors buy and sell rent-controlled apartments in San Francisco. Over the years, I have often been asked by both long-term landlords and real estate neophytes if buying apartment buildings in San Francisco is a good hedge against inflation. We know what my mentor would have said, but before I considered my own answer, I needed to start by looking at the basics of inflation, particularly local inflation here in San Francisco. (To make this a relatively simple discussion, this article only talks about short-term investment hedging and is not a discussion of a long-term total investment hedge that may come from appreciation after the sale of a building.)
Read the rest of the San Francisco Apartment Association publication here. http://ow.ly/vS6Ad

Negotiation Without Detonation – by Terrence Jones

Real estate transactions can be complicated. And if you represent buyers and/or sellers of multiunit buildings in San Francisco, like I do, it’s important to pay attention to the details. Most deals go off without a hitch, but even the most experienced broker can run into landmines. When this happens, what do you do?

Read the full San Francisco Apartment Association article here.