FEATURES

Northern California January 2017 Vol. 10 Issue 1

FEATURES Workplace Design Event Highlights Trends in Occupancy Standards for Today’s Tech Tenants / 20 Heavy Hitters Talk Regional Trends at Landscape San Francisco / 28 EB-5 Continues to Impact Commercial Real Estate Funding and Development / 38

Northern California January 2017 Vol. 10 Issue 1 Newmark Cornish & Carey All rights reserved. Copyright © 2017 Newmark Cornish & Carey Written by: Gary Marsh | Marsh Marketing Editor: Bonnie Readd Editorial Design: Grant Zhao Creative Director: Candice Liu Marketing Director: Peter Jograj For reprints or article suggestions contact Peter Jograj at 408.987.4102 or by e-mail at: [email protected] 2804 Mission College Blvd. Suite 120 Santa Clara, CA 95054 • 408.727.9600

PRESIDENT’S

LETTER

Greetings to 2017!

All of us at Newmark Cornish & Carey hope that you had a wonderful holiday season and that you are rested and ready for the New Year. After all, the final four months of 2016 were chock full of activity as the regional economy kept humming along and the financial markets really reacted to the surprising election results. We expect another busy year, as you will read in this issue, with Northern California poised to continue adding jobs to our economy, albeit at a slower rate than the recent 30 months. Since our last print edition of INSIGHT published in September, we have produced digital newsletters with original content and you will read those stories here, such as the update on EB5 as a financing vehicle for commercial real estate development projects. We also covered the lease up of Almaden Ranch, and its anchor tenant, Bass Pro. As retail concepts and business plan execution goes, Bass Pro is in a league of its own and this was one of our more popular stories in recent memory. The November

issue featured Landscape San Francisco, a media event produced by The Registry. You will want to read what some of the leaders in our industry have to say on the state of the market and economy. Which brings us to original stories prepared for this issue. First, we take a look at how pricey urban core markets are driving suburban activity, and follow that up with the outlook for Silicon Valley this year. The story on FASB discusses the impact of accounting rules changes on leasing, while the workplace design event article features a who’s who of tech tenants talking about design standards for the modern office and what tech workers want in their corporate environments. We close with an in-depth interview with Nicholas Bicardo, who joined our team last August and is the new Vice Chairman and Head of Retail Capital Markets Northern California. Nick and his team are playing a central role in the company’s expanded retail real estate and investment services.

Looking ahead, we expect no shortage of economic news as the new administration in Washington officially begins this month. How this impacts the real estate industry is on everyone’s minds, in addition to working in a rising interest rate environment for the first time in a decade. Preliminarily, the pundits and most of the trade media anticipate that the new administration and some of its economic policies should be good for the commercial real estate industry. Let’s hope so. We wish to extend our heartfelt gratitude to our clients for their ongoing trust in our professionals and staff to serve them with best-in-class real estate services. We recognize that everyone has options in selecting service providers and appreciate the relationships that we’ve established and the work we do together to achieve their business objectives. Have a healthy and prosperous 2017!

Chuck Seufferlein President, Western Region

Pricey Urban Core Markets Drove Suburban Activity in 2016

TABLE OF CONTENTS 08 /

Trends 2017 – IPO Market, Sublease Space, Jobs

10 /

Pricey Urban Core Markets Drove Suburban Activity in 2016

14 /

Silicon Valley Outlook

16 /

Infographic Space Comparison Apple and Google

18 /

New (FASB) Accounting Rules Set to Disrupt Commercial Leasing

20 /

Workplace Design Event Highlights Trends in Occupancy Standards for Today’s Tech Tenants

24 /

Retail Capital Markets Overview and Interview with Nicholas Bicardo

26 /

Bright Spot in Business Spending: Research

28 /

Heavy Hitters Talk Regional Trends at Landscape San Francisco

32 /

NGKF Buys Mexico City Affiliate

34 /

Anchored by Bass Pro Shops, Almaden Ranch Fulfills Destination Shopping Promise

38 /

EB-5 Continues to Impact Commercial Real Estate Funding and Development

40 /

Unlikely Trifecta of Negative News Adds Turbulence to Financial Market in the Third Quarter

42 /

Stanford & Cal Haul Home Rio Hardware

42 /

Amazing Apple

43 /

Bubble Watch

44 /

In Step with New Life Science Practice’s Jennifer Vergara and Mary Hines

46 /

Golf Tournament


p18

Workplace Design Event Highlights Trends in Occupancy Standards for Today’s Tech Tenants

NGKF Buys Mexico City Affiliate

Anchored by Bass Pro Shops, Almaden Ranch Fulfills Destination Shopping Promise p34

p28


p20

p10

p32


In Step with New Life Science Practice’s Jennifer Vergara and Mary Hines p44

p38

Northern California

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NEWMARK CORNISH & CAREY | 9

8 | INSIGHT

Trends 2017 IPO Market, Sublease Space, Jobs

As we roll into 2017, the question on many minds is will the IPO market snap out of its funk?

By Gary Marsh

Perhaps. In November Snap Inc., the parent company of the popular messaging service Snapchat, filed paperwork for an initial public offering that is expected in March of this year. It is one of the highest profile stock debuts in years and is expected to be upwards of $25 billion. By comparison, in September 2014 Chinese e-Commerce company Alibaba Group raised $169.4 billion in its IPO and Facebook’s May 2012 public launch raised $81.2 billion, according to Dealogic and as reported in the Wall Street Journal. The Snap offering could be a boost to what was a dismal 2016 for the IPO market. Dealogic reported that only 103 companies listed their shares in the U.S. last year and raised only $21.8 billion combined, the lowest level for deals since 2009 and for proceeds since 2010. IPOs being the important bellwether that they are for the Bay Area economy, INSIGHT will be keeping an eye on this topic throughout the year.

Sublease Space Speaking of bellwethers, sublease space is often considered to be to the commercial real estate market what eyes are to the soul in the Chinese proverb (“eyes are the windows to the soul”). Sublease space came to the forefront of everyone’s thinking when Twitter posted a marketing prospectus online in early August 2016 saying it would sublease approximately 30 percent of its Market Street (San Francisco) headquarters space (the San Francisco Chronicle, SF Business Times and even USA Today reported this news). For now, sublease space is “much ado about nothing” as it is filling an important piece of the leasing market by making available more affordable and flexible prime space to tenants in the market that are hungry for offices. Case in point and as The Registry first reported in October, Nerdwallet, the financial services recommendation and advice

site, committed to 104,850 square feet (three floors) at the 1 Tenth Street Twitter building. Then, in December, The Registry reported that Nextdoor, a private social network for neighborhoods and Thumbtack, a professional service recommendations matching service, took much of the remaining available 79,000 square feet in Twitter’s 1355 Market Street building. INSIGHT will be following the sublease space topic this year as the markets shift, beginning with a few references in the Silicon Valley Outlook report later in this issue.

Jobs Senior Economist Jerry Nickelsburg with the UCLA Anderson School of Management forecast in December that non-farm job growth in California for 2017 would equal a 1.8 percent gain – nominal growth by most measures but mostly because at a 5.5 percent unemployment rate, the state is basically at full employment. By comparison, in 2016 California generated approximately 2.4 percent more jobs than it had in 2015, according to the California Employment Development Department (CEDD). In the South Bay submarket of the Bay Area, from October 2015 through October 2016, 34,400 non-farm jobs were created in the region, a 3.3 percent increase. Beacon Economics anticipates moderate job growth in the South Bay over the next few years. From the third quarter of 2016 until the end of 2017, expect to see employment increase by about 2.5 percent, continuing at a rate of about 2 percent growth per year after that for the near future. Likewise, expect to see unemployment stick close to its current rate of 3.8 percent as steady increases in the labor force are offset by continued job gains. Meanwhile, Beacon Economics has reported that almost 36,900 job seekers entered the East Bay labor force between October 2015 and October 2016, a 2.7 percent expansion. This contributed to nonfarm employment growth that was also 2.7% over the same period. The East Bay unemployment rate stood at 4.3 percent as of October 2016.

Street Scene Much has been written and said about the Bay Area’s employment boom (600,000 new jobs since the end of the recession) and subsequent traffic in recent years. During the presidential election, we heard how people have to take multiple jobs or make long commutes to make ends meet. On a recent visit to the Peninsula and Silicon Valley, INSIGHT experienced these trends first hand. While waiting to get buzzed into a second floor office suite in downtown Burlingame, I chatted with the UPS delivery person who was also waiting to get buzzed in to make a delivery. Making small talk, the young African-American woman said she was tired but doing well (I thought the comment of being tired was odd, since it was only Monday). She went on to say that she lives in Manteca and gets up every morning at 4 a.m. to get herself and kids ready for school and to pack lunches for her children and husband. She takes a bus to South San Francisco (2 hours) but can’t sleep because it is too noisy, she said. She starts her shift at 9 a.m. and ends at 7 p.m. and she takes the bus back to Manteca. By the time she walks in the door, it’s about 10 p.m. Her husband takes care of the kids in the evening. I asked her if there aren’t jobs closer to home that she could take and she said no. “I get $19 an hour and $28 for time-and-a-half. I would be lucky to get a $10 an hour job in Manteca,” she said. That night I had dinner at a brew pub in Sunnyvale. My food server was a pleasant woman in her late 20s, half Korean, half Irish. She looked Hawaiian. Kimberly was her name, and she grew up in Monterey. Her Dad was stationed at Fort Ord. There were no jobs in Monterey so she moved to San Jose (at first). Kimberly works at two restaurants to ensure she gets at least three lunch shifts and four of the better paying dinner-service shifts, between the two restaurants. She also picked up a few late night shifts at a bar in Cupertino, where she now lives “to get through the holidays with some extra cash.” Her husband has a good paying construction job and is currently working on the Apple “spaceship” in Cupertino, installing some very expensive, curved-glass windows imported from Germany.

