2015 - Q1 Newsletter

As I write this message for our first newsletter of the new year, it seems like the start of 2015 was a long time ago in “CoreNet years.”  Since January 1, our chapter has hit the ground running in true award-winning chapter fashion.

Our holiday party at Domenico Winery in San Carlos was a smashing success and was well-attended by a great cross-section of our membership. The January chapter meeting, our 15^th Annual Market Forecast event, was generously hosted by Electronic Arts and was one of the most engaging and dynamic panels that we have had in recent years – kudos not only to our panelists (who included Ken Rosen from the Fisher Center at U.C. Berkeley), but also to our Programs Committee for another job well done.  (In case you missed this important program, there is a very detailed Market Forecast recap included below.)

One of our most important orders of business for our Chapter during this time of the year is succession planning, which has two major components: officers and directors, and committee co-chairs. Your Board has set as a very high priority a commitment to a transparent, inclusive and fully representative succession process. Additionally, we have focused this year on looking two steps ahead instead of just one. We want to promote and provide leadership opportunities for our members. As such, we need to look not just at who is in the candidate pool today today, but also who we can develop to populate the pool down the road. We then need to proactively provide them with the experience that they need to be productive Board members.

The first output of this process brought to you our nominated slate of officers for 2015/2016: President Sandy Heistand (Advent), EVP/President-Elect Michael Bangs (Oracle), Secretary Jamie Moore (DPR Construction), Director-at-Large John Lucas (Juniper), and Director-at-Large Jay Sholl (CBRE). Chris Chandlee (AT&T) will continue into the second year of his term as treasurer, and Dick Palomba will do the same as our administrative officer. As the soon-to-be immediate past president, I will step into the third director-at-large position.

In the coming weeks, we will be selecting our committee co-chairs -- the group that does the serious work for the Chapter.  I would be delinquent in my duties if I did not take this opportunity to encourage all of you to become involved and join a committee – and to consider becoming a Board member down the road. It is a truly rewarding experience.  (Information on how to get more involved can be found at the end of this newsletter.)

With that I will leave you with my hopes that I will see you at an upcoming chapter event, whether a monthly program, a Women of CoreNet event, or a Young Leaders get-together. Here’s to a strong 2015 for CoreNet NorCal.

Michael Casolo

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue).  The company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through approximately 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

A leading advisor to corporations and institutions seeking to improve the performance of their workplaces, CBRE’s Workplace Strategy team provides counsel in the areas of workplace assessments, strategy development and change management. With a focus on facilitating the creation, implementation and sustainment of customized workplace strategies, the team helps its clients improve employee engagement, drive organizational change, and manage real estate costs.  Please follow the link below to an informative white paper from CBRE called: “The Evolving Workplace: How U.S. Office Space Is Changing.” Please click here to an informative white paper from CBRE called: “The Evolving Workplace: How U.S. Office Space Is Changing."

CoreNet January Chapter Meeting Recap
by Erin Carew, Instigate Marketing & Public Relations

One of the best-attended meetings every year is our Annual Market Forecast because of the valuable information that is provided to our members.  Even if you could not make it to the meeting this year, we have provided here a detailed recap of the important discussion, including some of the most informative presentation slides.

On January 15, 2015, CoreNet Northern California held its Annual Market Forecast event at Electronic Arts’ headquarters in Redwood City.  Featured speaker Ken Rosen, chairman of Rosen Consulting Group, a real estate market research firm, and chairman of the Fisher Center for Real Estate and Urban Economics at U.C. Berkeley, delivered an informative and entertaining keynote address to a crowd of more than 150.

Rosen began his remarks with a macro perspective and shared what he sees as the factors affecting the current economic landscape.  On the positive side, he identified private sector job growth, strong auto sales, very low interest rates, global monetary easing, declining oil and gas prices (with a possible end of OPEC) and improvement of the for-sale housing market.  He pointed out negative influences as well, including a recession in Europe, a slowdown in emerging markets such as China, the “Fragile Five” and Russia, the contagion effect from the oil and commodity price plunge, geopolitical events such as ISIS in Iraq, Syria and Saudi Arabia, as well as unrest in Ukraine, Gaza, Pakistan, Iran, North Korea, Libya, interest rate normalization and the question of a credit and asset bubble.

Rosen noted that while the rest of the country is experiencing choppy to moderate growth, the Bay Area is currently experiencing a boom.  He indicated that global events could cause us to go into recession, however, be believes nothing domestic would cause that to occur in the near future.

