Prop M Pushes Prices
Real estate heavyweights broke down what our own "State of the Union" is at Bisnow's 4th Annual San Francisco State of the Market event last week at the Marriott Marquis. The talk of the town? How Prop M could make the city even less affordable.
TMG Partners CIO Matt Field says it's steady as she goes in the market, which is actually going pretty fast. But it's tougher to invest these days, with political winds to navigate. He says we should assume Prop M (which is designed to limit office development) will come into effect as demand far exceeds supply. Its potential implications include creating a scarcity premium, which forces pricing up, Matt says.
Forest City SVP Alexa Arena says the company's 5M project, a four-acre office and residential development in SoMa, is in a similar state to where Pier 70 was last spring, with six months until the project is hopefully fully approved. The challenge is how to balance a community with a lot of anxiety concerning growth, with significant rezoning at the center of that anxiety. Tenants are thinking five years out but it's difficult because there aren't swaths of space in any single location for critical mass. Dolby made a move early, notes Matt, buying TMG's building long before they were ready to move. Prop M may run up pricing, and tenants wanting to make S.F. a HQ are facing more supply pressure.
S.F. planning director John Rahaim expects growth at this current pace will level off in the next few years. He says the planning department has had an extraordinary workload for the past three years, pushing the employee count to 200. He thinks housing affordability, office allocation and transportation are all related to maintaining diversity. John says if we don't tackle those topics, the economics of the city won't work.
Hines senior managing director Cameron Falconer says the goal is to predict current growth and find a balance between long-term investing and shorter-term development projects. Cameron says this year is all about investment-making decisions. That means his firm may decide to shift away from office as a use because of risk as it relates to Prop M limitations. If Hines has a site that could be residential or office, the company may go residential.
Environmental Building Strategies principal Matt Macko, who moderated the office panel, asked about the rental rate spike over the past year and how Prop M comes into play. John counts 3M SF available now and almost 2M SF approved but not yet built. That means 5M SF could come online in the next couple of years without changes to Prop M, which he says is not a small number. If the market continues at its current pace, it will become an issue, but the collective discussion needs to be around job growth, housing affordability and transportation, John says.
The cost of land for multifamily development has picked up big time. Emerald Fund chairman Oz Erickson says doing mid-rise apartments costs $725,000 a door, which can still yield a decent profit. But the minute interest rates and cap rates go up, those values go down. For now, the majority of product built will continue to be rental. He calls the lack of affordable product the city's most serious issue. An incoming affordable housing bond will have a major positive impact.
AGI Avant president Eric Tao agrees S.F. needs to support that $300M bond measure, part of which includes rehabbing existing housing in bad shape. If the city starts producing more for middle income people, Eric says, that will help the housing crisis. At 4% cap, Eric can bulk sale apartment buildings for $1k/SF. It's not until you get into the realm of high-rise luxury prices that he would consider doing condos.
Webcor CEO Jes Pedersen agrees with Oz that it's a unique time in the city. LA is about two years behind S.F. in terms of the development cycle, and his firm is going "gangbusters" down there, he says. Geographic versatility will help Webcor in the long term, Jes says, by spreading out work between public and private markets. Just as Webcor is finishing 350 Mission and Samsung's HQ, others are starting.
Lend Lease SVP Bruce Berardi says as demand for construction services goes up, so does stress around labor productivity. In a supply-constrained environment, pay wages are going up annually. He's bringing in out-of-town subcontractors to do work, and he's seeing an influx come from Vegas (he's also talking to subs from Chicago).
The economy is firing on all cylinders, says Tishman Speyer managing director Carl Shannon. He's thankful for the success of his Infinity project, which proved to the market that the under-construction LUMINA project next door could and would sell. Carl says Tishman plays in large urban markets around the globe, which builds up a skill set; one of the company's latest projects is in Brazil.
Of the approximately 8,000 residential units currently under construction in S.F., 80% are being delivered as rental apartments, notes Polaris Pacific principal Paul Zeger, who moderated the residential panel. In addition, housing values for both rentals and for-sale homes have gone up dramatically in the last three years, but construction costs seem to have gone up even faster, he says.