Bay Area Brainstorm: 11 CRE Professionals On What To Expect In 2018
Record-breaking office leases and a large pipeline of housing units marked 2017 in the San Francisco Bay Area. Millions of square feet of office will deliver this year as will thousands of housing units. Bisnow asked 11 Bay Area CRE professionals what they are keeping an eye on in 2018, what challenges the Bay Area still faces and what opportunities are still available.
Check out what they had to say below:
stok founder Matt Macko
“Here at stok, we expect that the office wellness movement will become increasingly important. To stay competitive, companies need to attract and retain tomorrow’s talent. But beyond that, they need to create environments where people can do their best work. For that reason, the conversation is evolving to include productivity.
“The Bay Area’s top tenants are beginning to develop spaces that boost the cognitive function of their teams. There’s a ton of science behind this, but anyone who has felt drowsy after a long meeting in a closed conference room will understand. By reducing carbon dioxide and volatile organic compound exposure, and improving ventilation, you can create spaces where people really thrive. We also foresee even more implementation of biophilic design (creating spaces that allow people to experience nature). This has also been shown to reduce stress and increase happiness and productivity.
“We’re excited that the world of [virtual reality] is emerging in commercial real estate. VR allows developers and tenants to experience and visualize real estate before it’s even built, giving the phrase ‘try before you buy’ a whole new meaning. This is a trend that is changing how companies do business, and it’s going to grow more over time in our industry.
“We are actively testing and incubating the implementation of sensor networks for smart buildings to help owners and tenants integrate, monitor and control their building systems. The data these networks collect can be distilled and used in many ways, and we see this as an exciting development. Building Information Modeling is also growing at an increasingly rapid pace by helping developers use modeling to significantly reduce costs. We predict that in the next few years, every project will be using BIM.
“The continued rise of construction costs is certainly cause for concern. One solution is to employ more prefabricated building systems. Off-site construction and robotics can lower building costs, speed up construction and eliminate waste generated by traditional construction methods.”
CBRE Vice Chairman Jenny Haeg
“I’ve learned that it’s impossible to predict what will happen short term, but there are a couple of real estate trends that I’m keeping my eye on in 2018. My focus is on technology companies and startups, and the CRE market there closely follows the broader venture capital — and now private equity — market. What we’ve been seeing is a decrease in the number of financings from a few years ago, but a substantial increase in the average funding size as investors concentrate their bets on fewer companies.
“Investors are also raising larger funds, which along with new entrants like the SoftBank $100B Vision Fund, is allowing companies to stay private longer. It will be interesting to see if these trends continue and whether companies going public will free up some of their employees to leave and start their own companies.
“The biggest challenge I see in real estate is that brokerage firms will need to keep up with their clients’ evolving needs in terms of finding and creating spaces that allow their teams to be productive, creative and collaborative. Additionally, as software becomes a more integral part of every business, real estate advisers will need to leverage technology to help achieve their clients’ goals. An example of that is CBRE’s acquisition of Floored, which helps clients model their space in 3D, saving them a significant amount of time and effort.
“Additionally, the high cost of living and lack of housing in the Bay Area is driving companies to consider opening offices in other markets for sales, engineering and support. I think a few regions/markets are well positioned to benefit from this, especially Denver, Phoenix, Atlanta and Utah.”
Cushman & Wakefield Senior Director, Northern California Research Robert Sammons
“In the immediate term, we will see [office] net absorption climb well into positive territory thanks to new building completions — 415 Mission, 350 Bush, The Exchange on 16th, 181 Fremont, 100 Hooper — at or nearly 100% leased. The vacancy will be pushed lower while asking rents will continue to rise driven by the few remaining prime blocks. Though there will likely be some spaces that come to market during the year, only Park Tower stands out as a true mega-block remaining until 2022 when Oceanwide Center is completed. With over a dozen tenant requirements currently for at least 100K SF in San Francisco, it’s likely these blocks won’t last long.
“Prior to Prop M, the issue was would the city build too much office space and be faced with a glut? Today, with the city nearing its limit — just 2M SF remains in the queue — we are self-imposing our growth. A significant reason big tech leased so much space in 2017 was likely caused by the forecast of fewer large prime blocks over the next five or so years, thus a ‘get it while you can’ movement. Beyond the larger Prop M question is this: Will the Central SoMa Plan … be passed and, if so, will there be a ballot initiative so that significant new commercial construction can begin in earnest?”
