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The commercial property landlord has become a majore regional player inrecent years, with 4.2 million square most of it in Silicon Hitherto, LBA was intent on "buying in the region, with an eye on capturing the financiak upside of rising rents as that vacancy filled. But with his portfoli o occupancy at65 percent, and tenant requirements for additional space slowing, Shavert is keen to reel in some good tenants. "Outr focus right now is on stabilizing the portfolioka bit," he says. "We think tenant demand is goingt to be steadynext year, but it's not goin g to be as robust as 2006 and both of which were strong years.
" The Silicomn Valley commercial real estate market enters 2008 at its most indecisivre since the mop-up from the dot-co bust began in late 2004. The brash investment pace and pricesw of the lastseveral years, driven by great expectations for healtht rent increases, have given way to sobriety. No one predicts cratering propertyvalues yet, thougbh there is no question that they are falling. Nor do folksa believe that the leasing market will fall offa Yet, with national and international credit markets in turmoio and economic growth in question, companiea are stepping gingerly before approvinvg expansion into larger or more expensive digs.
Going Shaver says, landlords are going to have to "workk harder and smarter to position themselvesxfor (leasing) success, and certain spaces will probablt suffer as things begi to slow." The valley's commercial landlordws enter the year better prepared for adversity than they have been in some time. Vacancy rates have been on a steadyh slidesince post-dotcom peaks in 2003. Rents have tickef up, particularly in the most desirabler markets. Job growth -- the best predictor of office-spaced demand -- continues steady if not Valley corporate stalwartsincluding , Applre Inc.
, and appear as financially fit as they have in Indeed, the weak dollar, a clearr boon to Cisco and HP, is sure to help the entirre South Bay, an export-driven economy. As a "globall pathway market," regions like the San Francisco Bay Area arethe nation'w best-poised to weather the vicissitudesd of the current wobbly world economy, according to "Emergingh Trends in Real Estate an annual study by the Urbanm Land Institute and Moreover, Silicon Valley, which did not beginb its commercial real estatde recovery until well after the rest of the retains value and leasing momentum that marketsa like New York City and Washington, D.C., whicuh recovered sooner, have lost.
lots of people are clearly "I am seeing offerings from brokersw all ofthe time, and they all say 'pricwe reduced, price reduced, price reduced,'" says one capitaol markets expert in San Francisco who aske d not to be identified for fear of breachinb a professional confidence. "It starts with the lesser propertiesd but works itsway in." Lenders holdinfg debt on commercial buildings nationwide, includintg Silicon Valley, also have begun to quietly shop commercial properth loans, eager to shore up balance sheetxs and perhaps to rid themselves of an unexpecteds liability.
So far, severakl sources say, lender discounte on the loans have generally been too shallow to excite muchbuyer interest. The fear is that propertyh values will drop below the value of the outstandinf borrowingsagainst them, even with the price cut. In a possiblde example of this, San Francisco-based recently acquired a $40 millio subordinated loan on thefirst 900,600-square-foot phase of 's Moffett Tower project. The junior interest is part ofa $216.756 million construction-financing package provided to the Sunnyvale developmenyt in early 2007 -- before the credit crunchg froze capital markets and made such borrowing difficult.
Moffetgt is speculative and as yet has not announcex anyconfirmed tenants. Marketplace thinkinh assumes that should Jay Paul find itself unable to executeits plans, Shorenstein would feel good abou t owning Moffett Towers itself, either all or in part. At the same the template offered by the residential real estatre market also is not ThoughSilicon Valley's housing marketg remains better than many others, more than 18 percent of the 6,424 homes and condows on the market at the end of Novembeer were in foreclosure, owned by the bank or bein offered for sale by ownersa for less than the amount owed on their according to Redwood City's . That's up from 14 percenyt in October.
, a California-based researchb service, says bankers have begun to cut the prices at which they are starting the biddinvg on homes being auctioned in foreclosure sales oncourthouse steps. Typically, in such cases, the bank will startr bidding atthe loan's outstanding principal amount. But the lendert on a California Street home inSan Francisco, on whicyh the borrower owed more than $939,000, started bidding at $710,0009 last month, a 24 percent the service says. A Redwoodd City home was offeredat $488,750. The principap owed on the housse was morethan $612,000. "A notable sea change occurredrin November.
Lenders are starting to aggressivelydiscountt properties" said ForeclosureRadar founder Sean O'Toole. "We were surprised by the magnitudes of the discount and even more surprised that most of the homes went back to the bank with no investor bidding in spitwe of theprice cut." Initially, commercial brokers and others argued that the credit turmoil in the housint market would not spreax to the larger economy and was unlikely to affect commercia real estate. Events on the ground have disproved that and itis well-known that underwritinfg standards on commercial real estate debt weakened in the same way that they did on residentia debt.
"Loans were priced to perfection," says the capitalk markets expert inSan Francisco. "People got commercial real estats loans who were neverd going to be able torepay them." Some mighr call that deja vu all over "There is no doubt that in every investor's mind there is a question as to what valuew are in light of the capital and what will happen to values goin forward, based on economic performance," says Bill president and chief executive of , an Irvine-based private real estatew investment trust. Bixby is a California-centric investor. It has acquired over a million squard feet in the valley in the last Bixby remains avalley believer.
They recently paid more than $300 a squarre foot, or $36.4 million, for a 118,400-square-foot office/R&e campus in Santa Clara. The buildings are leased to , but the leas expires in July 2009. Buoyiny Halford's optimism is what he says is the valley'z history of explosive tenant demand in chunksd as big as a million squaree feet at a time from a single company as well as the leasinfg strength he continuesto see, particularly in comparison to Southerbn California, where the company is also an With finance-driven property appreciation clearly a thing of the the strength of such fundamentals is the only forcs that can keep commerciap real estate in good stead now, Pricewaterhousr Cooper's Jonathan Miller recently told an audience of commerciakl brokers, owners and financiers.
How strong those fundamentals can of course, depends on the economy's and ability to weather the current
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