Equity's Rolling In S.F.
This week at Bisnow's Capital Markets Summit at Hotel Nikko, StepStone Global partner Jeff Giller said S.F.'s trophy deals are getting “more than a couple” bidders. Ultimately it comes down to the highest bidder in a frothy market like the one we're in. Surprisingly, the winners coming out of the global financial crisis are ones like sovereign wealth funds. It's an area of the market he's seeing emerge. Who else is buying? A tremendous amount of wealth has accumulated in the tech sector, and there's a lot of private money there.
Columbia Property Trust SVP of Western region David Dowdney admits he was probably asked the cap rate question because he just bought two buildings here in the 3s. He thinks he knows why cap rates are so low in downtown S.F. these days: It's such a rapid rent growth environment. That's what attracted his firm to 650 Cal. There's a lot of tenant rollover early on in the next 24 months, and he's confident in these next two years that the healthy leasing market will continue and possibly push into the $70s/SF. Cap rates are also so low because the buyer profile has changed.
Partner Engineering and Science national client manager Jay Grenfell, who moderated, points out that core office product is trading at low cap rates. You can't talk about S.F. without housing, so he wonders at what point there's a flight to the “Bostons and Austins” once people can't afford to live here. There's even talk about Google employees camping out on campus to save on rent. He's got a good analogy for the spike in S.F. prices: Is the rising tide in S.F. lifting boats in the surrounding bay? (Just like last year's America's Cup lightweight ships that barely skimmed the water.)
Embarcadero Capital Partners principal Eric Yopes, who just sold 100 Cal to Pembroke, says the key thing to keep in mind with S.F. and the Bay Area is there's still a lot of market and submarket differentiation. He thinks it's fruitful to hold coastal cities up against two backdrops: one is fundamentals of the given market (what is going on with job creation and rent absorption) and the other is capital flows. There is a ton of liquidity, and arguably the last couple cycles are proof to a certain extent that capital flows trump fundamentals. That's been true in LA, he says, citing a recent $800/SF trade in Beverly Hills.
Veritas Investments CIO Roger Snell says we are lucky to live in a leading job creation market, where rents are high but inexpensive compared to some city centers of the world (Rome, Paris, Moscow). If you look at the same metrics for residential, it's a similar story. S.F. and NY are neck and neck when it comes to housing the most Fortune 500 HQs. There's a lot of wind left in our sails here, but affordability is a real problem. He's not a developer, and he told the crowd it's up to them to work with municipalities to solve the problem. If we don't “they will solve it for us”—and we likely won't like how that works.
Divco West director Jamie Lasher says his hot spot is office tech markets. He thinks long term, this is a good place to focus. His company made a big move in Oakland this year, having scooped up the prized Lake Merritt Plaza for a pretty penny.