Weekend Interview: Carl Shannon Talks Mission Rock, San Francisco And Affordable Housing
This series goes deep with some of the most compelling figures in commercial real estate: the deal-makers, the game-changers, the city-shapers and the larger-than-life personalities who keep CRE interesting.
Mission Rock will feature approximately 1,200 new residences, 40% of which will be offered at affordable housing rates. The project features 1.4M SF of office space, including Visa's brand-new headquarters, along with the renovation of historic Pier 48.
The project opened up for residential leases in late May and represents the only major mixed-use project to be completed during the pandemic era in San Francisco. The project opens while many questions hover over San Francisco, including concerns over safety and cleanliness that have dogged the downtown corridor, where office vacancy rates are some of the highest in the nation. In this interview, Shannon talks about the Mission Rock projects and the impediments to completing it, while discussing how Tishman Speyer views both the challenges and the opportunities abounding in San Francisco.
Bisnow: How did you get into real estate?
Shannon: I've been in real estate my whole career and it's the integration of creating a great physical building, creating a great community and creating a great economic result and it comes out of my training in architecture and in business school and wanting to integrate those things and create great environments.
Bisnow: I see that you are leasing residential units at Mission Rock. How is that going? Is there demand?
Shannon: Sure. I mean, literally, yesterday, June 1, we really opened the building and moved our first people in. We have 15 units leased as we speak, and we're leasing several a day at this point. That's, you know, almost 10% of the market rate units that are already spoken for, in basically being open a day. We're really incredibly proud. There's a unique architecture at The Canyon. And there's a unique environment right now. We're creating a new neighborhood in San Francisco that really knits together Mission Bay and Soma and fills in a very important missing piece of the puzzle and provides a great place to live and a great place to work. Right now, Visa is actively building out their tenant improvements in Building G and we've got nice lease activity on Building B. And there's 50K SF of retail in the first phase of Mission Rock, and we're not going to talk in detail about that today because we're going to do a press release here shortly when we get to a critical mass of signed leases, we're going to do a press release here quickly.
Bisnow: I'm sure that that entitlement process was probably lengthy. When you look at it in terms of your personal involvement, what were some of the greatest hurdles that you had to surmount in order to bring this to fruition?
Shannon: Well, I you know, I mean, it's complicated and, and being able to meet all of the obligations, all the commitments that we've made to the city, including 40% affordable housing rate, that's unprecedented. To do that without any public subsidy, to build a district energy plant and to create and capitalize a private utility in Mission Rock Utilities, to raise the site 5 feet for sea level rise and support the streets so that they don't settle. There are a tremendous number of execution challenges that are part of making this a reality. And I think the Giants did a great job of working with the city, but it really takes an organization like Tishman Speyer to partner with the Giants to really bring this to reality. And we're ecstatic to be opening the first phase of the project.
Bisnow: Absolutely. So let’s address the elephant in the room. Of course, San Francisco has undergone some significant changes here over the last couple of years. There's a lot of press about safety and cleanliness issues. Does that impact your business? Does that impact your ability to sell residential units?
Shannon: Look, we're in a brand-new neighborhood in San Francisco. And we're in one of the cleanest, safest parts of the city. We’ve got a great physical environment. People are comfortable there. We've got retailers willing to move into Mission Rock when other parts of the city are really suffering from a retail standpoint. So, San Francisco is going through some challenges, but long-term, we really believe in San Francisco. It is the economic engine that drives the Bay Area and it is incredibly robust. While there have been some tech layoffs, that tech economy is incredibly strong. This remains the preeminent place in the world to start a new technology company, and the economic engine that drives San Francisco and the Bay area as a whole is and will be a real growth engine over the next five, 10, 15, 20 years in the Bay Area and we expect Mission Rock to benefit. In the short term, because we have a brand-new neighborhood that is safe and clean, in some ways these concerns actually play to our relative advantage.
Bisnow: I can see from the buildings outside your office window that you're in San Francisco now but I also notice you have experience up and down the West Coast. Would you say that San Francisco is unique in some of the struggles that it's going through or is this something that Tishman encounters elsewhere, perhaps more broadly throughout the West Coast?
Shannon: So the answer to the question is: Yes. It is unique in that San Francisco has singular issues. The concentration of technology industries in the Bay Area and in San Francisco is higher than in any other market in the country. And their increasing embrace of hybrid work has meant that return-to-office numbers in San Francisco and more broadly across the Bay Area are lower than almost any other metro. But some of the urban challenges are shared in LA and Seattle and Portland and New York. There are 21st century urban challenges that all of these gateway cities face and all are trying to address. So San Francisco shares issues with other cities. However, due to tech concentration, at least from a return-to-work standpoint, San Francisco has lagged other markets.
Bisnow: Let me switch to vacancy rates. As you alluded to, Visa has moved its headquarters to Mission Rock. In terms of the rest of your office profile, how does a crowded office market affect Tishman Speyer’s approach to Mission Rock.
