News Clipping The Buzz, 2005 The Whispers, 2006
Dan Levy []
San Francisco Chronicle []
January 1, 2006

The buying and selling of Bay Area real estate continued at a torrid pace in 2005 with a record $18.3 billion worth of commercial property—including San Francisco’s premier skyscraper—changing hands.

Meanwhile, developers and city officials around the region scrambled to convert old office buildings and apartment complexes into condominiums as demand from home buyers remained strong.

In the realm of movers and moguls, Google announced that it will cohabit with NASA at Moffett Field, and George Lucas alighted at his new headquarters in San Francisco’s Presidio after years in Marin County.

Even ordinary office tenants, who sometimes got lost in the frenzy of the sales market, found reason to cheer. Many companies signed new lease deals in 2005, as office rents, still low by historical standards, steadily rose throughout the year.

Here are the highlights of the year that was:

Leasing market roars back

“Subscribers to ’the recovery’ will be believers,” reported the tenant-oriented Web site this month, after a flurry of lease deals. “Tenants blew the doors off any semblance of subtlety, taking down enormous blocks of space last quarter.”

For the year, tenants committed to 1.3 million square feet, about the same amount of space that was leased in 2004.

The activity put a big dent in the amount of empty space in San Francisco’s central business district. Available square footage downtown shrank to 10 million square feet, well below the record of 15.2 million square feet set in 2003 after the dot-com crash.

The filling up of empty space—and the absorption of sublease space that had been lingering from dot-com days, when companies took on too much real estate—dropped the office vacancy rate to 17 percent from a record high of 24 percent in 2003, according to Grubb & Ellis.

At the same time, average downtown rents increased by a whopping 20 percent to end the year at an average of $34 per square foot.

The improving market fundamentals seemed to finally put San Francisco landlords and tenants on firm ground after the dot-com hangover, which lasted nearly half a decade.

“It feels like we’re at or close to equilibrium, where there is not a surfeit of space nor a desperate shortage,” said Frank Fudem, a leasing broker with NAI BT Commercial.

BofA and boffo sales

While the leasing market swung back to normal, it was the record sales market that dominated headlines in 2005.

Commercial property remained an investor favorite, as the rise in rental rates and the insatiable thirst for property of all kinds converged.

“There was a continuation of the demand for well-leased, low-risk, quality property that produces a good yield,” said Paul Paradis of Hines, an active trader of San Francisco office buildings, including two on Howard Street and one on Montgomery Street. “People feel that the recovery in terms of rents is real. They see a positive trend for the future.”

Bay Area commercial property sales in 2005 totaled $18.3 billion, easily surpassing the $9.5 billion sales mark in 2004. The buyers of such properties as office buildings, industrial properties, retail centers and apartment complexes included the usual suspects: pension funds, insurance companies, wealthy individuals and real estate and private equity firms.

The biggest deal of the year was the pending $1.05 billion acquisition of San Francisco’s Bank of America Center by a Hong Kong investment group led by the heretofore unknown Vincent Lo, who gained instant notoriety by taking control of the Financial District’s biggest building.

The BofA deal was announced only a year after the longtime building co-owners, Shorenstein Co. and Bank of America, sold their stakes in the 1.8-million-square-foot complex to New York syndicator Mark Karasick.

Lo’s investment group has still not closed on the BofA deal, and he is being sued by Donald Trump, who objects to Lo using the proceeds from a Manhattan land sale to acquire the San Francisco property. Lo is the general partner, and Trump is a minority partner in the company that sold the Manhattan land.

Lo said in an interview this month that he cannot comment on the dispute while the matter is in the courts.

But for those in the mood for a Trump-style soap opera, the Donald offered this comment through a spokeswoman: “This is just the beginning of a very long case.” Stay tuned.

Conversion craze

In the Bay Area’s housing market, where local officials and community activists carefully scrutinize development plans, builders discovered the virtues of condominium conversion.

Taking an old office building or forlorn apartment complex and turning them into spiffy for-sale units has become one of the hottest development trends in the region.

From downtown San Francisco to Contra Costa County to the Peninsula, conversion projects abound.

Take the historic Furth Building on Sansome Street in the Financial District, or the Copper Ridge apartments in San Ramon or the Benjamin Franklin Hotel in San Mateo: All are in the midst of condo conversion.

“Converting is far less risky than starting with a piece of raw land and going through the entitlement (city approval) process, particularly in San Francisco, where entitlements can be easily challenged and changed at the last minute,” said developer Oz Erickson of the Emerald Fund, which converted the Essex high-rise apartments in Oakland in 2004.

Although the conversion trend was seen in high-profile urban projects, it also reached more-affordable cities in the suburbs.

Carmel Partners, former owner of the sprawling Parkmerced apartments in San Francisco, announced plans to renovate the Clarendon Hills apartments in Hayward.

The project would turn the 285 units into for-sale condominiums starting in the high $200,000s and going up to the $400,000s. The median home price in Hayward is around $525,000.

Apartments and hotels

Condos weren’t the only hot property in 2005.

Parkmerced, the city’s largest apartment complex, with 3,221 rent-controlled units near San Francisco State University, was sold to Stellar Management, a New York real estate investment firm, and Rockpoint Group.

The value of the deal was estimated at around $700 million, underscoring the investor appetite for residential property that produces steady cash flow.

Other apartment buildings that changed hands in 2005 included the Park Lane on Nob Hill, which was bought by the Lembi family; the Village Commons apartment complex in San Ramon, bought by Irvine investors Bascom Northwest Ventures LLC; and the Casa de Vallecita in Vallejo and Bayside Willows in Pinole, both bought by Beverly Hills investors Kennedy Wilson.

As for San Francisco hotels, amid a rise in room rates, the Sir Francis Drake and Campton Place in Union Square were sold, while the Four Seasons, Pan Pacific and Park Hyatt were all put on the block.

Google and George

Everyone, it seemed, had Google on the brain. The giant Internet search engine broke out of its online kingdom when it announced it would build a 1-million-square-foot office campus at the NASA Ames Research Center at Moffett Field in Mountain View.

Although the project is years away and still must go through construction approvals and design review, it signified how the Big Vision may be coming back to the Bay Area after the long post-2001 lull.

George Lucas also showed that big ideas pay off. In June, the “Star Wars” honcho christened his 865,000-square-foot Presidio digital arts campus with a huge organic feast for San Francisco’s political and business elite. Actor Don Novello, dressed as Father Guido Sarducci, told the swells that it reminded him of the story of fishes and loaves.

Strictly speaking: So long

This is my last story for The Chronicle after a wonderful 15-year run. I started covering small crime on the night cops beat, then graduated to reporting on drag queens and politics. Who knew it would all lead to real estate?

I would like to thank readers for their kind words and thoughtful feedback over the years, and wish everyone a happy, healthy and prosperous new year.

©2006 San Francisco Chronicle

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