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The Valley: A Better Bet Than The City?

San Francisco Office

Now than transit issues are finally getting worked out, the Valley is looking as good—if not better—than the city, according to developers, brokers, and investors at Bisnow's Future of South Bay event yesterday at the Hilton San Jose.

Turner Construction GM Dan Wheeler counts 32 tower cranes in downtown S.F., but there's now a flurry of activity throughout Santa Clara (Turner built Levi's Stadium) and he's excited to see downtown San Jose revitalize itself. Higher education is growing like crazy, and he's got manufacturing clients (working with a confidential chip maker in this area). Finding enough skilled labor is a growing issue, and he's emptied the halls of Las Vegas and Reno to bring that labor here. He's thankful Turner has the bandwidth of 46 US offices to move people here to work on signature projects.

Four Corners Properties founder Bruce Burkard, in referencing bubble chatter, says you never get hit by the bus you are looking for. Real estate is a risk-adjusted return game, so from that perspective it's a great investment to put money. The question is how to mitigate that risk the best you can; it could be by having credit-quality leases or in terms of what the financing structure looks like. In the next few months, lenders are going to continue to get capital out. Buyers shouldn't be putting all their eggs in one basket now; they hopefully have been buying on a consistent basis over the past two to three years, he says.

Clarion Partners senior associate Kyle Naye bought a property a few months ago from Four Corners, an 82k SF office/R&D building at 2901 Patrick Henry. (Bruce jokes he hopes he didn't sell for too cheap.) Kyle's in the acquisitions group of the New York-based investment manager, which is expanding in some West Coast markets. In S.F., Clarion's easily bid on five to six properties, but relative to what he's seeing in the city, the projects Clarion's been scooping up in Silicon Valley this year have been more attractive from a yield standpoint

Eastdil Secured MD Greg Cioth is seeing the highest values of property assets anywhere near the rail, where rents have spiked. It's been a lot easier the past two years to get those types of green projects financed. The latest shift he's seeing is in the "last mile." Business parks that weren't walking distance to the rail had a problem. Now there are now enough systems transporting employees to the rail, and those office buildings can now call themselves "rail served." That helps landlords to lock down tenants, attract younger workforces, and is a cost-effective way to raise rents.

TMG Partners partner Denise Pinkston is fed up with traffic (it took her more than two hours to drive to the event from East Bay). Not every landowner and company be Google and provide a fleet of buses, however, but employees still need to get to work. So she's working with the Mountain View City Council as it figures out ways to accommodate millions of square feet of office development. TMG is part of a Emery Go Round bus system that transports employees between BART and big companies in Emeryville like Pixar. She's helping replicate the idea in the Valley by forming a nonprofit (heavy hitters on the board hail from Google, Intuit, and LinkedIn). The privately-financed shuttle will start rolling out in Q1 '15.  

Miller Morton Caillat & Nevis partner Peter Kline, who moderated, asks Greg if we're in a bubble. Nationally, it does feel like we are in a very expensive market (Palo Alto and Mountain View's prices per square foot are higher than they were in 2000 and 2007). Greg says we are blessed to be in this market with companies like Google, whose cash on hand has quadrupled since 2007. Interest rates are low and cap rates haven't come down yet, producing a record spread between each. The question for buyers in the Valley is how much they want to pay—whether it's $1,000/SF in Palo Alto or $200/SF in North San Jose, there are pockets for everyone everywhere. 

Cornish & Carey Commercial EVP Phillip Mahoney says social media companies get a lot of press, but the story is there are a host of companies you haven't heard of that are doing well and are one of the healthiest aspects of the Valley. Those industries are designing the next level of glass for the iPhone 6 and making chips, for instance. He reveals a dirty little secret related to transit: Caltrain is reaching capacity and can't add a lot more trains to it. There's a VTA-backed bond measure coming up he says to watch out for. Traffic is a deep problem outside the city, with thousands more daily trips on the Lawrence Expressway than on the Bay Bridge, he points out.

Calvano Development principal Mark Calvano, whose cousins are part of the Styx, is looking at doing some housing and hotel projects in the Valley. He expects to see more deployment of capital down the road. It's hard to predict where you are in a bubble and when the top or bottom of the market is. Warren Buffet, he points out, admits he didn't even see the bubble before the housing crash. That said, he thinks this market has legs beyond what most people estimate. He thinks that's because tech has become so important and bleeds through every industry (just look at cars: They are computers with wheels).