Shannon: Look, I think we have, what you see in the office market is that and this is true, not only in San Francisco, but around the country and around the globe. The very best buildings continue to do well. People want great places for their employees to come and collaborate. And that's having a really great physical environment, a physical environment with private outdoor space, with high floor-to-ceilings, with great retail, with great amenities in a great neighborhood. Visa is tremendously excited to bring their people from One Market. In our Building B we've got the only really brand-new building in San Francisco in a highly amenitized environment for tenants to look at. So am I concerned about the vacancy rate? Absolutely. Do I think the office market is challenged in the near term? Absolutely. But in both the dot-com bust and in the Global Financial Crisis, San Francisco went through tough times, and it took a while to reach the bottom but then once San Francisco reaches the bottom given the strength of the economic engine, it has historically pulled out of those cycles very quickly and much more quickly than the rest of the country.
Bisnow: Do you think the bottom is in on the office market in San Francisco?
Shannon: I think that in terms of the emotional feeling about the office market, we're basically at the bottom. We're beginning to see an uptick in activity. You know, six months ago, nobody wanted to make a decision because they didn't want to look like an idiot in retrospect, but now the market has reached a certain level of stability. People need to make commitments, they want collaboration. And while the big players are not really in the market yet, we are seeing an increasing momentum of small and midsized tenants in the marketplace. Activity begets activity and I think we are either at or very near the bottom, at least emotionally, in the commercial market.
Bisnow: I want to ask you about the regulatory environment in San Francisco. Do they make it difficult to develop projects such as yours?
Shannon: There's no question that San Francisco is one of the most complicated cities anywhere to do business, particularly in the development arena. That said, we have built a track record over the last 20 years at Tishman Speyer of really cooperating with the city and building what the city wants. And we've been able to get things done here where others have failed and gone home with their tail between their legs. So yes, it is difficult, it is challenging. But If you are willing to partner with the city and work with them, and I think Mission Rock is sort of the preeminent public-private partnership and that you know, we are working with the Port of San Francisco and all of the other city agencies to make this project a reality.
Bisnow: So I see you are in charge of affordable housing for Tishman and you have a national lens on the issue. So walk me through what do you think are some of the new ideas that are kind of coming in affordable housing, not only in San Francisco but more broadly, throughout the United States?
Shannon: Well, look, I think housing affordability historically has been a New York, Boston, LA, San Francisco, kind of problem. However, I think as we go into the heart of the 21st century that's becoming a problem throughout so many metro areas in the United States and housing affordability is no longer just a gateway city challenge, but it is really a challenge across America. That means incredible creativity at the city levels, at the state levels and at the federal levels to make sure that we build enough housing. Rob Speyer is incredibly committed to getting it done. We are closing here shortly on the first phase and Edgemere Commons in the Rockaways in far eastern Queens. We have another project on Van Courtland in the Bronx. We expect to grow a national platform in affordable housing starting with those two projects.
Bisnow: What are some other impediments to project viability in the near term? I hear a lot of talk about labor costs and material costs. Are those just cyclical issues that will probably come back down to earth soon? What's your view of the market as you look forward?
Shannon: Look, I mean, we went through a period of really extreme inflation in construction costs. So one of the reasons that nothing pencils today is construction costs are probably up over a third from pre-pandemic levels for the generic San Francisco project, while rents are basically back to where they were pre-pandemic. Some of that was commodity pricing. Labor is integrally related to the housing problem, right? The reason that labor is so expensive, is that the guy who hangs the drywall in the building in San Francisco wakes up in Tracy in the morning, and drives to San Francisco. And if he's going to do that, he wants to get paid well, which you've got to respect and understand. But, the labor costs are too high because we don't have enough housing. So we've got to do things like temporarily reduce affordable requirements and temporarily reduce other city fees in order to incentivize housing and while it's not specifically talked about in the in the dialogue at the moment, I would suggest the transfer tax is also a huge impediment to building housing of any sort in San Francisco today.
Bisnow: So as promised, onto more lighthearted fare. First up, what do you like to do on the weekends when you have some free time?
Shannon: Well, I have two young daughters, who I'm raising with my wonderful wife here in San Francisco and they are both in schools here in San Francisco. So we spend time with them at soccer, at sporting events and other things related to school. I try to stay involved in the community. I teach in the Master of Real Estate Development program at Berkeley, so I spend an afternoon a week with MRAD students, helping them learn about the real estate development business. I sit on several boards. I think it's really important that Tishman Speyer is seen as an integrated part of the community. And that requires being involved in all kinds of levels on what's going on in San Francisco.
Bisnow: Last question for you, give me one bold prediction for the rest of 2023.
Shannon: I actually think that if you look at the residential market in San Francisco, incomes to rent, sit at 4.5 times. That is as affordable as San Francisco has been in a long period of time.The main reason is not because rents have come down but because incomes have continued to go up. Mission Rock is the only new multifamily building to deliver that started since the pandemic. You got vacancy at low numbers and as the Metas and Amazons and Apples of the world tell their people that they need to come back to work, you will see the trickle of people coming back into San Francisco and that momentum will put upward pressure on apartment rents.