“If you don’t know where you are, you don’t know who you are”

Uptown Studios HQ, Broadway Corridor, Sacramento

“If you don’t know where you are, you don’t know who you are” – Wendell Berry

When negotiating a lease, you have to pay attention to the bottom line, but you cannot forget about your team.  No longer is it just about price and how many cubes you can fit in a phone booth.

In the iconic Christmas movie, “The Grinch,”  the slathering, big, green Grinch is bounding his sleigh to Whoville when he hears all the Who’s singing.  This infuriates the Grinch, and he exasperates, “All the Noise! Noise! Noise!”  While an open office environment may not work for the Grinch (or for all the Whos) it is great for many company functions, particularly where collaboration is needed.  But many other functions, say engineering, design, coding, writing,research and stealing Christmas,  an open environment may not the best solution.  In an August 2012 article of Forbes, this topic was discussed and the opinions differed considerably.

  • Dr Vinesh Oommen concluded, “In 90 per cent of the research, the outcome of working in an open-plan office was seen as negative, with open-plan offices causing high levels of stress, conflict, high blood pressure, and a high staff turnover.
  • Craig Knight suggests that traditional office environments may increase individual wellbeing by 32% and office productivity by 15% (The Secret Life of Buildings.)
  • Professors Anne-Laure Fayard and John Weeks point out in their article, “Who Moved My Cube” (Harvard Business Review, July 2011), “Some studies show that employees in open-plan spaces, knowing that they may be overheard or interrupted, have shorter and more-superficial discussions than they otherwise would.

Recently, Facebook looked at the office environment this way:

For Facebook’s new office design to actually foster the right kind of interactions, it must provide sufficient privacy so that their engineers can talk in private and work without interruptions. Fayard and Weeks suggest it comes down to: Proximity, Privacy and Permission.

  • Proximity: Give people plenty of space between each other, but facilitate traffic patterns that result in “run-ins” at shared resources like restrooms, entrances/exits, snack rooms, elevators, etc.
  • Privacy: Work stations need to be designed to offer visual and acoustic privacy; a cardinal rule is that workers should always be able to see if someone is approaching them.
  • Permission: The corporate culture dictates what is “permissible”; workers need to know to what degree is informal socializing accepted or encouraged, and what is acceptable or not when it comes to interrupting someone who is working.

For now we’ll have to wait to see if Facebook engineers will “like” working in the “largest open floor plan in the world” or whether it will cut their productivity and job satisfaction.

Employee productivity is enhanced by thinking about the day to day routine of the employee.  Can they walk to lunch?  How about shopping?  Parking, Transit, Banking?  Anytime you can provide the employee the time and convenience to tend to personal matters like errands, the employee will be more effective in the office (as long as they deal with personal matters on their breaks and lunch hour.)  Frankly, I believe many companies foster an empowering approach where as long as an employee is “getting it done” there are no defined breaks or lunch hours.  Labor laws tend to get in the way, but there are ways to navigate around the law, while complying.

Employee Turnover is reduced significantly when putting employees well being first.  If you have ever had to hire a new employee or deal with a disgruntled former employee you know how costly it can be.  Spending a little extra to make the workplace special and a welcoming environment results in an excellent ROI.  Inc. Magazine discusses this https://bit.ly/2yltstj .

“An individual is not too distinct from his place. He is his place” – Gabriel Marcel

If you have questions about your lease, I can help.  If you need design advice, I can send you in the right direction.  Please feel free to call me at (916) 761-1202 or email me at tom@baconcre.com.

Sacramento Value

Amazon HQ2 Takeaways

Amazon Moving to Sacramento?  No, but other Unicorns will!

Last year, 238 Bidders for Amazon’s 2nd headquarters submitted proposals to induce Amazon to locate 50,000 employees in their regions.  Everyone I am certain had reasons but according to CCIM’s chief economist, K.C. Conway,  only 50 bidders met the base criteria.  If it were not for California’s onerous regulatory environment, employment law and taxation, Sacramento would have had a shot.

I think it is idealistic, to say the least, to think that California is going to remove the weights from Sacramento’s saddle, but this doesn’t mean that we cannot compete on a Statewide level – against and in conjunction with – the Bay Area.  Sacramento has to focus on its strengths and choose its battles wisely.  For Sacramento, the Amazon Bid was an essential part of the growing process, a battle worth fighting.

Back to the Amazon RFP.  The HQ2 RFP illustrated trend in relocation decisions:  It is not all about costs.  It is about: Workforce, Quality of Life and Corporate Culture Fit.  The Study reviewed also lists the top municipalities that bid for Amazon, and a large percentage of the top bidders are located east of the Rockies. Take a look at the report here:   ttps://bit.ly/2ra9koy

So what is Sacramento going to do about it?

