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Spieker Properties bullish on the Bear Flag State

California is the place you oughta be," or so goes the theme song for a '60s sitcom still in reruns.

One company that perfectly reflects this attitude is Spieker Properties Inc., a Menlo Park, Calif.-based REIT that acquires, develops and manages office and industrial properties, primarily along the West Coast.

But Chairman Warren "Ned" Spieker Jr. hasn't had much time to sit around the cement pond with Ellie Mae's critters. In 1997, Spieker Properties acquired over $1.5 billion in assets, containing 12.5 million sq. ft. of office and industrial space. In the first quarter of 1998, Spieker Properties made over 4 million sq. ft. of office and industrial acquisitions, at a cost of slightly more than $500 million. All but one of these properties are located in the Golden State.

"The West Coast offers some things we find are critical to our business," says Spieker. "That is, high growth markets and attractive demographics, highly educated work force, a motivated work force, job growth, a pleasant place to live and barriers to entry."

Spieker, a University of California Berkeley graduate, formed his company 11 years ago when Trammell Crow Co.'s Northern California/Pacific Northwest division split with the company, taking part of its portfolio as a going-away present. This was just before the bottom dropped out of the commercial real estate market.

"We didn't do a lot of high-risk development from '87 to '93. We developed for our tenant base," Spieker says. "But we also kept a relatively conservative balance sheet."

By 1993, Spieker Properties had became a publicly traded REIT with a portfolio of more than 11 million sq. ft. of office and industrial properties. The firm now owns and manages over 40 million sq. ft. of assets, mostly on the West Coast, with an equity market cap of almost $3 billion. Office properties make up 63.2% of NOI, industrial 36.8%.

In an effort to foster brainstorming, Spieker shares an open office with his executive officers, including Vice Chairman Dennis Singleton, COO John K. French, CFO Craig G. Vought and Chief Investment Officer John A Foster. The wall-less idea just might be paying off. In 1997, the company set a record in Sacramento when it snagged $34 million worth of office property and land on Douglas Boulevard, the biggest deal to date in Placer County. Earlier this year, Spieker was a leader in the REIT race to acquire San Francisco's six-building Embarcadero Center, a premium office property which ultimately went to Boston Properties for a cool $1.2 billion.

The majority of the company's holdings are located in five areas of California (San Diego, Orange County, LosAngeles, San Francisco and Sacramento) plus Seattle and Portland, Ore. One reason Spieker wants to concentrate on areas along the Pacific Ocean is a desire to live where his company does business, giving him an edge over other executives who have to jet into town for a deal. Another reason is much more practical: the barriers to entry common to the West Coast that help separate the players from the talkers.

"You can take certain areas of the country that are just flat like a pancake and the latest loop road defines the best new location," says Spieker. "Every one of our markets, perhaps with the exception of Sacramento, has some pretty strong geographic barriers, such as bays and hills, not to mention environmental, shall we say, discipline. Other parts of the country don't."

Spieker tries to acquire and develop property in "clusters" of each of the 14 Western submarkets it serves, often buying buildings or land next to buildings the firm already owns. A prime example of Spieker's submarket control is the area surrounding San Jose Airport, where the company owns 80% of the Class-A office space.

"If we have 10 buildings or 20 buildings in an area, and have great market share, we can offer that tenant flexibility," Spieker says. "We think that's a very important requirement on the parts of most tenants today with the world changing as quickly as it is."

Clustering produces twin benefits: control over rents and distribution of overhead. Spieker can often use one on-site management office to handle several buildings and help to defray the expense of such amenities as health clubs and conference rooms.

Little perks go a long way toward achieving Spieker's high rate of tenant retention. Tenants of Spieker's buildings have access to amenities at any company-owned buildings in any state. A San Diego tenant who flies to Seattle can utilize the health clubs and conference rooms in buildings the company owns there.

Satisfied tenants tend to stay when their leases expire, even if their new rents increase significantly upon re-lease. In the first quarter of 1998, expiring leases were re-leased at effective rates that were 21.7% higher than the previous rents, down slightly from 23.8% in the fourth quarter of 1997. Still, Spieker Properties assets enjoy an overall occupancy rate of 94.5%.

The combination of clustering and amenities gives Spieker Properties greater control over rents, which helps please shareholders constantly seeking higher FFO. But Spieker tries to put the tenants' needs ahead of the shareholders'.

"Without a tenant, you're nothing," says Spieker. "You won't have to worry about shareholders because they'll all be gone."

Spieker occasionally comes into possession of assets located a time zone or two away from Menlo Park, though usually not by design. Last fall, the company acquired a $725 million, 44-property portfolio from WCB Properties and Whitehall Street Real Estate Ltd., a fund run by Goldman Sachs & Co. The transaction, the firm's largest portfolio acquisition to date, yielded the 17-story One Capital City Plaza, a 410,000 sq. ft. Class-A office property in the tight Buckhead submarket of Atlanta, as well as several properties in Denver, Phoenix and Texas. Spieker announced in July that The Rubenstein Co. of Philadelphia has agreed to purchase Capital City Plaza for an undisclosed sum.

"I think it's a misconception that REITs should never sell," says Spieker. "We bought those properties with a larger package that was predominantly West Coast. And we have, for the most part, sold those properties for one reason or another."

When the market eventually flattens out and buying becomes less profitable than building, most REITs will no doubt devote more time to development. Analysts think Spieker's 30 years of experience in development will help his firm through the next market cycle.

"Spieker is a little better off (than other REITs) because they have a development infrastructure and they've got a more generic real estate portfolio where they've got smaller users, more fungible real estate, so they're alittle more diversified," says Lawrence D. Raiman of Donaldson, Lufkin & Jenrette. "And they've got a program and a leg into the next growth cycle, which is through development. It should enable them to grow."

In the future, will Spieker Properties be able to keep focusing all its development efforts on markets west of the Rockies?

"In five years, if we woke up, I would be surprised if we weren't in some other geographies. But that isn't to say we're actively seeking them out," Spieker says. "The logical way to expand into a geography is to merge with another company that has a franchise and a major concentration of properties in a particular area."

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