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August 28, 2015

Long-stalled office projects take flight as tech demand pushes down Peninsula

San Francisco Business Times

Mary Ann Azevedo

What a difference a year makes. Last summer, only one office project was under construction on the Peninsula. But as the tech industry's white-hot growth has pushed into areas beyond San Francisco, office developers have started to build in San Mateo County again.

In addition to Kilroy Realty and Hunter/Storm's Crossing/900 project in Redwood City, which started construction in late 2013, developers such as Hines, Wilson Meany and The Sobrato Organization have all placed bets on the Peninsula, with large speculative office projects breaking ground in the last 12 months.

The Crossing/900 has snagged Box Inc. as a tenant, and Sobrato has snapped up EMC Corp. at one of two buildings that it started on spec at 151 Commonwealth Drive in Menlo Park. Wilson Meany secured SurveyMonkey as an anchor tenant with a 210,000-square-foot lease (See story, facing page).

Still, with the vacancy rate on the Peninsula at an exceptionally low 6.85 percent at the end of the first quarter, developers have reason to be optimistic. That rate is unprecedented save for a brief blip in the dot-com era, according to Colliers International Senior Vice President Mike Cobb.

Meanwhile, average asking rents for the Peninsula jumped another 10 percent in the first quarter, to $54.72 per square foot fully serviced, Cobb said.

"Downtown Redwood City is following in Palo Alto's wake," Cobb noted. "The less core locations, though, are also showing terrific growth."

The largest leases on the Peninsula in 2015 were signed by Survey Monkey, EMC Corp., Rovi Corp. - which took 103,900-square-foot deal at 2 Circle Star in San Carlos - and Pebble Technology Corp., which subleased 54,000 square feet at the Crossing / 900 in Redwood City.

As space has filled up, average office rents on the Peninsula have climbed about 25 percent in the past two years, Cobb said.

New tenants looking for space will continue that trend. For example, Google's October 2014 purchase of Pacific Shores will have an impact on the market, leaving a number of smaller tenants searching for new space. The true impact of Google's acquisition of Pacific Shores won't be really felt until late next year - as the majority of current leases at the project get closer to their end dates, said Kidder Mathews' Associate Vice President Sandy Rodriguez.

"There is a fair amount of space available at the project (in the buildings not owned by Google) for those that may want to stay there," she said. "A great deal of the leasing activity on the Peninsula is like a game of musical chairs - local tenants relocating to accommodate their changing needs."

Other activity is from San Francisco companies negotiating for expansion space on the Peninsula, said Rodriguez.

Rodriguez said the Peninsula is attractive because it provides the type of space that is in demand.

"Speculative development of new and well-located product is the most critical component of attracting major tenants to the Peninsula - or keeping them here," Rodriguez said. "We have seen some existing properties updated to better match the kind of space today's tenants are looking for."

Steve Dostart, president of Palo Alto-based Dostart Development, pointed out that activity in the southern Peninsula is very strong while the northern Peninsula has always seen less activity.

Dostart expects to be in front of the Redwood City Council soon with plans to break ground on 601 Marshall St. sometime in early 2016. If all goes as planned, shell construction of the 138,000-square-foot Class A office project should be complete in 2017 with tenants moving in early 2018.

"We are targeting tenants who really value being in downtown Redwood City. These range from startups to more established companies to law firms," he said.

Chase Lyman, vice president of leasing and acquisitions for The Sobrato Organization, said construction is under way on the 214,000-square-foot University Square development at 2100 University Ave. in East Palo Alto. He anticipates the warm shell to be complete by the fourth quarter of 2016. Sobrato's Commonwealth Corporate Center in Menlo Park should be finished in the first quarter of 2016.

"The majority of the demand is on the tech side," he said. "We've had some interest, lots of inquiries but no tenants signed yet."

Building spec is always a gamble, Lyman acknowledged.

Sam Cheikh, a director for Hines' West region, said Hines broke ground on 400

450 Concar in San Mateo in March with the expectation of delivering tenant improvements in the summer of 2016. The three-building, 305,000-square-foot office project is designed to be flexible to attract a variety of users, Cheikh said.

"San Mateo is centrally located with great public transportation access, which today is a necessary recruiting tool for companies," he added. While Hines has yet to sign any leases for the space, it is speaking with several tenants.

"We're very confident the market is there," Cheikh said. "We're seeing a lot of demand."

For the full story, go to San Francisco Business Times.

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