Greater Sacramento Economic Council (GSEC) headed up by Barry Broome quickly determined that you can’t fight it, but you have to acknowledge the handicapping the State of California puts on Sacramento.  I bet the Serenity Prayer would come in handy here.  What GSEC has done is shift the focus to our strengths while acknowledging our weaknesses, our realities.  And let’s face it, the job is getting a little easier for Sacramento.  When compared to a decade ago, Sacramento’s value proposition is night and day.  Take a look at GSEC’s latest PR:  https://bit.ly/2HGTddu

Sacramento’s office market and you?

Sacramento consists of about 110 million square feet.  The market is made up of about 20 sub-markets.  Each of these sub-markets have a different value proposition.  If you happen to be a building owner or developer in a sub-market still looking for a value proposition, you can most likely learn something from Amazon’s H2Q RFP – How can I create a better experience for a tenant’s employees?

If you are a Tenant, looking at locations you need to ask which location will create the most productive environment for my peeps?  Enhanced productivity compensates for higher rents.  Even if you are not looking at alternative locations you should always be asking yourself how to make your workplace a better place.

Want a copy of the H2Q report?  Just send me an email at tom@baconcre.com.  I will send you the PDF.

Calpers HQ - Sacramento CA

Go Green or Go Home

Go Green or Go Home!   Being from California, going Green is not longer optional. From 1978 for residential – and 1980 for non-residential – the EPA has gradually accelerated the energy regulations around new construction. These regulations are Title 24. The Code for all the regulations is Title 24 http://www.energy.ca.gov/title24/

The original intent of Title 24 was to conserve energy, but not to save money. As the years have gone by, the Code has evolved to dramatically increase the cost of construction. Why does California need Standards? Energy savings comes to mind, and for commercial buildings (office, industrial, tech etc,) the two biggest components for energy consumption (potential savings) are HVAC and Lighting.

Many of the regulations, while innovative, may not pencil for developers. And when things don’t pencil either rents go up or things don’t get built.   For example when planning a tenant space, Title 24 calls for “Light Harvesting” which mandates that all lighting is calibrated to turn off when no one is in a portion of the space. Take it a step further, you have to consider the orbit of the earth; based on the position of the sun (consider the afternoon sun shining on your windows) HVAC and lighting can be adjusted to turn off or throttle down.

You may remember the 2000/2001 energy crisis in California. Since then, the Energy Commission has placed more emphasis on energy consumption. Building components that Title 24 covers is all encompassing – from the envelop – to the guts of the building. The other goals for Title 24 are:

  • Comfort- Efficient buildings are more comfortable for the occupants and the delivery of light, heating and cooling is much more consistent throughout your premises.
  • Economics- In the early years much of Title 24 was a nuisance and big energy saving improvements didn’t really pencil. That has changed dramatically as technology, particularly in Solar, has improved.
  • The Environment
  • Curtailment of greenhouse gases

Many tenants considering new locations will give environmentally friendly, energy efficient buildings “points” in their property selection matrix.  It just feels good, and potential employees and clients take notice.

If you are a tenant looking at moving into a new location that needs significant Tenant Improvements within previously occupied space be aware: If the building you are looking at is older, it is possible that it may not be in compliance with current ADA or Energy codes. So, when the Landlord goes to pull a permit for the construction of the tenant improvements, the City Planning Department could require the Landlord to comply. This can be costly since it adds to the scope of work. Sometimes, as much as a Landlord wants a new tenant, the Landlord may decide to pass on a tenant that requires significant tenant improvements. They will just wait for a tenant that doesn’t need tenant improvements. So, it is better to figure this out in the initial stages of a negotiation rather than waiting until you are about to sign a lease.

Golden 1 Center Arena

When an Office Building Sells, Tenants Pay

Sacramento CA: About a week ago, 621 Capitol Mall sold for $161,000,000. This amounts to $439 per square foot; nearly $100 a square foot more than what Wells Fargo Center sold for 14 months ago. 621 Capitol Mall (aka US Bank Tower) was built in 2008 and is home to Downey Brand, US Bank and Nossaman LLP. KP Public Affairs is moving into 16,000 square feet in March.

This sale is a significant validation for the Sacramento commercial real estate market because the price is significantly higher than the average, and this is Shorenstein’s first purchase in the Sacramento Market. Shorenstein, based in San Francisco,  is one of the country’s most prolific, opportunistic institutional investors.