Regarding U.S. employment growth, Rosen stated that we have been through the worst recession of our careers with estimated loss from peak to trough of 8,818,000 jobs. Since February 2010, approximately 11,215,000 jobs have been created.  In 2014, jobs grew at an average of 238,000 per month.  “We are creating a jobs machine in the Bay Area,” said Rosen, “Job openings have soared, and we are at full employment by anyone’s measure.”  He added,  “However, Federal Reserve Chairperson Janet Yellen is yet to reflect this in monetary policy.”

Rosen went on to give his perspective on monetary policy and shared his predictions about when and how much the Fed will raise short-term interest rates, often referred to as policy firming. He criticized the quantitative easing program the Fed initiated in 2013 under former Chairman Ben Bernanke, which consisted of buying trillions of dollars of bonds.  Rosen dismissed the program, which ended in October of last year, as ineffective as it created few new jobs, however, it did create the beginnings of an asset bubble.

Regarding the central bank’s decision to keep short-term interest rates near zero, Rosen said, “We have never had these unheard of low rates.  There has been nothing like this since the Great Depression.”  He commented on the Fed’s quarterly forecast, which he referred to as “the dots.”   Published by the Federal Open Market Committee, the forecast details members’ projections for the federal funds rates, their key short-term policy instruments, which are released in the form of dot plots. Rosen indicated that currently “the dots” illustrate the committee forecasts raising short rates gradually ultimately reaching 2-½ percent by December 2015.  He said, “This will be a big change from where we are now but is still low for interest rates.”  He pointed out that the biggest challenge would be rates normalizing and said that he believes much would take place over the next three years.  He added, “Interest rates in places like Europe and Japan are too low. That’s why our rates are not going up.”  Rosen said he thinks it is likely we will see a “forward curve” with the ten-year bond going to 3 percent by the end of 2015 and to 4.5 percent by 2019.  He commented that we have a trillion dollars less in residential debt and that he thinks money is too tight, pointing out that even many well-qualified buyers are unable to qualify for a mortgage.

Rosen commented on inflation and indicated it is contained for the moment.   He said that many experts have expressed concern that the quantitative easing program would devalue the dollar and drive up inflation.  However the opposite seems to have occurred. Rosen said, “I think oil and commodity deflation is a good thing.  We don’t have to have wage increases because costs are down.”  He added, “I can’t believe what I hear out of the central bank regarding deflation.”

Another key component to the economic landscape Rosen addressed is that U.S. oil production has soared.  He expressed that U.S. has begun importing considerably less and has actually started to export oil.  He said, “I think the Saudis are making a huge mistake by refraining from cutting production.”   He added that he believes gas, natural gas and electricity rates will drop and that it will have a negative effect for places like Russia, Texas and the Middle East.

Rosen gave an overview of the economic outlook for 2014-15 and characterized it as moderate to choppy recovery at 65 percent.  In terms of economic growth, he predicts upward movement in GDP of 2.8 percent.

Relative to employment, he forecasts the unemployment rate decline from the current rate of 5.8 to 5.3 percent during the next year.  He also believes that we will see 1.9 percent growth in employment with 2.6 million jobs created. He sees the S&P 500 at 2,189 and the Dow Jones Industrial Average at 18,921.  (Please see Rosen’s Economic Outlook 2014-15 slide for a complete overview.)

Here in the Bay Area, Rosen believes we will continue to be top on the list of regions with strong employment growth and will experience double the national average. He joked that he has received job offers that would require him to move to Philadelphia.  He said, “They hit their employment peak in 1790, so I declined.”  He commented that he thinks Washington D.C. is unattractive from a real estate perspective with government agencies and contractors shrinking.  He believes all cities with a strong tech presence will remain on near the top of the list in 2015 in terms of growth, and cities with a concentration of energy companies place high as well.  However cities with heavy energy employment will be at the bottom of the list next year.

He went over midpoint pricing by property sector and provided average cap rates and IRRs and compared today’s averages to those experienced at the peak in 2007.  For gateway office product, he showed 2007 cap rates of 5.25 percent and IRRs of 7.40 percent compared to 2014 cap rates at 5.00 percent and IRRs at 6.25 percent.  For suburban office, he showed 2007 cap rates at 6.25 percent and IRRs at 8.40 percent and 2014 cap rates at 6.50 percent and IRRs at 7.50 percent.  For gateway industrial product, he showed 2007 cap rates at 5.15 percent and IRRs at 7.25 percent and 2014 cap rates at 5.00 percent and IRRs at 6.25 percent.  (Please see the slides titled Midpoint Pricing by Property Sector for a complete overview).