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10 | INSIGHT

Pricey Urban Core Markets Drove Suburban Activity in 2016 By Gary Marsh With commercial rents and housing costs seemingly hitting new record highs each calendar quarter in and around downtown San Francisco, leading Silicon Valley hubs and other magnetic near-by locations, it’s no surprise that Bay Area residents and businesses alike are seeking relief from the sticker shock typically seen at this stage of the real estate and economic cycles. And an increasing number of them are securing relatively affordable workplaces along the suburban freeway (and BARTserved) corridors of Contra Costa and eastern Alameda counties—and even points further east and north. While this hasn’t generated another round of speculative office development in those bustling ‘burbs—at least not yet—several noteworthy developers are actively supplementing transit-convenient suburban multi-housing stocks, along with additional facilities targeted toward retailers and service outfits who follow all those new rooftops and employees. Some of the most notable examples are playing out along the Tri-Valley market’s BART-served I-580 and I-680 corridors. For instance, high-growth cosmetic outfit Rodan + Fields opted to expand out east rather than pony up for more high-priced space near its home office in The City. R+F recently committed to about 150,000 square feet within a huge block of the former AT&T space at the 680 Corridor’s highestprofile mega-project, Sunset Development’s Bishop Ranch in San Ramon. Thanks to the Rodan deal and numerous other noteworthy occupancy transactions, the Tri-Valley office market’s third-quarter net absorption (exceeding 700,000 square feet) amounted to its best showing since the turn of the Millennium, reducing the Class A vacancy rate more than 350 basis points to just over 13.5 percent. Again the apparent key attraction, along with transit access, is the affordability of the corridors’ rental rates—relatively speaking, of course.

Average asking rents for top-tier fully serviced office space in Bishop Ranch have strengthened to a bit over $2.50 per square foot per month, a huge bargain compared to San Francisco and the highest-demand hubs surrounding Palo Alto. Overall asking rents (i.e., all quality classes combined) now average more than $5 a foot in San Francisco, and about $4 in Silicon Valley, with Class A spaces in the strongest submarkets often commanding twice those rates. But developers expecting commercial and residential tenants to continue migrating away from urban cores should pay particular heed to associated risks at this point in the cycle. Truth be told, demand in the Bay Area’s core markets appears somewhat softer today than it was a year ago. San Francisco office rents and space absorption have hit something of a plateau in recent months, while Silicon Valley’s absorption and vacancies have trended negative over the past couple quarters. And millions upon millions of square feet of newly constructed competition is on the way.

Meanwhile, rising land and materials costs have thinned development pro forma margins, as likewise tends to happen after years of resilient user demand primes the construction pipeline. Most recently, heavily booked Bay Area construction contractors and subcontractors have been able to squeeze those margins even further by sharply raising compensation rates.

surpassed the 6.5 percent mark sometime around Thanksgiving.

Would-be developers now needing additional rental-rate premiums to make their latest suburban proposals pencil should also keep in mind that suburban markets tend to get hit first when general economic growth recedes. And as mortgage securities surveillance specialist Trepp reports, delinquency rates of securitized mortgages collateralized by U.S. office, industrial and even apartment properties each increased by at least 10 basis points in November.

According to the widely cited annual Emerging Trends in Real Estate analysis from PwC and the Urban Land Institute, suburban areas accounted for 91 percent of population growth, and 84 percent of household growth, within the top 50 U.S. metro areas from 2000 to 2015. And during the recovery period starting in 2010, employment growth in suburban locations has been half-again stronger than in urban sites.

The retail sector was stable, but at an uncomfortable delinquency rate of nearly 6.2 percent. The thriving apartment category’s delinquency rate remains at an enviable 2.5 percent, but industrial delinquencies are now up to 5.7 percent. And the everrisky office sector’s nationwide average

The more encouraging trendline for the Bay Area’s suburban-minded developers is that— notwithstanding all the discussions of urban revitalization—employers and employees have demonstrated a clear preference for suburban life so far in the early 21st Century.

Despite the risks inherent in launching speculative suburban developments when cycles near their peaks, it’s probably no surprise some pretty savvy players are pursuing ambitious projects in Bay Area ‘burbs.

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12 | INSIGHT

Indeed at Bishop Ranch, Sunset’s Mehranfamily-led brain trust perceives great opportunities to continue attracting tenants by upgrading the big business park’s amenity offerings – such as the 300,000-square-foot City Center retail/entertainment complex soon to provide a more eclectic array of experiences. Down the 680 in the greater Pleasanton marketplace, other local heavyweights are collectively building thousands of apartments, often supported by retail spaces, mostly at sites convenient to freeways, BART and other transportation assets. For instance big public REIT Essex Properties is developing a pair of projects totaling about 500 units a quick skip from the East Dublin/ Pleasanton BART station. Some of the future residents are bound to be employees of cost-conscious traditional Silicon Valley corporate employers this suburban hub has been attracting. A notable

timely example: human-resources software developer Workday has purchased two buildings totaling approximately 275,000 feet in recent months surrounding its headquarters facility near the West Dublin/ Pleasanton BART station. Workday also just launched construction on its 410,000-square-foot LEED Platinum flagship adjacent to the BART platform and across from Stoneridge Mall, all right at the 580/680 interchange. Considerable residential and retail development is also occurring along the 680 corridor’s northern stretches, where rising rents and dwindling vacancies may well generate some spec office development in the not-too-distant future. In Walnut Creek, Blake/Griggs Properties is preparing to launch a nearly 600-unit apartment community with 30,000 square feet of retail near the 178-unit apartment project it is opening near the Walnut Creek BART station.

Further up the freeway in Concord, CenterCal Properties is converting part of the former Chevron campus into the $100 million Veranda venue featuring some 375,000 square feet of shopping and entertainment spaces. And factoring in the removal of former Chevron space along with the recent 280,000-square-foot Newmark Cornish & Carey-negotiated lease to Wells Fargo at Swift Plaza, Concord could even become ripe for additional office development. With the availability rate falling and top-tier North Corridor offices now commanding average rents north of $3.75 per square foot (up by double-digits since mid-2015), select projects might pencil out ahead in Walnut Creek and/or Concord. Indeed some seems inevitable in the latter city, as a Lennar affiliate launches the initial 500 acres of development at the decommissioned Concord Naval Weapons Station in 2018.

Meanwhile, and thanks to the large vacancy left by Fireman’s Fund in Novato as it greatly downsized and moved remaining operations to Petaluma, the Marin office market’s overall availability remains in the uncomfortably high teens. Even so, landlords can take comfort in that asking rents for top-tier offices have moved up nearly 15 percent over the last year to more than $4.50 a foot in Marin’s southern and central flanks. And the escalations are now migrating further to the northern parts of the county, Newmark Cornish & Carey’s Haden Ongaro told the Marin Independent Journal in early December. “We foresee a strong 2017 with rents continuing to go up and maybe a couple of bigger deals,” Ongaro told the Journal.

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14 | INSIGHT

Silicon Valley Outlook By Gary Marsh

Bob Dylan’s lyrics, “you don’t have to be a weatherman to know which way the wind blows,” aptly applies to Silicon valley’s office and R&D market coming into 2017. Third quarter net absorption for R&D product was negative 1,465,564 square feet, the biggest hit to the sector since 2014, while the office market tumbled in 2016 as well, with each of the first three quarters of last year in negative net absorption territory, according to Newmark Cornish & Carey research (4th quarter data was not in when this issue went to print). The third-quarter drop in office net absorption outpaced the first two quarters last year and left the market down 811,240 square feet through the first nine months of 2016. Compounding matters, there are over 100 office and R&D projects in various stages of construction and planning that could bring more than 50 million square feet to the market in the next few years if they all get built.

For office space, the overall average asking rate for Silicon Valley space finished the third quarter last year at $3.91 per square foot, up from $3.60 per square foot at the end of the third quarter in 2015. Class A asking rents tumbled slightly in the third quarter of 2016, declining to $4.18 a foot from $4.22 per square foot at the end of the second quarter. The most expensive office rents in Silicon Valley, not surprisingly, are to be found in Palo Alto. Howie Dallmar and Kevin Cunningham from Newmark Cornish & Carey’s Palo Alto office are marketing 550 High Street, which is owned by Chop Keenan and has three floors of office space (22,000 square feet total). The fourth floor of the building is residential. The asking rate for the offices is $10.95 per square foot, triple net.