When an office building sells for a price significantly higher than its assessed value, the Property’s tax basis goes up. In this case, the previous assessed value was $122 million – soon to increase to $161 million.

The tenants are responsible for increases in expenses over and above its Base Year, and this includes property taxes. The Base Year is typically the year a tenant’s lease commences. With this recent sale, the assessed value increases by approximately $40 million. Property taxes are approximately 1.15% so the property tax bill will go up by $460,000 or $1.25 a foot per year. Therefore every tenant in 621 CM will pay 10 cents a foot more in rent to cover this increase in property taxes.

Unless you are a special tenant (special meaning: large, Fortune 100, or the public sector) you are probably going to pay more rent when your building sells. So when looking for a new property, consider the ownership’s goals for the building. For example, if they have owned the building for 3 to five years and the market has appreciated considerably, there is a chance that the owner will sell the building during your lease term. And if it sells for a big number, you are probably going to be picking up a bigger portion of the tax tab.

If you have specific questions about your current lease, the assessed value of the building you are in and what your possible exposure is, I can help.  Please feel free to call me at (916) 761-1202 or email me at tom@baconcre.com.

Aerial Downtown Sacramento

News Break:  Sacramento Office Market Banned for Taking Performance Supplements

For decades, Sacramento has been considered a secondary or tertiary market.  For those who bought-in 3 to 5 years ago, they are now reaping the benefits.  Now that the office market has reached equilibrium, it is only a matter of a couple years until we will see meaningful uptick in construction of speculative office product. 

Before the end of the year the most significant private sector deal was announced. Centene bought Health Net and immediately expanded in the Prospect Park submarket (Highway 50).  But the biggest deal – that was put together through the efforts of multiple public and private sector players including the City of Sacramento, The County and GSEC – is Centene’s projected 1.25 Million expansion into the North Natomas Market. 

Rolling into the End of 2017, the overall Sacramento Office Market had just recorded three positive quarters of net absorption.  While the 1st quarter was negative 138,000 square feet, the 2nd quarter was positive at 158,000 square feet, the 3rd quarter at 644,000 square feet and the 4th quarter at 106,000 square feet. Net Absorption is defined as: The net change in occupied space over a given period of time.   The biggest submarket winner is Highway 50 at positive 208,000 square feet.  2nd place was the Natomas submarket at 141,000 square feet and rounding out the top 3 is the Roseville Rocklin market at 74,000. 

New construction:  For 2017, we had 670,000 of office space under construction.  It was not long ago that less than 20,000 square feet was under construction.  The majority of this new construction is pre-leased; for example in Roseville Adventist Health is building 242,000 square feet, Kaiser is building 194,000 square feet and in Sacramento Dignity Health is building 68,000 square feet.  The biggest and most notable speculative project is The Ice Blocks development at 16th and R Street in Midtown Sacramento. The Ice Blocks Development is definitely raising the bar for Sacramento by delivering an awesome urban infill project that includes several cutting edge retailers and market rate housing.   First tenants will be moving in around May.  Heller Pacific is the developer who has added to the Midtown vibe with developments like MAARS located at 20th and J Street.

The overall vacancy factor for office space inched closer to single digits (10.3%) and the central business district is currently hovering around 9.1% (it was 8.6% going into the 4th quarter, but we saw negative absorption of 95,000 S.F.)  Markets with the lowest vacancy factor are:  Midtown and East Sacramento (about 5% combined), Folsom at 7%, Roseville and Rocklin at about 8% (which by the way was sitting at over 15% just three years ago. 

Overall Market Rents at the end of the 2017 averaged about $1.80 per square foot.  The CBD asking rent was at approximately $2.90 for class A space and the overall average asking rent is $2.45.  So, when you are looking at buildings in and around downtown with rents below $2.00 and in some cases lower that $1.65 these properties could be a great value for tenants and value add investors.  Midtown Sacramento is another market with huge upside as properties are renovated and rents increase. 

Sales in the Sacramento region really accelerated in 2017, particularly for class A properties.  In the CBD, three Class A properties in excess of 50,000 s.f. with an average price per square foot of $224 per S.F. Comparatively, in 2016, 400 Capitol Mall and 520 Capitol Mall sold for $343 and $340 PSF respectively.  For additional insight into “who owns what” take a look at: https://sacramentobacon.com/who-owns-sacramento/

And in the first week of January, 621 Capitol Mall sold for about $420 a foot.  Institutional Investor Shorenstein was the buyer, and this purchase is its first buy in Sacramento.  This is national news that adds to Sacramento’s momentum on the national and international stage. 

