Will These Hot Rents Last?
Are San Francisco's high rents and low vacancy rates a passing phase? Yesterday, our star-studded debt panel debated that topic and others at Bisnow's Capital Markets Summit.
With rents above $60/SF, Prudential Financial principal Jaime Zadra says we are at peak performance in the city. She feels good on multifamily. Housing stock in S.F. is very old and people have been waiting a long time for a Class-A product, which is finally arriving. (Finally an excuse to use the nice bed sheets.) She's cautious of $4 to $5/SF rents, but she doesn't know if she'd call it a bubble, with true income and growth spurring those high prices. Prudential's lending on all major property types, with a big appetite to place $9B this year mostly in coastal markets.
Jefferies LoanCore managing director Jean Baker says the core is shifting, and the traditionally "off center" locations are now where people want to be. She's seeing companies like Google gobble up entire buildings, without a plan to necessarily occupy. She wonders if there will be a spike in subleases at some point. From a lender's perspective, retail isn't that attractive anymore, as more commerce and groceries go online. Lifestyle centers are a better fit for CMBS.
GRS Group director Kevin May, who moderated, notes that $1.4 trillion in commercial mortgages will mature between this year and 2017, with CMBS loans comprising a fourth of that. Panelists are wary that there are more CMBS shops today than the day before the last bubble burst. Jean says Moody's has taken a stance as a gatekeeper this cycle, pushing back on hospitality loans. Moody's is trying to hold the line, but Jean's not sure it can singlehandedly do that.
Liberty SBF SVP Zach Murphy quotes an S&P study that's concerning for office space: the 23% of US office workers who worked home four days a week in 2009 has jumped to 40%. He's hot on Phoenix, which has high paying jobs and what you can get in that market is amazing compared to here, LA, or NY. Some 40% of his book is in the hospitality space, with a focus on repositioning. He goes for deals "out of the ordinary" and doesn't mind smaller markets (take one 200-room project in Nebraska). His value-add range is $3M to $25M.
Are we in a bubble? Zach hates using the "B" word for tech, but it'll be hard to make an argument for paying $4,500/month for a one bedroom unless income levels trend up. Large assets are now 4% to 5% above the peaks of 2006 and 2007 in terms of valuations, says Moody's. Zach says a lot of people were sitting here in 2010 saying they couldn't believe how crazy people got in 2007—and now here we are, paying more. (To be fair, we've blocked out a lot from 2010—looking at you The Last Airbender.) Jean says there are so many people in S.F. now that demand outweighs supply. It's hard to see that changing unless there's a major tech correction and more decide they want to be in the Valley, not S.F.