A parking structure rises up in the eastern portion of The Irvine Company’s Santa Clara Square, where 600,000 square feet of office space was recently completed and another 1.1 million square feet are scheduled to come online in 2017. Santa Clara Square already has 50,000 square feet of retail opened (anchored by Whole Foods). Approximately 1,800 apartment units are slated to open in 2018 with another 45,000 feet of retail configured as a ‘main street’ theme.

“We would still characterize our market as healthy but hard to match the pace of the last year or two,” Yandle said.

“It’s not the first time we have seen product chase, and ultimately catch, the market. It is more reflective of supply increasing than demand decreasing. There is still a lot of demand, just not as much from the major players,” says Newmark Cornish & Carey’s Executive Vice President John Yandle. “On the positive side,” Yandle continued, “the Valley is going more vertical than horizontal and it should slow sprawl— the days of 35 percent lot coverage for commercial offices are over.” INSIGHT asked Yandle’s colleague, Executive Vice President Todd Shaffer, if the shift in the marketplace is cause for concern: “No, not really. Development may have caught up, but remember it takes 3-5 years to bring new product to market, and going forward, it is going to take even longer—cities want slower growth,” Shaffer said.

Sublease Space

Impact on Rents

Sublease space continues to filter into the market but is significantly offset by demand for the price relief this same product offers. In the third quarter last year more than 155,000 square feet of office sublease space was absorbed, bringing the total for the first three quarters of 2016 to 422,988 square feet. The overall Silicon Valley office vacancy rate finished the third quarter at 9.4 percent.

The softness that started in 2016 had more of an impact on absorption than rents. In fact, in the third quarter Santa Clara’s R&D asking rate increased $0.06 from the second quarter to reach $2.17 per square foot—the highest it had been since the dot.com era and more than twice as high as asking rents from its 2011 low when rates in Santa Clara bottomed out at $1.00 per square- foot.

For R&D product, sublease space is less of a factor as it gets absorbed almost as quickly as it is put on the market. The overall R&D vacancy rate was 11.0 percent at the close of the third quarter.

Valley-wide, R&D asking rents were $1.87 per square foot at the close of the third quarter. By comparison, they were $1.65 per square foot at the end of the third quarter 2015.

Shaffer described the market going into 2017 as closer to equilibrium than it has been in years. “The amount of space hitting the market will make 2017 more competitive between landlords and tenants as everyone will have to fight for fewer deals with more options to choose from, but as John said, that’s just because we should have a more normalized year than what we experienced in 2014, 2015 and the early part of 2016. We expect asking rates to soften, however. For landlords footing the bills on tenant improvements—that could be offset by lower construction costs. After three years of dramatic construction cost increases, we are hopeful that pricing for materials and labor will stabilize in 2017,” Shaffer said.

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Infographic Space Comparison - Apple and Google 37 Million S.F. Later (and counting...) 10.8M 2012-2016 Apple Google

Total

LEASED

6.9M PURCHASED

3.9M

2.8M 2.0M

Apple

2.3M 494K

2014

179K

2013

* Does not include ±4 million SF of North San Jose future development Capacity. Does in clude new Cupertino “spaceship” HQ.

2012

1.8M

2015

BAY AREA TOTAL

3.9M 3.3M

3.3M

1.8M

644K

2016

Google

TOTAL

5.1M

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18 | INSIGHT


According to FASB’s “Accounting Standards Update” in late February, lessees will be required to recognize balance sheet assets and liabilities “for the rights and obligations created by those leases.” Designed to improve the financial reporting of leases, the new standards terminate what the Securities and Exchange Commission and other parties view as a major area of off-balance sheet accounting. From Enron to the role of CDOs in the Great Recession, many off-balance-sheet scenarios have turned from hidden liability issues to financial horror shows.

New lease accounting standards for commercial properties will force major changes in bookkeeping and real estate strategy. By Brian A. Lee

“Recent surveys suggest that less than 10 percent of companies are prepared to comply with this new standard,” says Pinnell, who maintains that while the effect of the accounting changes on landlords will arguably be minimal, both sides of the leasing equation must thoroughly prepare to rise to the new standard.” The key to commercial real estate is cash flow. Safety, if not success, comes in numbers, as in the number of tenants an owner has filling up real assets and cutting monthly rent checks. That’s why any changes to the rules of commercial leasing, such as those announced in the first quarter 2016 by the regulator Financial Accounting Standards Board (FASB), get a lot of attention in the real estate world. Perhaps accounting revolution is the better description if it adds $1.35 trillion in assets and liabilities to company balance sheets, as the National Association of Realtors reported.

Stephen LaMontagne

“The main challenge will be to understand the tenants’ new motivations,” says Stephen LaMontagne, partner at Moore Colson, an Atlanta-based certified public accounting and consulting firm. “Since the new requirements will result in increased leverage on the tenants’ balance sheets, tenants may negotiate for shorter lease terms and/or more variable components to the lease in an effort to minimize the resulting leverage.”

The new standard’s essential premise is that substantially all leases will be capitalized on the balance sheet, including what was traditionally recorded as capital leases and operating leases. The stipulations bring a whole new focus on lessee assumptions and the key drivers of the lease negotiations, including the initial term and renewal/ cancellation options, variable payment streams and residual guarantees, according to Wayne Pinnell, managing partner at Haskell & White LLP in Orange County, Calif. According to LaMontagne, the FASB changes have created “pressure points” for the tenant that will increase the risk to the landlord because of the likely increase in financing costs on the property (see raised risk) and decrease in value of the commercial asset due to shorter lease terms and uncertainty with respect to variable payments.

Wayne Pinnell

Plusses & Minuses When the new rules go into effect in 2019, the lessee balance sheet will be “grossed up” to record “right-to-use assets” and a corresponding lease liability based on the present value of the lease payments. “Under the adoption criteria for existing leases, the asset will not always equal the liability, resulting in a cumulative change adjustment that is recorded to retained earnings,” says Pinnell. “By some estimations, there are many leases out there that could result in recording a liability in excess of the asset which would have an immediate negative effect on retained earnings.” LaMontagne points to the change in straight-line rents as a particularly noteworthy item to come out of the comments period leading up to FASB’s final pronouncement. The change from lease revenue typically being recognized on a straight-line basis could have a significant impact on how lessors recognize revenue from operating leases related to real estate. “In the new requirements, to the extent that step rents are used to reflect or compensate the lessor for anticipated market rentals or market conditions, the lessor is required to recognize rental revenues on a systematic basis other than straight-line,” LaMontagne adds. Pinnell introduced another consideration: “Companies will find themselves negotiating with other business partners, including banks, when contracts, such as borrowing agreements, have provisions based on liquidity, EBITDA (earnings before interest, tax, depreciation and amortization) and other classic measurements that will generate different results from the new accounting affecting balance sheets and income statements.”

Devil in the Details To implement the new FASB commercial lease standard, companies will need

new processes, systems and controls that will impact both their operations and IT departments. Any gaps in staffing, knowledge/ training, software and systems, and data storage must be addressed. “Companies should thoroughly prepare in advance for the changes that the lease pronouncement will have on their balance sheets as the implementation could have significant impact on debt covenants and other financial statement ratios,” LaMontagne asserts. After inventorying all leases, organizations will need to determine if they are operating or finance, a classification that will affect the revenue and expense “recognitions” for landlords and tenants, respectively, according to the partner at Moore Colson, a more than 35-year-old accounting firm. In addition, lessees and lessors will also need to identify lease and non-lease components in a contract and allocate the transaction price to the individual components in accordance with the new revenue recognition standard. “Recent surveys suggest that less than 10 percent of companies are prepared to comply with this new standard,” says Pinnell, who maintains that while the effect of the accounting changes on landlords will arguably be minimal, both sides of the leasing equation must thoroughly prepare to rise to the new standard. For public companies, the new FASB standard should be adopted for fiscal periods beginning after December 15, 2018, i.e., calendar 2019. The “trick,” according to Haskell & White LLP’s managing partner, is the requirement for retrospective application, which means large public companies will be restating financial statements from 2017 forward. Private companies have the benefit of one additional year before the advent of new lease accounting standards that will create a new “market standard” for lease lengths and rental rate structures. “Another issue affecting financial reporting is the adoption of new standards for revenue recognition, the adoption for which is currently one year ahead of the leasing standards,” Pinnell says. “As such, we are approaching a period of unprecedented changes in major areas of reporting affecting virtually all private and public companies. These landmark overhauls will be challenging companies as they deal with infrastructure, knowledge and personnel issues.”

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20 | INSIGHT

Workplace Design Event Highlights Trends in Occupancy Standards for Today’s Tech Tenants Story and Photos by Gary Marsh

With words like ‘collaboration’ and ‘community’ dominating the conversation, The Registry’s second annual Workplace Design Silicon valley event offered plenty of insights on what tech companies want from their workplaces in today’s environment. Held in one of the first three spec buildings constructed by the Irvine Company at Santa Clara Square (the building is warm shell complete), the panel was moderated by Caroline Quick of T3 Advisors and the panelists included Google’s Amber Bradbury, NVIDIA’s Jack Dahlgren, Splunk’s Ed Axelson, Studio O+A’s Primo Orpilla and SurveyMonkey’s Becky Cantieri.