In terms of where we are in the cycle in San Francisco, Rosen opined that multifamily is furthest along.  The office market shows more building; however, it is relatively tame in terms of new construction.  Vacancy rates are, of course, down and rents are up.  40,000 jobs were created in the city in 2014, and there is a good number of new office buildings under construction.  He believes Silicon Valley has more staying power than in past cycles and a little toppiness in stocks is unlikely to cause a collapse.  He pointed out that a great deal more office space is being built, vacancy rates are down, and rents are up.  He indicated San Francisco would bump up against Prop M soon, which will mean more spillover to Silicon Valley and the East Bay.

Rosen ended his remarks by saying, “Something could upset the capital markets.  REITS could drop 15-20 percent.  I recommend monetizing core assets or refinancing with an assumable mortgage or doing a like-kind exchange.”

He provided these investment implications:

Core Real Estate:

• Buy high quality REITS on a substantial dip (15-20 percent).
• Buy office, medical office, industrial, apartments, senior housing data centers and retail at 5 percent - 7 percent above cap rates, 80 percent replacement costs or below.
• Monetize mature core assets if cap rate is below 4 percent by sale of like-kind trade or refinance.
• Lock in low debt costs with assumable debt.
• Short long-term treasuries.
• Short China high-end residential real estate.
• Short Euro.

Value Add:

• Debt for traditional assets.
• Buy vacancy in strategic markets.
• Reposition assets for upgrade/use.
• Buy distressed assets from European lenders.
• Development deals.
• Apartments.

Opportunistic:

• Single family land/housing.
• Select office and industrial development.
• Grocery-anchored retail development.

Rosen then participated in a lively panel moderated by Joe Hamilton, executive managing director at Newmark Cornish & Carey.  Panelists included Amber Schiada, vice president and director of research for JLL’s Northern California and Rocky Mountain regions, Garrick Brown, vice president of research, western states, for DTZ, and Hilary Perchard, vice president of business development at Sky Ventures.   

Women of CoreNet Launched 2015 With “The Race For Space: A Expert Panel Discussion Meets Speed Dating”

Women of CoreNet started 2015 with a new venue, new program format and new ideas!  DPR Construction hosted more than 100 attendees in their beautiful new offices in San Francisco, where WOC held an interactive program featuring experts from three disciplines of corporate real estate, discussing the approaches they use to keep ahead of the real estate requirements for their companies.  Iris Gai (VP of REW, VMware) focused on how to engage your senior leadership in developing a long-term regional location strategy.  Chris Ross (director, global operations – Adobe) spoke to our attendees on the importance of pre-determining your options in hot markets so CRE’s have the information readily available to act quickly when business changes.  Keith Zaky (vice chairman, CBRE) provided the imbedded broker perspective, discussing the importance of being a “trusted partner” (only one strike and you are out!) and with trust, a team can be engaged in the early planning stages to achieve the best results. We wrapped up with a de-brief by our moderator, Jana Gunsul (principal, DES Architects + Engineers).

Attendees divided into three mini-sessions with our panelists rotating from room to room offering their insight and approach, citing examples of real-time issues and successful solutions. Each session lasted approximately 18 minutes, with 20-40 people per group. The smaller group sessions enabled an up-close and personal opportunity for the speakers to deliver their message and answer questions that were most relevant to our membership. Several of the attendees commented that the mini sessions encouraged interaction and facilitated more questions/discussion within the groups.

We ended the afternoon session with a networking event and tours of DPR’s new facility.

Thanks very much to our sponsors: DPR Construction, Tandus/Centiva, DES Architects + Engineers, and Allen Matkins.
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The CoreNet Young Leaders Committee was in charge of our December meeting, and they brought us incredible lessons in team-building through improv.  The meeting was led by the ComedySportz improv troupe, and the entire CoreNet NorCal membership at the meeting became part of the show.  From human trains to a giant game of “rock, scissors, paper” involving everyone in the room, the show prompted everyone to get involved, and it certainly looked like everyone was having a great time.  But the show and meeting had a deeper purpose.  According to Jeff Kramer, ComedySportz’ chief entertainment officer, improv can help us improve our organization through observing, connecting, and responding by empowering our teams. If nothing else, this program once again demonstrated that the future of CoreNet NorCal is in good hands.

Get more involved in CoreNet NorCal! One of the best ways to increase your involvement and really get to know other members of CoreNet NorCal is by joining a committee. The CoreNet committees create and organize the events, meetings, programs and publications that you enjoy. Committees you can join are: Young Leaders, Special Events, Programs, Membership, Community Reinvestment, Communications and Technology. All of our committees are looking for volunteers. If you are interested in joining a committee, please contact our Administrative Director, Dick Palomba, at dickpalomba@att.net or (925) 337-1000, and he will connect you with a committee.