In South Natomas, the submarket immediately north of downtown,  the Evergreen Company paid $55MM ($174 a foot) for Natomas Corporate Center (2485 and 2495 Natomas Park Drive).  This is a bargain for the iconic project. 

2018 should be another very positive year with continued growth in Healthcare, Insurance, Education, Energy and Technology.  Who knows where our next new companies will come from, but I bet we will begin to see a steady increase of migration from the Bay Area combined with organic growth. 

 

Sawyer

Sacramento’s Big Man is just getting started.

How About Those Sacramento Kings?  The Kings won last night without their Big Man, Cousins.  Frankly, they looked like a whole new team, with contributions from everyone, with six players in double digits.  Willie Cauley-Stein had a career high 29 points.

Would the Downtown market be on such a winning streak without its Big Man? I don’t think so. Property is selling in the Midtown and Downtown Markets (THE CORE) for prices that are justified by increased demand for housing in Core, the Arena (The Big Man) and a multitude of other developments. Believe it or not, the demand for properties is going to increase and sustain itself, so long as the trend for migration into the Core continues. Another factor bolstering values is the replacement cost for commercial properties has increased by over 30% in the last 5 years. This is due to increased labor and material costs.

When the Arena was announced, overnight, property values in the vicinity of the site went up at least 25%. Buildings like 555 Capitol Mall, 501 J Street, The Travelers Hotel Office building and the former Greyhound Bus Station are just a few examples. For Sacramento, the Arena changes everything; consider this blog post comparing The Golden 1 Arena to San Diego’s Petco Park: For Sacramento, The Arena is the Cake

Midtown hasn’t needed the Arena to take off. For many years rents have been suppressed in this market, and as new developments come on line, the rents will be commensurate with Midtown’s value proposition and Vibe. All the new residential development, coupled with the new Sutter Hospital and the Ice Blocks are a few of the projects making it happen.

Below are a three comparable sales that demonstrate the viability of Commercial Property in the Core.

Sale #1: 831 L Street. This site consists of a 27,200 s.f. parcel with a 44,000 s.f. building with over 50 parking stalls on the site. The price was 5,000,000 which amounts to about $113 foot for the building and a land value of about $184 a foot. I see this property having two lives, one for the next 5 to 10 years as a leased building.  In its next life, the property will make way for a new development that maximizes the site.

Sale #2: 910-930 K Street. These vacant buildings sat on the market for at least 5 years, and sold about 2 years ago.  Total site consists of 20,909 s.f of land with 31,600 S.F. of buildings. PRICE: $5,300,000, that pegs the underlying land value at $250 a square foot and $167 a foot for the vacant buildings. To put this in perspective, just one block away 770 L Street, a 169,000 square foot (90% occupied) class A office building sold for $173 a foot before the Arena was announced.

Sale #3: 2020 I Street. This 9,500 S.F. building sold for $2,802,500 ($295 / SF). This building is home to Trumpette, a specialty childrens clothing store. The property sits on a relatively large lot with great parking. Wouldn’t be surprised to see some “alley activation” here.

The sales listed above are notable examples of properties that have sold at exceptional values, values that reflect where the Core is heading. This doesn’t mean that a property worth a $100 a foot is going to immediately sell for $150 a foot, but it certainly builds a solid case for optimism and positive momentum.

Golden 1 Center Arena

Sacramento’s Golden One Arena Makes Almost Everything Better

The Sacramento Kings staying in Sacramento was great, but the Golden One Arena and its profound ripple effect  is the biggest game changer since the Gold Rush. Other cities (San Diego, Denver, San Francisco, etc.) have developed new arenas and the impact on their economies have been great. However, in relative terms, Sacramento’s Arena will probably turn out to  be far more significant.  We have already seen an appreciable uptick in investment activities. Hotel development is happening with more to come, office buildings are selling and Landlords are feeling pretty good.  For  both retail and office tenants (and this is where the “almost” comes in) the future is complicated; On one hand you have an evolving Core with added amenities, then on the other, you have spiking rents and diminished choices.

When compared to other cities, the reason why The Sacramento Arena project is more significant in relative terms is because Cities like San Diego and San Francisco already had a lot going for them: international destinations, corporate support, and natural beauty.

For this discussion, let’s take a look at San Diego and the impact of Petco Park. The total project cost about $450,000,000. Petco Park was competed in 2004. Since then, there has been over a $2 billion in development around Petco Park. The development consisted of 3,500 residential units, 957 Hotel Rooms, and 610,000 square feet of office space. Since 2004, the assessed value of real estate tripled. Petco Park created 19,200 jobs.