Dahlgren got things going by providing an overview of the development of his company’s new HQ facilities dubbed ‘Project Endeavor’ that even has its own tagline: “A New Home for Collaboration.” He cited a study by MIT (Massachusetts Institute of Technology) in which people that share the same floor in the same building have a very high percentage of bumping into each other (so to speak), whereas people that work in the same building but not the same floor connect incidentally on a more limited basis (single digits %) while people working in the same campus but different buildings “hardly ever” connect with their colleagues on a nonplanned basis. Later in the discussion, architect Orpilla called what they (the design teams) are trying to accomplish “engineered serendipity,” or the business of creating collaboration and its end product—ideas. Related, Axelson, who prior to Splunk ran the real estate and facilities department for Twitter, commented that “the value of random interaction cannot be over-stated.”

L-R (NVIDIA) Jack Dahlgren, Operations Manager, (Splunk) Ed Axelson, Corporate Real Estate & Facilities (speaking), (Studio O+A) Principal Primo Orpilla, (SurveyMonkey) Becky Cantieri, Senior Vice President Human Resources

NVIDIA’s futuristic-looking campus at San Tomas Expressway and Walsh Avenue in Santa Clara has about 500,000 square feet in just two stories, giving it some of the largest floor plates around outside of Facebook’s 430,000 square foot single room in Menlo Park. Dahlgren said the building will have 2,200 work stations around the perimeter with common areas dominating the center of the facility. “The large floorplates have lots of nooks and crannies and decks to host mini-meetings and community-based conversations,” he said. The triangular theme symbolizes the basic element of computer graphics – the polygon. Occupancy is expected in the first half of 2017. (Building photo courtesy of the 111th Aerial & Architectural Photography)

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A look at the building perimeter (showing no obvious ingress and egress) and hearing that “all” of the common areas would be in the center of the building could be confusing, but after the event Patty Steele, a Senior Managing Director with Newmark Cornish & Carey who attended The Registry event and toured NVIDIA’s new facility in November, cleared that up: “The building has two floors of subterranean parking and the primary and certainly employee entrance to the facility is in the center from those parking areas. It leaves almost the entire perimeter open for offices and 360 degrees of killer views. All the mechanical systems are in the center of the building and not on the roof. I think they have plans to create some upper level space for employees to hang out, lounge and connect. It’s an amazing facility and demonstrates the level of design companies need to do these days to not only recruit and retain employees, but make them as productive as possible,” Steele said.

Google’s Amber Bradbury, Regional Facilities Operations Manager, speaks while NVIDIA’s Jack Dahlgren looks on Bradbury said “at Google it is super important to include intentionality into all design work with the goals of achieving a holistic plan that supports cultural elements so the workplace promotes engagement and offers better tools for its workers.” She also said that diversity is one of Google’s biggest initiatives and talked about creating a work environment that accommodates five generations of workers. Think about that—there are people working for one company that are in their 20s, 30s, 40s, 50s and 60s—and they mostly work differently because of their age differences. Google is trying to address that. Newmark Cornish & Carey’s Steele noted that several of the speakers talked about how important it is (critically so) for end-users to be involved in design and space planning from the very early stages of creating new office space.

(SurveyMonkey) Becky Cantieri is doing the talking In fact, “staff input is a fundamental pointof-view for our company. After all, we are a survey company,” said SurveyMonkey’s Cantieri. She continued by saying that engagement and asking employees their opinions matters greatly to the company’s leadership. When the company built out its HQ in San Mateo, they showed employees the initial design phase by issuing a survey and then showed staff subsequent design iterations by surveys. Further, SurveyMonkey physically showed staff the building during buildout so there was a great deal of buy-in to the design and space planning well before they took occupancy. Axelson was part of the corporate real estate team at Netscape in the late 1990s when the modern workplace shifted from private offices to open floors and cubicles as the labor market (for tech talent) started shrinking. “We recognized back then that the availability of talent spurred interior design and how important it was to work with enduser groups and recruiters to get the space right,” he said.

Speaking is Studio O+A’s Primo Orpilla

T3 Advisors Vice President Caroline Quick moderated the event.

Returning to the theme of collaboration, Orpilla said that it is his job (and his teams’) “to set up the framework for fostering community.” Dahlgren echoed the sentiment, saying that “transitional spaces are important—the space near conference rooms, for example, to provide space for people to chat casually before going into or coming out of a meeting.” As to the future of office space, Orpilla was confident that it will still be around for decades to come. “The office will never go away because as humans, we like community,” he said.

Jack Dahlgren

Northern California

January | 2017


24 | INSIGHT

Retail Capital Markets Overview and Interview with Nicholas Bicardo

What attracted you to the NGKF platform, and why now?

“We’re heavily focused on building out a best-in-class capital markets team in all of the major U.S. investment markets. At HFF, we started the Northern California retail investment platform and grew it into one of the top market positions and we have the opportunity to do that here. I love being involved in building and growing something. What is largely different at NGKF is that we have access to leasing intelligence and can connect the two lines of service—leasing and capital markets—for our clients.

What’s the current 30,000-foot view of the retail capital markets space?

“It continues to be the barbell spectrum (the metaphor for activity being weighted heavily on the far left and equally as heavy on the far right). On the left you have value add and on the right, core— both of which have incredible demand from both capital and tenants. Everything in the middle is considered to be slightly off the plate and that is where we see less activity. Fundamentally, the retail market is quite healthy. Certain segments of the industry continue to go through changes, such as department stores, grocery, etc., but change is constant in retail. Investors and owners have a strong sense of confidence in the market. Vacancy rates are low and rents are strong, especially on the West Coast. If there is an issue with retail right now, it is lack of quality inventory (for sale).”

By Gary Marsh In August Nicholas Bicardo, joined Newmark Cornish & Carey in San Francisco as its new Vice Chairman and Head of Retail Capital Markets Northern California with the mandate to grow the firm’s investment sales platform for institutional-grade properties with a concentration on retail and mixeduse assets located throughout the Western United States.

Prior to joining Newmark Cornish & Carey Bicardo worked at HFF. He has closed more than $2 billion of real estate transactions with 16 years of experience. Recent transaction include Pacific Commons (Fremont, CA $202 million), Alameda Landing (Alameda, CA $125 million), Alamo Plaza (Alamo, CA $102 million) and Ghirardelli Square (San Francisco, CA $55 million) to name a few. Bicardo’s team includes Director Brandon Rogoff and Associate Director Bryce Holman. Bicardo earned a bachelor’s degree from the Haas School of Business at the University of California, Berkeley.

At the time of his hiring, NGKF Western Region President Chuck Seufferlein said: “I am thrilled to integrate Nicholas’ team with the newly expanded Northern California NGKF Capital Markets team, as well as with the robust retail leasing group at Newmark Cornish & Carey. Creating a powerful combination of people, platform and services ensures our clients’ needs are expertly defined and perfectly executed.” INSIGHT interviewed Bicardo before the holiday break to learn more about his team’s focus and current conditions in the retail capital markets space. Here’s a snapshot of that interview.

What’s going on in the trenches – what’s hot, what’s not?

“We continue to see a lot of activity in the secondary markets. For sellers, pricing has fully recovered and even surpassed metrics seen in the prior cycle in most secondary markets. For buyers, there are significant arbitrage opportunities where existing cap rates are relative to the existing interest rates (even with the recent uptick in rates).” “What’s hot right now is high street/urban retail and grocery-anchored retail. Both continue to generate incredible demand

from domestic and foreign capital. The grocery-anchored space continues to be the darling. Good quality product located in primary markets is very limited. When it comes available, we are seeing new benchmark pricing on every trade. Given where fundamentals have improved to, the value add product is almost far and few between. “What’s challenging right now is the B-mall space. We have been involved in several B mall transactions and currently there continues to be little capital for that product from both the lender and equity side. This is largely a function of continuing changes in the retail space and the fact that many B malls are going to be transformed over the next five years if they want to remain productive.” “The main discussion point in the market right now is pricing. The increase in treasury rates, post-elections, have lenders re-pricing which has a direct impact on underwriting for the equity. Treasuries have gone up more than 70 basis points (from early November to late December when this interview was conducted). This movement coupled with the recent increase in rates from the Fed certainly sets the stage for an interesting 2017.”

What are the primary sources of capital for retail deals? “Funds from the advisors, separate account money, public REITs, and private syndicators.”

With so much capital chasing all available offerings, where is the smart money going for alternative options? “Smart money” is going after opportunities where they can capitalize on their expertise. They are pursuing opportunities where they can leverage their expertise and add value, particularly by growing the net operating income to a property. Capital is going for location – ideally on or near transit, dense, infill locations. Investors continue to exercise discipline in their underwriting and making sure their investments are risk adjusted.”

