AgdaPkt 2005-10-24 - Laserfiche WebLink

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%1. It!' CB RICHARD ELLIS CONSULTING Sedway Group CBRE C8 RICHARD ELLIS Mr. Larry Carr September 15, 2005 Page 6 Key Office Tenant Assumptions There are several categories of assumptions unique to the potential reuse of the property by an office user. These assumptions pertain to occupancy of the space, the valuation of the property, employee density, utility rates, and tenant improvement allowances. Reuse Potential. CBRE Consulting conducted an overview of the Redwood City office market for the purpose of projecting when the property might be reoccupied by a traditional office tenant. Documented in Appendix B, this overview indicates that Redwood City's office inventory is currently 29 percent vacant, which is considerably higher than its historical average of 15 percent over the 1996 to 2003 period. Office tenants likely to consider the Excite@Home campus, with space needs in the 75,000-square-foot plus range, are generally willing to extend their search for space as far north as Burlingame or Millbrae and as far south as Mountain View. While the Excite@Home space has excellent freeway exposure and is one of Redwood City's few available, newer office campuses, the property is not well located relative to existing retail services. High vacancies in other San Francisco Peninsula submarkets, most notably Foster City and San Mateo, will provide stiff competition for the former Excite@Home space. Moreover, these submarkets are more centrally located between Silicon Valley and San Francisco, offering better access to a Bay Area-wide workforce.5 Considering the existing supply of available office space in competing submarkets, Redwood City is expected to lag the recovery in the rest of the SFP market. Consequently, CBRE Consulting does not anticipate market-based occupancy of the property for a traditional office tenant until 2010. Consistent with standard office market assumptions, the space is assumed to be 90 percent occupied at this time. Property Assessed Valuation. Given its vacant status, CBRE Consulting believes the property is currently overvalued at $63.9 million. Therefore, the analysis assumes the property will be reassessed at a lower value, at least consistent with prevailing market rents. Based upon the office market overview, CBRE Consulting projects that these rents will be $22.20 per year in 2006, the beginning year of the discounted General Fund revenue analysis. At this rent level, less an assumption for operating expenses and vacancy allowance, the property would be valued at $41.7 million (see Exhibit 8). This value estimate assumes an investment grade capitalization rate of 7.0 percent, which would likely be used by the County Assessor for this purpose. It is assumed the property will be sold or reassessed again in 2010, when it achieves stabilized occupancy. The presumed market rent at this time is estimated at $28.40 per year. Net of operating expenses and the vacancy allowance, this translates into a value of $53.9 million, assuming a higher 8.5 percent market capitalization rate. The higher capitalization rate reflects terminal cap rates used currently by institutional investors. In the years between the two assumed revaluations, and after the 2010 property revaluation, the value is assumed to increase 2.0 percent per year pursuant to the provisions of Proposition 13. 5 Several real estate brokers interviewed for this study mentioned the fact that Central San Mateo County, i.e., Foster City and San Mateo, offers better access to a Bay Area-wide workforce. Assuming this is a factor driving office demand, the performance of the office submarkets seems to support this - Foster City and San Mateo are doing much better than Redwood City. This is supported by the placement of Highway 92, which provides easy access for the population west of Highway 101 and the San Mateo Bridge, providing access to labor from the East Bay.