Allen Matkins Real Estate Department Chair Tony Natsis
“Continuing from last year, we’re going to have more large-lease transactions in development projects. That’s definitely not going to end — there’s still a lot of demand throughout the Bay Area, which will bring about many ground-up development lease deals in 2018.
“San Francisco will continue to grow at an unprecedented rate. With all the upcoming projects in the works throughout the central business district, the city will see new pockets of density develop. This shows no signs of stopping.
“People in San Francisco feel like we’ve run out of land, but there’s actually way more going on in other parts of the city besides the current CBD. Exciting projects to look out [for] in the near term ... are Park Tower at Transbay, 5M, Parcel F, Pier 70, the new Golden State Warriors arena in San Francisco, Uptown Station in Oakland and Coleman Highline and Midpoint@237 in San Jose. Among others, Central SoMa, The Shipyard and Candlestick Point will be massive when those developments get going. San Jose is really the next big thing in the Silicon Valley — downtown and North San Jose will be on fire in the coming months and years.
“We still have the same challenges throughout the Bay Area that we’ve had in the last few years — namely transportation, traffic issues and affordable housing. I consider Mayor [Ed] Lee’s passing as a challenge for the future of affordable housing, considering how much momentum he had going for him. This doesn’t reflect on any of the future mayoral candidates, but it does create some challenges for the city of San Francisco moving forward. K-12 education will also become a real challenge throughout the region in the near future as millennials start having babies.”
Emerald Fund principal Marc Babsin
“The San Francisco multifamily world will see more than 2,000 housing units delivered for the sixth year in a row. Historically, this level of housing production is unprecedented. The new rental supply should continue to depress rents, thereby helping to address the housing affordability crisis somewhat. For new projects coming online in 2018, we expect to see rental concessions continue in the ongoing slug fest to lease up and reach stabilization.
“After 2018 and 2019, the production of new market-rate housing will be slowing down markedly on account of high construction costs and affordable housing fees. We’ll likely be looking to large-scale projects, such as Parkmerced, Candlestick Point, Treasure Island and Schlage Lock to provide the next significant block of market-rate housing in San Francisco.”
Pacific Eagle Holdings Senior Vice President Hans Galland
“San Francisco’s residential market is fairly complex. It is driven by the interplay of macro-forces and the dynamics in specific submarkets or neighborhoods.
“In 2018, the tech industry will likely continue to fuel demand, solidifying price and absorption in the upscale-to-luxury range, countering forces such as new tax regulation and a softening rental market. Products in established neighborhoods can be expected to weather new forces well — possibly even benefiting from a ‘flight to quality.’ This year, in the light of newfound uncertainty, we may see new residences in great neighborhoods with a rich offering of local amenities and easy access to transit to benefit even more, as risk-averse buyers who still want to buy gravitate towards mature core locations.
“In addition, against the backdrop of an increasingly fluid and remote workforce, we’ve been noticing that the lines between the modern workplace and home continue to blur. Buyers want their space to exemplify this newfound freedom. As a result, we’ll see more developers catching up and offering amenities that entice residents to connect or work in a communal setting that encourages networking.”
TMG Partners Chief Investment Officer Matt Field
“On the demand side, we’ll be watching the pace of office absorption, the evolution of co-working and co-living and demand from biotechnology, advanced manufacturing and last-mile delivery. On the supply side, we’ll be watching residential deliveries and any response on rents and sales prices. Politically, our team continues to keep a close eye on potential legislative responses to the housing crisis and growth. Construction costs, housing affordability and commutes will continue to be challenges.
“Transformational projects, which deliver either contemporary buildings into emerging areas or transforming older projects into contemporary buildings, are the most exciting for us right now. Our 680 Folsom project is a good example.
“The South Bay will see positive change from the BART extension and will experience continued robust demand from technology companies. With all of the excitement happening in downtown San Jose, including our proposed development near Diridon Station and SAP Center, we expect this part of the Bay Area to take off.”
