Friday, October 07, 2005

Job growth will accelerate the Bay Area's commercial real estate recovery in 2006

Posted on Fri, Oct. 07, 2005

Building of offices predicted to expand

By James Temple

- Job growth will accelerate the Bay Area's commercial real estate recovery in 2006, pushing rents up as much as 20 percent in some markets and raising the prospect of the first significant new office construction in years, according to NAI BT Commercial's 2006 Northern California Market Snapshot.

In a presentation Thursday, Peter Linneman, real estate professor at the Wharton School of Business and the study's co-author, said the market would continue to expand for at least three to four more years.

He dismissed as overblown a litany of oft-cited risks to the economy, including soaring oil prices, the widening federal budget and trade deficits, rising interest rates, the housing bubble, and overpriced commercial real estate.

"Real estate doesn't have to do well; it only has to do well compared to stocks and bonds," he said, noting that it has.

The two biggest potential dangers in the economy, he said, are the over-construction of and speculation on condos in certain markets -- though, he said, that risk is relatively low in the Bay Area, given high prices -- and who the next chairman of the Federal Reserve will be.

"We've taken for granted a benign and productive Federal Reserve" for the past quarter century, he said.

In San Francisco, vacancy rates will close in on single digits next year, and Class A office rents will rise 10 percent to 20 percent, the report predicts, to an average of $37 per square foot per year.

Mike Kamm, CEO of the San Francisco brokerage firm (which also announced a name change from BT Commercial on Thursday), said at the presentation that biotech, software, technology and finance firms are driving the regional market with expansions and new operations.

He noted that Yahoo Inc. and Google are rumored to be scouting San Francisco for 200,000 square feet and 150,000 square feet of office space, respectively.

Coupled with other large companies known to be in the market, such as Barclays Global Investors, this could spark office building.

"Large blocks (of contiguous office space) are scarce and new office construction might be just around the corner," he said.

Kamm added that the San Francisco office sales market has been scorching, with more than 24 percent of the skyline, or 18.5 million square feet, trading hands since January 2004.

The report didn't include predictions for the East Bay market, but NAI BT provided the Times with a preview of its third quarter office report for the Interstate 880 and I-80 corridor: It noted that office vacancy rates declined by more than a percentage point, from 16.6 percent during the comparable period of 2004 to 15.2 percent.

Rents resumed momentum after the previous quarter's lull, rising from $21.72 to $22.20 per square foot year-over-year.

Richmond and Alameda saw vacancy rates climb in the third quarter, but every district in Oakland, Emeryville and Berkeley improved.

In the Oakland city center submarket, vacancy fell from 17.4 percent to 13.4 percent, with per-square-foot rents climbing to $24.

"We're continuing to see an improving market," said T. Jeff Starkovich, managing partner of NAI BT's Oakland office. He added that land values in the area have accelerated faster during the past 24 months than in the past 10 years.

NAI BT has not released its report for the I-680 corridor.

James Temple covers real estate for the Times. Reach him at 925-977-8534 or

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