But the Boom in San Diego is like adding an extra layer of frosting on an already amazing chocolate cake. For Sacramento, the Golden One Arena is the cake. The Arena combined with the potential expansion of the convention center is going to change our whole community. There will be more hotel rooms, restaurants and housing. The tax revenues are going to increase commensurately, and the City of Sacramento will realize a solid return on its investment. According to the San Diego Business Journal, the City realized an annual return of 7.6%.

By 2021 I predict that we will see the addition or renovation of 1,000 hotel rooms (The Sawyer adds 250 rooms and there are rumors of about 300 rooms near the Tower Bridge in West Sacramento.)

The CBD office market will tighten considerably, and there probably won’t be more than 500,000 square feet added to the inventory in the next 5 years.  There are several sites, but the cost of construction requires rents the market is not quite ready for.  Plus we need more tenant demand in the private sector.  Certainly Kaiser Hospital Helps.

The Arena (like Bacon) makes everything better.  If you are looking to make a move in the office sector (whether you are looking to develop buy or you need to renegotiate your lease or find a new location) Please contact me at (916) 761-1202.  tbacon@kiddermathews.com.

Porcupine

Renewal or New Lease? Don’t Go Naked.

How long would a snail survive without its shell; a porcupine without its quills; a skunk without its spray? As a commercial real estate broker representing occupiers in their commercial real estate dealings, I strongly encourage retaining a broker when dealing with a renewal or new lease.

Certainly, you are capable of finding space; there are numerous data providers like Costar and Loopnet. An exceptional broker is your interpreter and guide. An exceptional broker knows which landlords are well capitalized and which landlords are not. An exceptional broker orchestrates your transaction in such a way that you will be assured that you are making the best deal possible, and that you will experience minimal downtime in your business. An exceptional broker anticipates issues and navigates you through the deal process. An exceptional broker knows what a good deal is (if you are unrepresented, you may not know a good deal when you see it, and negotiate too hard, or more likely, you will leave money on the table or forget to address critical lease language issues).

Most important, an exceptional Broker represents you, not the landlord.

Tenant Rep Broker, Generalist or Dual Agent? A broker that represents buildings, represents landlords. There is a different mindset when you represent the Landlord. There is one goal: get the space leased up! In addition, and probably most important, the Landlord’s broker has a fiduciary obligation to the Landlord.

But lets be realistic. In small markets, most brokers cannot make a living just representing users. They are Generalists. They represent buyers, sellers, landlords and tenants. A Generalist has a broad perspective that can come in handy.

Effective January 1, 2015 (SB 1171) new legislation requires brokers and agents to provide extensive disclosures in leasing transactions as to who they represent. The law went so far as to suggest that there is a conflict even when your agent’s firm represents a building (even though your agent is not associated with the building.) Practically speaking if you are looking to pick an agent and you are concerned about a conflict of interest (dual agency) see what properties the agent represents. Frankly, you can ask the agent to disclose what properties they represent. If they don’t represent any buildings you would consider, then I would say that you will be in good hands, so long as the agent is experienced and has the expertise to get the job done.

Brokers that represent only Tenants (Tenant Reps) are very effective and supposedly have no conflicts. Even if an agent (or their firm) represents no buildings, they can still have a conflict. For example, what if the Tenant Rep represents a tenant looking for similar space in the area you are looking? That certainly would be a conflict, particularly in a tight market with limited options.

What if you don’t want to move, you just want to renew your lease? Should you still retain an agent to represent you? Of course! The agent will create a competitive environment that you cannot create on your own. I just finished up a negotiation where the tenant acknowledged there is no way they would have gotten as good a deal on their own, and this is a client that negotiated their previous renewal on their own.

If the Landlord’s agent is doing their job, when the time is right, the agent will approach you about renewing your lease. You may have developed a good relationship with this agent, but the simple fact remains, they represent the landlord. So when the Landlord or its agent approaches you regarding a renewal, let them know you have an agent or you plan on retaining one. In most renewal negotiations, the landlord will happily pay your agent’s fee, in fact it is usually in landlord’s budget. When a landlord pays a commission, that means they finalized a renewal, and the tenant is staying. A commission is always less costly than filling up a vacancy.

There is conflict inherent in the business everywhere. As a broker, the critical tenet is to do the right thing, treat people fairly and look out for the interests of the party you represent. As the Occupier, when hiring an agent, look into the potential conflicts and hire an experienced – and exceptional – agent where the likelihood of conflict is minimized.