Transwestern Senior Managing Director Edward F. Del Beccaro
“We expect Bay Area housing prices to continue to increase in 2018 except for high-end rentals in San Francisco, mid-peninsula and Oakland. The high cost of living and wages could cause national companies to rethink expanding in California and possibly even move out of state. This trend could crimp office and industrial fundamentals in terms of companies staying or expanding their operations here. However, the Bay Area metro continues to be a job- and GDP-generator with tech, just-in-time logistics, healthcare, life sciences and robotics leading the charge.
“Therefore, look for additional construction opportunities that will address the affordable housing shortage to retain and attract top talent. While the Trump tax plan creates new regulatory and tax uncertainty impacting Bay Area homeowners, it could also spur local companies to invest and expand. Look also for the additional reshaping of retail due to online shopping trends, such as adaptive reuse of malls and drone delivery.”
Legacy Partners President Guy Hays
“We’re closely watching rent control initiatives, as well as efforts to repeal Costa-Hawkins [which restricts local rent control laws]. We’ll also obviously be keeping tabs on rents and new apartment starts. The impact of rent control movements in the Bay Area will be challenging for the industry as a whole. Also, the high cost of production for new construction is still a concern, which results in lower yields. This leads us to ask ourselves, ‘How much new production will ultimately be started?’ Only time will tell.
“For [opportunities in] the Bay Area, the East Bay still looks promising. We’ve been working on the second phase of Renaissance Square in Concord, which is a very strong area for us. East Bay rents are still reasonably resilient, yet more affordable compared to the rest of the Bay Area. We think this will provide some new investment opportunity in the near future.”
Meridian Senior Vice President Dan Rosenbaum
“From the perspective of Meridian’s value-add Bay Area general office business line, 2017 ended up being another year of ‘I wish I had bought more of these,’ as rents continued to increase and cap rates remained low. Suburban office — as opposed to the 24-hour/gateway cities of San Francisco, Oakland and hot San Jose — became more in favor with institutional investors as evidenced by nine-figure purchases in Walnut Creek and San Jose at prices per square foot not matched in the last peaks of 2006 [to] 2007.
“In our opinion, suburban office will stay the course in 2018. None of the economic indicators that we track show any sign of pending national slowdown and, certainly, there is no Bay Area slowdown. Tenants will continue to demand on-site amenities, including outdoor gathering areas, community rooms, higher-end gyms and off-site amenities such as local restaurants and retail — walkable, if possible. Proximity to heavy rail (Caltrain or BART) has become a primary indicator of attractiveness to tenants. Combine that with a vibrant downtown and you’re cooking with gas!
“While all parties have concerns about the way healthcare will be funded, healthcare real estate continues to evolve and fundamentals remain strong. The aging population requires more and more care and younger patients are challenging the way that the systems deliver care. Patients want convenience, access and customized care. Systems continue to reimagine their delivery of care and the impact on the physical spaces should provide for another great year of activity in healthcare real estate. We are seeing great activity in our existing buildings and for our build-to-suits.”
Urban Pacific Development principal Chris Collins
“Aside from the obvious priorities of housing affordability, construction cost escalation and supply and demand for residential and office, we are focused on tracking the timing of the Moscone Center expansion, as well as Phase 1 and Phase 2 of the new Transbay Transit Center. Each of these has major implications on the continued health and growth of San Francisco’s hotel, convention and travel businesses.
“We are particularly excited about working with Hines to bring a new, one-of-a-kind destination hotel to Transbay’s Parcel F in downtown San Francisco. Parcel F, and our other Urban Pacific-Hines venture at the nearby Block 4, are the last developable sites in the Transbay neighborhood — they essentially complete the neighborhood. The two sites will provide vital funding to the new transit center, as well as significant jobs, community benefits and much-needed affordable housing.
“We foresee cost and regulatory challenges as being the greatest inhibitors of new housing developments. Construction cost escalation is difficult to address, whereas the current administration has the ability to make a positive impact on the housing affordability crisis or, alternatively, take away funding sources for affordable housing.
“Generally, cities that offer access to quality jobs, quality of life and reasonably priced housing will lead the evolution of our nation’s urban and suburban areas. Those who embrace smart growth and promote or preserve socioeconomic diversity will rise to the top. There are many challenges facing the Bay Area, but Oakland and the East Bay may provide examples for the rest of our region to follow.”