Northern California often finds itself insulated from broader national business trends, but the widespread changes in the commercial real estate markets are some cause for concern this year, according to a new report from Cornish & Carey Commercial/Oncor. The report’s outlook for 2008 observes that, “After several years of a growing national economy and relative smooth sailing by all accounts, we’ve run into one of the most challenging periods in memory.” On the other hand, as Cornish & Carey president and CEDO Chuck Seufferlein says in his introduction to the report, “While there is uncertainty in the national economy and locally in some submarkets, there is much to be optimistic about in Northern California–particularly in and around Silicon Valley and San Francisco.”

Employment remains strong and venture capital investment is trending upward, Seufferlein points out, noting that some of the region’s technology-based, bellwether companies recently reported earnings that exceeded analysts’ expectations bysubstantial margins. “In general, their financial performances reinforce our optimism for a solid year of growth in 2008,” Seufferlein says, but he adds, “We’ll know more after the first few months of the year are behind us.”

The Cornish & Carey outlook for 2008 examines office, industrial, multifamily and retail investment and leasing prospects for markets throughout San Francisco and the Silicon Valley, including Palo Alto, San Mateo, Hayward, Pleasanton, Walnut Creek, Sacramento, Roseville and the East Bay submarkets. The outlook identifies a number of industries that are driving tenant demand, and it cites what the company refers to as a “high-octane performance by many of Northern California’s technology companies” in 2007, although it expects that pace to slow somewhat in 2008. Among the industry sectors that lease substantial amounts of space in the San Francisco Bay area are life sciences firms, which continue to prosper. On the other side of the ledger, “the steep decline in the housing industry is mostly affecting Sacramento, the Central Valley and portions of the East Bay” the report points out. Long term, this is bound to affect leasing activity in the State Capitol, since the largest tenant in Sacramento’s market is historically the government.

Regarding its Silicon Valley outlook, Cornish & Carey says that the “defining moment” for the market’s investment sales in 2007 was the merger of CarrAmerica and Equity Office Properties, which put together two of Silicon Valley’s biggest real estate operators into one unit. “The consolidation of the two large portfolio owners demonstrated the strength of the private equity markets, although the question arises as to whether the transaction could have been completed in today’s lackluster credit environment,” the report states. For 2008, it says, one consequence of the merger for tenants will be an increase in operating expenses in the form of property tax. “Otherwise, the single entity should have more leverage in the marketplace simply because CarrAmerica/EOP will be approached with more deals than if they operated independently,” the report concludes.

In San Francisco, the report points out, office vacancy rates in the third quarter last year reached their lowest points since the collapse, with class A offices at 7.4% and the overall office market at 8.4%. For the year, positive netabsorption in the San Francisco market registered at approximately one million sf, “not record-setting but considered very healthy,” according to the report. It calls San Francisco “one of the strongest office markets in the country” despite changing economic conditions.

In addition to its analyses of the Silicon Valley, San Francisco and other Northern California markets, the Cornish & Carey outlook report also addresses broader national questions, such as whether the US will enter a recession in 2008. But it points out that, “Northern California is usually one of the last regions of the country” to enter a recession and is typically among the first to emerge from one. It also cites the region’s strong attraction for venture capital investment, with the Bay Area leading other regions of the country for venture capital funding. In the third quarter 2007, for example, more than 31% of the nationwide total of $8 billion in venture capital funding went to Bay Area companies. That venture capital often drives companies that rent office, industrial and R&D space that in turn helps to drive the region’s commercial markets.

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