Very little retail space was built in the downturn but it has come back a bit in the last 36 months. Do you see much new retail development coming online in 2017 and 2018? “New supply has picked up but it isn’t substantial. Being in a supply-constrained environment has been good for early investors, landlords and sellers. New development is tough to justify. The cost of construction is high and construction financing is not easy to come by. Any new retail in the next 24-36 months will be limited and highly selective.”

Northern California

January | 2017


26 | INSIGHT

Bright Spot in Business Spending: Research

Resilient R&D

Originally Published in the Wall Street Journal By Ben Leubsdorf American businesses are building fewer buildings and buying fewer machines, but they have continued to spend on a key ingredient of future productivity and economic growth: research and development. Private fixed investment in R&D surged at a 17% annual rate in the second quarter, adjusted for inflation and seasonal variations, according to the Commerce Department. That was the strongest burst of R&D spending growth since the third quarter of 2006, and it came as business investment declined for both equipment and structures. Firms can postpone capacityexpanding investments in machinery and plants when business is slow, said Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, a trade group. But “R&D is like your seed corn,” he said. “In order to be competitive, you’ve got to have products in the pipeline.” Business investment remains a troubling weak spot for the U.S. economy, and it has contributed to a slowdown in overall growth since last year. A broad measure—fixed nonresidential investment—declined outright in late 2015 and early 2016. It would have declined this spring for a third straight quarter had rising outlays on intellectual-property products, including software and R&D, not offset declines in spending on equipment and structures. Looking through short-run volatility, business investment in R&D and software was more stable through the 2007-09 recession and subsequent recovery compared with company spending in other categories, and it has picked up in the past few years as the federal government has scaled back its own R&D expenditures. Since late 2007, fixed private investment in intellectual property has risen 29%, including a 23% increase in R&D

Business spending on R&D and other intellectual-property products was stronger and more stable during and after the 2007-09 recession compared with spending on equipment and structures.

spending, versus 15% growth for equipment purchases and a 19% decline in spending on structures. The recent pullback has puzzled Federal Reserve policy makers as they debate mixed signals on the health of the economy and consider the proper timing of their next increase in short-term interest rates. “Part of it, of course, has been the huge contraction in drilling activity associated with falling oil prices, but the weakness in investment spending extends… beyond that sector, and I’m not certain of exactly what explains that,” Fed Chairwoman Janet Yellen said in late September. Some companies have shifted spending from physical stores to software and other digital infrastructure as e-commerce accounts for a growing share of U.S. household outlays. Wal-Mart Stores Inc. this month said it would open fewer new stores and beef up its online efforts. “We are really excited about how our capital allocation is changing,” Chief Financial Officer Brett Biggs told analysts. “It’s being geared more toward the future.” There are signs that capital expenditures may stabilize in the second half of this year. The U.S. oil-rig count began to rise this summer as oil prices stopped tumbling. A proxy for equipment investment, new orders for nondefense capital goods excluding aircraft, climbed for three consecutive months through August, though it pulled back in September.

Change in inflation-adjusted private fixed nonresidential investment by category since the fourth quarter of 2007

30%

Intellectual property products 28.9%

20 Equipment 14.7%

10 0 -10 -20

Structures -19.4%

-30 -40 2008

2009

2010

2011

2012

2013

2014

2015

2016

Note: Data are seasonally adjusted. Source: Commerce Department THE WALL STREET JOURNAL

28 | INSIGHT


Registry Publisher Vladimir Bosanac with Dana King

Story and Photos by Gary Marsh

Last month’s Landscape San Francisco event produced by The Registry featured a lineup of heavy hitters including Michael Covarrubias, Chairman and Chief Executive Officer of TMG Partners as well as Chairman-of-theBoard of the Bay Area Council; Michael Ghielmetti, Founder and President of Signature Development Group; Eli Khouri, President and Chief Executive Officer of Equity Office and Stephen Collins, Chief Operating Officer of the Golden State Warriors. Dana King, a Sausalito-based artist and former CBS Channel 5 Anchor Broadcaster, moderated the discussion on Oakland with Michael Ghielmetti.

Bosanac and King with Michael Covarrubias Covarrubias principally wore his Bay Area Council hat for his presentation and briefed the audience on some of the Council’s biggest initiatives, including housing and transportation. He pointed out that since the post-recession expansion, the Bay Area has added 600,000 jobs, yet only one-tenth that much in new housing units, or a paltry 60,000 new homes. The Council has a goal of creating 150,000 new housing units in the next few years by modifying the California Environmental Quality Act(CEQA) and by the recent passage of SB 1069, the accessory dwelling unit law. These changes come as solutions to the imbalance between supply and demand of housing stock. Getting that bill passed, said Covarrubias, was “like pushing the biggest rock uphill that you can imagine.” His perspective on 2016 is that it has been hampered by stock market volatility in February (the Dow dropped 500 points before recovering), a slow summer and a fall distracted by the threat of a Trump presidency. He was tough on general business news reporting, cautioning against believing the headlines and encouraging everyone to read entire stories. The TMG CEO was even tougher on economists, saying “the herd instinct among (economic) forecasters makes sheep look like independent thinkers.” He expects 2017 to have similar conditions to 2016, in which low cap rates and growth rates, continued foreign investment in U.S. real estate and high construction costs are likely trends. Covarrubias also said that energy markets and commodity markets will be among the most dynamic elements in the economy.

Northern California

January | 2017


30 | INSIGHT

Eli Khouri and Bosanac

Michael Ghielmetti and King

Michael Ghielmetti and Dana King opened their segment with a discussion of Signature Development’s ambitious Brooklyn Basin project, which when complete in 10-12 years will have approximately 3,100 residential units, retail and office space and about 350 boat slips in two marinas. Proving once again that real estate development is not for the faint of heart, Ghielmetti noted that he started the Brooklyn Basin project in West Oakland about 15 years ago. The audience of nearly 200 real estate professionals collectively laughed when King asked the developer why he has stuck with the project so long. “Because I had so much money tied up in it when the recession put the project on pause,” he said dryly. Groundbreaking of the first phase of 250 apartments will commence soon. Oakland is currently benefitting from not just local developers but institutional players as well, including Blackstone, Invesco, TMG and CIM, among others, Ghielmetti explained. He added that Oakland isn’t only on the rise because of the high costs of commercial and residential rents and construction in

San Francisco, but also because Oakland has a thriving creative and social scene, with multiple theaters, art galleries and some of the trendiest restaurants on the West Coast. The East Bay city reminds him of Mission Bay in the 1990s, saying “who would buy a Mission Bay one-bedroom condo back then for $300,000 and think that it would be worth three times that now?” Ghielmetti cited other attractions to Oakland including “land costs [that] are one-third less than they are in San Francisco, construction costs [that] are 10% to 15% lower” and also lower entitlement fees. And there is still opportunity in Oakland. A few years ago SPUR completed a study that found 55 acres of land available for development or redevelopment in Oakland. While some of that has been sold off, there is still available land. On crime, Ghielmetti said when he first started Brooklyn Basis, crime was usually in the conversation, “but investors don’t ask [him] about that anymore.” When King asked him what makes him tick, he explained that he loves the creative aspect of the business and the people. When

King asked him what has changed in the business, Ghielmetti answered candidly: “It seems like it is less about relationships and product (development product type, features, architecture and amenities) and it’s more spreadsheet and IRR driven.” Eli Khouri was named President and Chief Executive Officer of Blackstone Group LP’s Equity Office unit in August 2015. While Equity Office is based in Chicago, Khouri and his executive team maintain their offices in the Bay Area. The former Kilroy Realty Corporation’s Executive Vice President talked at length of all of the redevelopment opportunities that still exist in the Bay Area, despite the intensive “value add” real estate investments by dozens upon dozens of investors in the last five years. Though unrelated to Bay Area real estate, it was interesting to learn that Blackstone’s huge $1.3 billion acquisition of Willis Tower in Chicago in 2015 (the former Sears Tower and second-tallest U.S. tower) is in the middle of a $400 million refurbishment and repositioning and when it’s all said and done, a tower name change is all but certain. “The project was undercapitalized and we’re in the process of transforming the tower to

Stephen Collins

an environment that will appeal to today’s tenants, and as far as a name change goes, Willis Tower isn’t exactly a catchy name, now is it?” Khouri asked the crowd rhetorically. As for the current market and his thoughts on when the cycle may turn downward, Khouri was confident that any downturn would be mild regionally and not long. “San Francisco is important to [Equity Office] because it is the “thought leader” of our entire economy. Understanding what is going on with innovation is more than just technology. The real jobs in our economy require intensive brain work and that happens here,” he said. In terms of the building environment, Khouri said that building owners have changed their attitudes from creating spaces that tenants have to fit in to and adapt, to making spaces that work for people. Staying with the brain theme, he said “the brain works best on happiness so we’ve made the transition to creating environments that work best for people.” Stephen Collins, the newish Chief Operating Officer of the Golden State Warriors, brings a remarkable pedigree to the job. He ran Madison Square Garden for 15 years and prior to that he was involved in the

Meadowlands development (the New Jersey sports complex and race track). Collins was adamant that the customer experience is the ultimate driver of the team’s planned new arena in San Francisco. “When Joe Lacob and Peter Guber bought the team a few years ago, it was with the vision to build a new arena (Oracle Center was built in 1966), and not just to build an arena but to do so with private financing. It’s very important to them to control the customer experience and you can’t do that unless you own and run the building,” Collins said. Despite media coverage of opposition to moving the Warriors to San Francisco and building a new arena in Mission Bay between the San Francisco Ferry Building and AT&T Park, its full speed ahead for Chase Center, as the new facility will be called thanks to its major sponsor, JP Morgan Chase. “Dirt moving will start in January (2017), construction in spring and using the standard arena development schedule of 28 months, it should be complete by July of 2019 and ready for the Warriors’ 2019/2020 season,” Collins said.

