Starboard Commercial Real Estate

Hans Hansson | November 30, 2011

Kilroy, a major new player in commercial real estate acquisitions in the San Francisco Bay Area, recently paid $400.00 a foot for a near vacant office building in South of Market that has had trouble leasing in good times as well as bad.

Buildings are selling at prices up 40% in one year while rental rates are skyrocketing in areas that are attractive to tech firms.

San Francisco is considered one of the top four commercial real estate markets to invest in the United States.

Vacancy rates in core tech areas have dropped to less than 5% with overall vacancy rates dropping to the low teens for the first time since the dot-com boom.

All sounds like a real estate boom!!!!

Yet it makes no economic senseā€¦

In 1985, I did a deal for $34.00 a foot at 33 new Montgomery Street for shell space. The term was for five years and there was a dollar increase per year. The tenant received $35.00 a foot to build out the space. The broker received a $1.00 a foot per year in fees; attorneys and architects added another $4.00 a foot. The operating expenses to run the building was $12.00 a foot and the net income to the landlord on that deal was $10.00 a foot.

Today in 2011, a deal could be done for $43.00 a foot at the same building with the same dollar increase per year. The tenant in shell would receive $70.00 a foot to build out the space. The broker would receive $2.00 a foot per year with attorney and architects fees running $5.00 and operating expenses now running $19.00. This leaves the landlord with a net income in a hot market of $4.00 a foot for the same type of deal 26 years later.

Yet the building just sold for 20% more 26 years later.

Today, new commercial buyers are thinking about replacement cost.

To build that same building today at 33 New Montgomery Street includes: buying the land, hold time to get the necessary approvals, adding in finished construction and leasing would total somewhere around $1,200-$1,400 dollars a foot. As a result, REIT buyers do not look at net incomes they look at safety and replacement costs; at $400 a foot that looks like a steal in comparison to building a new product.

The problem with looking at buildings as you would fine art is that net income still has not kept up with the value of buildings. In fact, over the years the spread between net income and building value has increased rather than decreased. San Francisco may be enjoying higher rental rates but those rental rate increases are coming because of a tech boom that is based upon speculative firms that may or may succeed. The real issue is whether mainstay businesses are able to pay higher rental rates or not. Like the rest of the country, most mainstay businesses have stabilized their business at best and are not booming. The shoe is about to drop.
Posted 7 years, 6 months ago on November 30, 2011
The trackback url for this post is http://blog.starboardnet.com/bblog/trackback.php/206/

Comments on this post:

Re: Hype in Commercial Real Estate Values in San Francisco Could be the Next Shoe to Drop
Awesome post! Keep up the excellent work!

2012/02/03 by Edinburg Homes for Sale • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/206/63646/
Re: Hype in Commercial Real Estate Values in San Francisco Could be the Next Shoe to Drop
The question in the cycle when this "tech bubble busts" will conventional business be set to take off to pick up the slack

2012/02/10 by Anonymous • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/206/63949/
Re: Hype in Commercial Real Estate Values in San Francisco Could be the Next Shoe to Drop
great post! Keep up the sweet work!

2012/02/19 by McAllen Homes for Sale • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/206/64170/

Comments have now been turned off for this post



Real Estate Blog Top Sites Blog Flux Directory  Real Estate blogs   Top Blogs
Credits: ©2018 by Starboard TCN Worldwide Commercial Real Estate
Powered by bBlog | template by Starboard Commercial Real Estate, inspired by dmig