To learn more about the new Warriors arena check out www.chasecenter.com.

Northern California

January | 2017


32 | INSIGHT

MEXICO CITY—- In October Newmark Grubb Knight Frank acquired Newmark Grubb Mexico City, with which it has had a local presence since 2013. The acquisition of the firm founded in 1997 as Alles Group Mexico City by Giovanni D’Agostino represented another milestone in NGKF’s commitment to growing its footprint in the region.

D’Agostino will continue to lead Newmark Grubb Mexico City and will serve as regional managing director of the Latin American region. “NGKF’s global resources and platform broadens our capabilities to offer a wide spectrum of services,” he says. “Now, more than ever before, we are able to exceed the expectations of clients’ increasingly sophisticated real estate needs.” Barry Gosin, CEO of New York City-based NGKF, notes that Newmark Grubb Mexico City “has built a strong reputation as one of the most well-respected commercial real estate operators in the region. Mexico is poised for substantial commercial real estate growth in the coming years. We are thrilled to take a direct role in the growth of this region in recognition of the increasing demand by US clients.” Mexico City represents the world’s 12th largest metropolitan area by population. Many multinational corporations see the region as a hub for their operations. Mexico’s largest city represents a significant portion of the volume of capital funding for commercial real estate development throughout Latin America and the construction pipeline there is at an all-time high.

Northern California

January | 2017


34 | INSIGHT

Almaden Ranch Fulfills Destination Shopping Promise And how Bass Pros Shops Became the Anchor Tenant

In real estate, there can be good timing and there can be unfortunate timing. Story and Photos by Gary Marsh Almaden Ranch, a new 350,000-squarefoot center located in San Jose along the northern border of Highway 85 at Almaden Expressway, certainly has elements of both. Eli Reinhard, owner of Arcadia Development Company, bought the land decades ago. That’s obviously a good thing. Around 2005, he started working on plans to develop the site into a mix of a “power center” with big box tenants and a neighborhood-serving shopping center with restaurants and related retailers. Reinhard brought in Deke Hunter with Hunter Properties in a joint venture to develop the center and by 2008 they were ready to start marketing the retail space. “We started talking to all of the usual big box occupiers that you would expect us to when the recession hit and all of them more or less folded up shop for new locations,” says Jim Randolph, Executive Vice President, Retail, with Newmark Cornish & Carey and one of the leasing brokers on the project (with Matt Sweeney, Managing Director, Retail and Jake Randolph, Associate Director). Fast-forward a couple of years with little to report in between, and after several tries (beginning in 2009) the marketing team was able to sign Bass Pro Shops, the Springfield, MO-based outdoor retailer that recently

announced it was buying Cabela’s Inc. for $4.5 billion in cash, as an anchor. “This is the magic and power of ICSC. Everyone is there, even in down years,” Randolph explains. ICSC, the International Council of Shopping Centers holds an annual spring meeting in Las Vegas. It was ICSC 2012. Deke Hunter set up a meeting for Matt Sweeney and Jake Randolph to visit with Mike Dunham, Bass Pro’s real estate executive, at Bass Pro Shops’ massive booth. “Let me paint the picture for you: Every broker, developer and economic development director from states and cities all over America are pitching Bass Pro Shops to open a store at their site, in their state and in their city. Bass Pro Shops has typically sought locations in suburban markets. We were pitching a location in the 10th largest city in the U.S. – it was a different demographic for them,” said Randolph.

Northern California

January | 2017


36 | INSIGHT

The rest, as they say, is history. Bass Pro Shops opened in October 2016. The balance of the center is now nearly leased up.

Jim Randolph (L) and Matt Sweeney (R)

“We’re trading paper [lease agreements] for the remaining space in the center – except for about 1,000 square feet,” said Matt Sweeney. Total Wine & More, a family owned wine and spirits retailer based in Potomac, MD, is in the process of opening more than a dozen Bay Area stores. Total Wine at Almaden Ranch is under construction and scheduled to open early next year. City Sports Club, the Northern California branch of fitness chain LA Fitness, occupies more than 40,000 square feet. Restaurants include MOD Pizza, The Habit Burger Grill, Panera Bread, Firehouse Subs, Starbucks, Panda Express, Noodles & Company, Rubio’s Fresh Mexican Grill and SmokeEaters BBQ. Retailers Ulta Beauty Supply, Verizon and European Wax Center also leased space in the center.

Bass Pro Shops’Amazing” John Morris

To the surprise of Hunter and company, Bass Pro founder and owner John (Johnny) Morris sat in on the ICSC meeting. He not only took an interest in Almaden Ranch, but flew his private plane to San Jose a few days later to check out the site.

Lobby of the San Jose store

Morris told the Almaden Ranch developers and architect that once the tackle and bait business at his father’s liquor store reached a certain level, he and his entire family took a vacation to Freeport, Maine, to visit the L.L. Bean Inc. headquarters and store. It was on that trip that Morris identified the opportunity to open a chain of stores that would sell not only fishing gear and bait, but also all of the accessories that go along with it. Expanding into hunting and camping was a natural extension of the fishing business. Shortly after that early 1970s trip Morris leased his first store in Springfield.

John Morris started selling lures and bait out of the back of his father’s liquor store in Springfield, MO in the early 1970s, because he was dissatisfied with the tackle sold at nearby shops. He turned that small business into a chain of nearly 100 Bass Pro Shops megastores with roughly 20,000 workers and made himself into one of America’s richest men along the way. According to Forbes, he has a net worth of $3.9 billion and ranked 403 on its list of the world’s billionaires.

The largest sit-down and full service restaurant at Almaden Ranch is Uncle Buck’s Fish Bowl Restaurant, which was named by Bass Pro’s Founder Johnny Morris, who learned to fish with his Uncle Buck. Uncle Buck’s (17,400 square feet) is owned and operated by Bass Pro Shops and is connected to the 132,600-square-foot store. The restaurant includes bowling lanes, which fit into the strategy of making Bass Pro Shops and Almaden Ranch a destination shopping center. Bass Pro Shops typically draw customers from a 100+ miles radius and visitors often spend a half day or longer in the shops. The first Bass Pro Shops in Northern California was in Manteca. Bass Pro Shops also opened a store in Rocklin shortly after the San Jose store opened.

Bowling lanes at Uncle Buck’s

“Going there, it was exciting to learn about Bass Pro and what makes them tick. All retailers have to deal with merchandisers for store displays etc. and Bass Pro operates its own light fixture manufacturing facility, as well as other items, for their stores. We visited the headquarters and were introduced to the construction and architectural team. Inside the facility, we visited this huge long hallway full of stuffed animals that were waiting for a home in one of the many Bass Pro Shops stores across the country. Everything is just a higher level of quality than what you normally see from retailers,” said David Janes.

If the deal with Cabela’s closes, the 68-yearold will run a sporting goods empire with about 180 locations in the U.S. and Canada and will control 20% of the $50 billion U.S. hunting, fishing and camping market, according to analysts with Stifel, a financial services holding company. After Almaden Ranch landed Bass Pro Shops as its anchor tenant, Deke Hunter, Eli Reinhard, Brad Durga (an Arcadia associate) and lead architect David Janes with San Francisco-based SGPA Architecture and Planning took a trip to Springfield to meet with Morris and tour the headquarters’ store as well as the resort (Big Cedar Lodge), the golf courses and the museum Morris built in the nearby Ozarks.

By 1974, Bass Pro Shops printed its first catalog for gear. In 1978, Johnny introduced the first professionally rigged fishing boat, complete with motor, and the Bass Tracker boat package revolutionized the marine industry. Janes was so impressed by the Morris-built HQ and resort that he says going there should be on everyone’s bucket list. See for yourself.

Big Cedar Lodge: http://www.bigcedar.com Golf/Restaurant & Museum called Top of the Rock at: http://www.topoftherock.com See the Native American Heritage Museum at: http://www.topoftherock.com/ attractions/natural-history-museum-en.html

Northern California

January | 2017


38 | INSIGHT


Abteen Vaziri

“There is a major battle within Congress between the populous states and the rural states for their share of EB-5 funds,” says New York-based Abteen Vaziri, director of Greystone EB5 Holdings.

Designated an EB-5 regional center in 2010, the Cleveland International Fund (CIF) has not only raised more than $225 million in overseas capital to fill important commercial real estate financing needs in Northeast Ohio, it has also helped create nearly 13,000 jobs during the last six years.

Steve Strnisha

Bigger volumes and participants in the employment-based, immigration-focused segment of real estate should mean bigger attention from government and project leaders.

By Brian A. Lee Even Congress can appreciate a nearly 1,300 percent increase in investment activity. The number of approved “immigrant petitions by alien entrepreneurs”—the first step in applying for an EB-5 visa with the U.S. Citizenship and Immigration Services—increased 14-fold from 2008 to a total of 8,756 last year. While immigration policy may carry a stigma right now in our nation’s capital, each one of those approvals means more U.S. investment and opportunity under the 1990 immigration law that grants a fast track to residency for those foreign investors meeting specific capital and job-producing requirements in their new commercial enterprises. So where’s the catch? End of third quarter marks the congressional deadline for reauthorization of the EB-5 Investor Visa Program, and questions about it go beyond returns, reform and renewal.

Abteen Vaziri He maintains that multi-billion dollar developers have taken a large chunk of EB-5 dollars to urban areas, which has hindered the competitiveness of rural projects. Having raised ample EB-5 funds in the early days of the program, rural investment and development teams have grown frustrated by the imbalance. “Although they have the right to be upset, their reasoning is unjustified as EB-5 is a jobs program and is supposed to generate jobs in areas that have high unemployment rates,” Vaziri says. “Most of the rural states have unemployment rates in the low-4 and high-3 percent range, where large urban areas have unemployment in the high-5 percent or higher range.”

According to CIF CEO Steve Strnisha, his organization’s most significant contribution has been to the Flats East Bank Project in Cleveland. The mixed-use development, which includes an 18-story office tower, a 150-room Aloft hotel, retail space and restaurants, has transformed 20 blighted acres in Cleveland along the banks of the Cuyahoga River and Lake Erie into a thriving waterfront district. CIF utilized the EB-5 program to provide $45 million in funding for the $272 million first phase, which included the first mortgage for the hotel, the most difficult property to finance. That allowed conventional lenders to then step in to complete project capitalization. Strnisha says, “While the availability of credit for well-conceived real estate developments has increased substantially over the last several years, there are still opportunities that meet EB-5 program job creation requirements and lack a sufficient first mortgage loan source. These are generally part of mixed-use developments where an individual component—retail, office, or hotel—may not meet certain lending

Steve Strnisha

“In the wake of the financial crisis, it was very difficult to find funding for new commercial real estate projects,” says developer Scott Wolstein, CEO of Starwood Retail Partners based in Suburban Cleveland. “Working with CIF to include EB-5 as a critical part of our capital stack allowed us to bring our vision of the Flats East Bank Project to fruition.”

requirements around issues such as preleasing or other concerns.” Obviously, large urban projects such as Flats East Bank are more likely to create more direct and indirect jobs. Also, EB-5 investors feel greater security committing their funds to major, established developers, as opposed to some rural projects that can be on shakier financial footing. Vaziri believes more and more institutional groups will enter the EB-5 market. As investors become more sophisticated, the standards for EB-5 projects will improve. “There really is a shortage of good sponsors in the EB-5 industry,” he says. “Also, 10 or 15 years ago, projects that banks would not underwrite and which did not have the right profitability metrics were getting built through EB-5 financing. As a result, investors have found themselves in the position where they get their green card, but do not get back their initial $500,000 investment.” As chief operating officer of the North Texas EB-5 Regional Center (before he joined Greystone EB5 Holdings), Vaziri funded the largest EB-5 raise in the Lone Star State: the $162 million redevelopment of the historic Statler Hilton Hotel & Residences in downtown Dallas was fully funded in 2015 thanks to $85 million in senior debt through EB-5.

In most cases, EB-5, which primarily draws from the Chinese investor market, is used as the mezzanine debt or the preferred-equity portion of the capital stack. During the credit crisis, CIF primarily provided first mortgage financing for a variety of projects. The majority of Greystone EB-5 deals, which currently exceed $200 million in or about to be in the market, consists of approximately 20 percent equity, 30 percent EB-5 mezzanine loan proceeds and 50 percent traditional construction financing — a very typical EB-5 capital structure. In the past, most regional centers that have raised EB-5 funds have been “mom-and-pop” companies that do not have substantial balance sheets and/ or sophisticated knowledge regarding real estate lending, development and servicing, Vaziri explains. As more sophisticated developers look to EB-5 funding for their projects, it will be tougher for smaller sponsors to compete. “The developers want to make sure that their EB-5 sponsor will be in business in seven years, can adequately handle investor relations, and manage the EB-5 process and loans,” he adds. “As the EB-5 market has grown, large, publicly listed developers have entered the market, set up their own regional centers and successfully funded mega-projects with EB-5 funds, which has really created a demand for an institutional sponsor to enter the EB-5 market to serve the needs of those small-tomedium sized developers.” CIF’s Strnisha maintains that traditional real estate construction projects should remain the predominant EB-5 focus. However, increased investor interest and growing national needs could expand the program focus to include public infrastructure, higher education (especially for public-private partnerships) and healthcare facility projects. The numbers don’t lie, whether it’s the increased volume of foreign investors or the decreasing amount of days Congress has to extend the EB-5 program. Expect the land of opportunity to continue to embrace an investment program that, despite the growing pains, is delivering bigger and bigger results to both the CRE sector and U.S. markets.

Northern California

January | 2017


40 | INSIGHT

Unlikely Trifecta of Negative News Adds Turbulence to Financial Market in the Third Quarter

Financial markets hit a turbulent patch in the third quarter as an unlikely trifecta of negative events hit the news cycle.

By Gary Marsh Allegations of Wells Fargo’s aggressive sales culture and subsequent revelation of scandal associated with opening false accounts, the surfacing troubles at Deutsche Bank AG due to its thin capital cushion, and the consequences of Britain’s June vote to leave the European Union absolutely hammered England’s currency– the U.K. Pound Sterling. While the situation for Wells Fargo & Co. has yet to fully play out, the widespread publicity has caused bank regulators to begin looking at other U.S. banking institutions into their cross-selling tactics. “A lot of us are worried there’s similar doings going on at other banks,” said Senator Richard Shelby, chairman of the powerful Senate Banking Committee in a CNN Money article in late September. At the very least, the inquiries are distractions to bank operators and deterrents to profitability.

Deutsche Bank’s problems are partly a hangover from the 2008 financial crisis as well as some German banking analysts’ hovering their computer mice over the panic button. In late September the U.S. Justice Department proposed that Deutsche Bank pay $14 billion as a settlement for the bank’s involvement in mortgage securities dealings ahead of the financial crisis. While Deutsche executives have said they wouldn’t pay anything near that amount (reports are it could be more like $5.4 billion), the hefty fine is certain to strain its balance sheet, causing some observers to assert that raising capital will become essential. To make matters worse, the bank’s shares have fallen over 60 percent from its 52-week high. Taken together, Deutsche Bank’s plight has some analysts publicly saying that Europe’s banking system “is one bank failure away from crisis.

The Pound is down about 30 percent from a year ago and more than 10 percent from the late June referendum on ‘Brexit.’ Moreover, the EU has begun to talk tough as Britain moves closer to enacting Article 50 of the EU agreement (the Lisbon Treaty), which will officially begin the negotiations on the terms of the U.K.’s disengagement from the Continent. Much like our own political season between two divisive candidates running for President, the fight between London and Brussels looks like it will be bruising. The net effect of this will likely contribute to ongoing uncertainty in the capital markets. How Brexit and dynamic currency fluctuations will impact debt markets remains to be seen, yet again, anything perceived as destabilizing has the potential to negatively influence financial markets and capital flow.

Northern California

January | 2017


42 | INSIGHT

Stanford Cal Haul Home Rio Hardware When the Olympic Games came to a close, Stanford (27) and Cal (21) ended up with more medals combined (48) than Germany and France (each with 42), Australia (29), Italy (28), Canada (22) and many other nations. In fact, only the U.S. (121), China (70), Britain (67) and Russia (56) took home more gold, silver and bronze from Brazil. Team USA’s total medal count was the second highest ever for a Summer Games following only 1984. The U.S. earned the most gold medals at 46 (Britain came in second with 27), and the American women out-medaled the men 61-55 and out-golded them 27-18.

Amazing Apple iPhone sales may be slowing and Apple has reported two consecutive quarterly drops in revenue, snapping a 13-year streak of growth. Apple is not only the world’s largest company by market value, but its $53 billion in net income last year was greater than the combined earnings of technology behemoths Facebook Inc., Google’s parent Alphabet Inc., Amazon.com Inc. and Microsoft Corp. We find this amazing. Then again, the company did recently sell its billionth iPhone.

Creating Their Own Green Sources In addition to its core business, Apple recently received a federal designation for its energy subsidiary that allows it to become a wholesale seller of electricity from coast to coast. In effect, Apple is creating its own green utility company, although the main customer is itself. Walmart and Google already have the energyproducing designation.

Although much of Apple’s manufacturing is done offshore, it still has extensive needs for electric power in the United States — and not only for the sprawling new corporate campus it is building at its headquarters in Cupertino, California, and its 270 retail stores around the country.

One of Apple’s biggest demands for electricity comes from operating the computing cloud through which it sells apps, music and videos to users of its iPhones, iPads and Mac computers.

Bubble Watch Robust employment data usually doesn’t spur economists to start calling for the bubbles to form, much less burst, but in case you spent a good bit of August hanging out at the lake (Tahoe, or Como?), sipping rosé in the South of France or simply occupying the back-deck hammock for an inordinate amount of time, you may have missed some data-driven news that could sound the bubble alarm. But first, as Kai Ryssdal says on American Public Media’s Marketplace, “let’s do the (employment) numbers.” “Robust Hiring Spurs Fed Watch,” was the A1 headline in the August 6 Wall Street Journal following reports that employers had added 255,000 jobs in July, which kept the nation’s jobless rate steady at 4.9 percent. Although August numbers weren’t final by

the time this issue went to press, the month was shaping up to be much more tepid with about 151,000 new jobs versus the 180,000 expected. The first “bubble alert” came with the August 11 news, “Home Buyer Shortage Threatens Recovery,” which reported on the housing recovery that began in 2012 and how the overall housing market has improved, but has left behind a whole swath of the middle class during the buying spree. The article pointed out that real wages have not improved enough to encourage move-up buyers to buy bigger and more expensive homes. However, what alarmed us most about the article was that home prices “are now just 2% below the peak reached in July, 2006, according to S&P CoreLogic Case-Shiller Indices.”

August 12 brought us another page one story in the WSJ: “U.S. Stocks Notch a Record Trifecta.” The day before, the Dow Jones Industrial Average ended up 117.86 points to 18613.52, surpassing its most recent record on July 20. The S&P 500 and the Nasdaq Composite topped highs set earlier in August. The last time all three indexes jointly closed at records was Dec. 31, 1999. Heart palpitations, anyone? Just when we started to write off this string of news as some sort of anomaly so we could go back to our summer activities, like hang gliding off the cliffs near Torre Pines (what, you didn’t do this?), all the Bay Area newspapers lit up with this headline: “Tech Boom Reaches Record Heights in Bay Area.” “The Bay Area now has nearly three-quarters of a million tech jobs, 746,100. That number tops the prior record for tech employment set during the dot.com era, by 21,000 jobs, according to Bay Area New Group analysis of official statistics from the state Employment Development Department released in June.” While not all the news was positive (Cisco announced at about the same time that it was laying off 5,500 employees, which equates to 7 percent of its workforce), the combination of stock valuations and tech employment reaching pre-dot.com records and housing prices about to match 2006 high-watermark rates merits attention that a bubble may have already formed and it’s anyone’s guess when it could pop.

Northern California

January | 2017


44 | INSIGHT

In Step with New Life Science Practice’s Jennifer Vergara and Mary Hines Story and Photos by Gary Marsh

Jennifer Vergara (left) and Mary Hines (right) joined the Life Science practice at Newmark Cornish & Carey in April and now work in the San Mateo office with Executive Vice President and Managing Director Josh Rowell. The women have made their mark as two of the most preeminent commercial real estate brokers in the country focused on biotech and pharmaceutical businesses. During their combined 30 years in the business, they have completed over 500 transactions totaling more than 12.0 million square feet, representing both landlords and tenants from startups at various stages of development to Fortune 500 companies. INSIGHT connected with Ms. Hines and Ms. Vergara to learn more about their move to Newmark Cornish & Carey and to find out what’s going on in Bay Area life sciences real estate. Their combined replies were bundled into a single answer because, as one of them said in the interview, “the success of our relationship is because we are in sync with each other 99% of the time on how we do things and approach the business.” Besides, we will note, the successful anonymity for song credits worked pretty well for Lennon and McCartney. Q. How’s business? A: The life science real estate market continues to be very robust with very little inventory and strong demand. After record venture investment years in life science in 2014 and 2015, there was some concern about a potential for a pull back. Fortunately, the first half of 2016 has continued to be very strong with $4.7 billion invested in life science, of which $1.5 billion has been allocated to life science companies that are located in the Bay Area. Several of our clients have had huge successes, such as Denali Therapeutics raising the largest series A in the history of biotech. We represented them in the first lease at The Cove, which provides for great amenities, including a full service café, upscale boutique hotel,

Bayshore Road in Mountain View that Alexandria Real Estate Equities Inc. had controlled. Google’s parent, Alphabet Inc.’s entrance into life sciences will have more impact on the industry as that plays out. Yet there is still about 5.0 million square feet of life science supply that can be built on mostly in South San Francisco. For example, a client of ours, Phase 3, recently purchased Genesis, a 400,000-square-foot building that has been repurposed for life science and an additional plot of land that allows for another 420,000+-square-foot building.

Q. About you two – what has been key to your success, individually and as a team? A. Foremost, strategic thinking and focusing on a single niche – life sciences. And we’re in it for the long haul. We don’t do deals to do deals. We see transactions as formations of relationships, and the relationships have carried us through over the years. As a team, we think two heads are better than one. Our partnership allows us to fully analyze any given project or situation from two different

and retail space. It’s a new combination of development new for South San Francisco. Another client of ours, Flexus Biosciences, was able to sell part of their technology to Bristol Myers Squibb for $1.25 billion in less than two years from inception. We’ve really enjoyed being a part of their journeys [as well as the journeys of] several of our other clients.

which was arguably the low point in the market following the recession. Rental rates vary according to submarket, but needless to say they have consistently increased as availability diminishes. We’re tracking approximately 1.5 million square feet of tenant demand, which means that we expect the balance of the year and 2017 to remain robust for life sciences real estate.

Q. Tell us a little bit about the recent market, in terms of absorption, availability, tenant demand etc.

Q. On the market, does the tech boom put undue pressure on the life sciences space for development deals and inventory?

A. For the five quarters from 1Q15 through 1Q16, there was a little over 2 million square feet of positive net absorption throughout the Bay Area (of dedicated life science real estate). It drove the availability rate down to 8 percent. To put that in perspective, it was 18 percent during the first quarter of 2011,

A. Technology companies do put substantial pressure on the San Francisco Peninsula commercial real estate market. For example, when Facebook bought a Prologis campus in Menlo Park, it displaced about 500,000 square feet of life science occupiers. Google took about 150,000 square feet on West

perspectives, which always provides us with great insights and challenging debates! That is something we wouldn’t be able to do on our own.

Q. You worked well together and were successful as brokers with the previous company you represented. Why the move to Newmark Cornish & Carey, why now?

Q. Neither of you have a science background (Jen graduated from Santa Clara University with a Bachelor of Science in finance and Spanish studies, while Mary graduated from San Jose State University, receiving a Bachelor of Arts with honor). How did you get into this sector of the real estate business?

A. Newmark Cornish & Carey is an amazing brand and the company has some of the best brokers in the region. That translates into something meaningful to our business— information. Access to more information and sharing information makes us better brokers, which enhances the service we provide to our clients. We were also impressed by Chuck Seufferlein (Western Region President), Josh Rowell and Michael Sheinkop (President, Brokerage Services for Newmark Grubb Knight Frank, based in Chicago). We listened to them explain their vision and how they work as a management team. It really matters to us how certain things are decided, and we appreciated their emphasis on strategy. Plus it says a lot about the company that they were able to retain all of their brokers after the acquisition by Newmark Grubb Knight Frank.

A. We have always had a passion for real estate and once we started working in the industry as brokers, we very quickly identified with biotech companies. Although we don’t have science backgrounds, we have a lot of interest in science—the work our clients do is fascinating. Their passion for what they do for society is admirable. Through our clients we have become very passionate about their mission to bettering lives through science.

Vergara and Hines represented Denali Therapeutics in the first lease executed at The Cove, a new life sciences campus being developed by HCP Inc. in South San Francisco. The Cove fronts Highway 101 on the east side of the freeway. Denali leased approximately 38,000 square feet in the center building in the above photo. A hotel is under construction (on the left) and to the right is another of eight lab/office/research buildings that will comprise the 847,000-square-foot campus.

Northern California

January | 2017


46 | INSIGHT

Golf Tournament Luke Allard, Associate Director in Newmark Cornish & Carey’s Santa Clara office was on the tournament’s winning team, along with Ryan Slater and Greg von Thaden of Colliers and Josh Reginelli and Steve Woods of Technical Builders (pictured below), with a score of 21 strokes under par. Jesse Millman, Managing Director in Newmark Cornish & Carey’s Santa Clara office got a hole-in-one on the money hole, pocketing a cool $100,000 before taxes (and let’s not forget company split – haha). This past September, the Association of Silicon Valley Brokers (ASVB) hosted their exciting annual golf tournament at Cinnibar Hills Golf Club in San Jose, drawing a good amount of attendance from Newmark Cornish Carey’s Santa Clara office. Throughout the day, the association raised $9,600 through raffle ticket and mulligan sales. The ASVB chipped in to make an even $10,000 donation to the Veteran’s Resource Center at San Jose State University.

From L-R, Director Sean Whitney, Senior Managing Director Shawn Kellenberger, Teddy Childers from USAA, and Senior Managing Director Mike Saign.

Senior Managing Director Bill Steele & team.

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