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John Kilroy On Why A Recession Is Only A Negative Thought Away

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John Kilroy considers himself an optimist, but he worries international strife might cause people to talk themselves into a recession. John kicked off Bisnow's San Francisco State of the Market event yesterday at the Fairmont San Francisco, where nearly 500 industry professionals packed the room to hear what our speakers expect in the year ahead.

John Kilroy speaking at San Francisco State of the Market 2016

John said the last five years have yielded glowing reports on the economy in the Bay Area, with employment up, rents up and vacancies down, supply in control and interest rates near zero. Such conditions created what he called a golden period in real estate.

But the headlines have grown as dark as the Bay Area's storm clouds, ranging from worries about China's economic woes to drops in VC funding (despite VC funding, even with a 30% drop, still being higher than it was a few years ago, he noted).

The crowd of nearly 500 at the San Francisco State of the Market 2016

John's advice? Keep doing what you're doing.

Even with uncertainty in the global markets, uncertainty in the financial markets, worries about the price of oil and stalemates in the nation's capital, everything John sees in the West Coast markets where Kilroy operates looks good.

There's a degree of caution, an expectation of adjustments, but for a company that looks at the long-term, there's still plenty of positive news. He's bullish on San Francisco, saying you can't find a better place to invest.

John said San Francisco and other West Coast hubs, such as LA, Seattle, Silicon Valley and San Diego, are where people want to live, where the technology clusters are and where the universities are located. Those things aren't going away.

There will be challenges. Housing continues to be a critical need and moves to raise affordable housing requirements could have a chilling effect. In an effort to create more affordable housing, we need to be wary of bad policy, he said.

Mark Calvano and John Rahaim, San Francisco planning director, speak at San Francisco State of the Market 2016

San Francisco's planning director, John Rahaim (right, with moderator Mark Calvano of Calvano Development), followed the keynote and said he shares John Kilroy's optimism for the year ahead. As the Baby Boomer generation and Millennials gravitate to cities, it should help to bolster cities even if the economy takes a downturn, he said. 

John Rahaim expects another strong year for San Francisco, predicting another 4% to 5% growth in a city that has outpaced its own growth quarter-to-quarter for the past five years. The employment base of the city, which never lost as many jobs during the recession as the national or California average, has grown by more than 100,000 jobs in three years, John said.

Answering questions from Mark, John offered some insight into the year ahead. Mark brought up affordable housing, which was the linchpin in ending Crescent Heights' bid for Transbay Parcel F, shut down the city's sale of 30 Van Ness to Related California, and now is the subject of two amendment measures set to go before voters in June. One could raise required affordable housing from today's 12% requirement to 25%.

The crowd of nearly 500 at the San Francisco State of the Market 2016

John Rahaim called affordable housing the city's most important issue. The planning department wanted to find the sweet spot between maximizing affordable housing without killing development, he said, with the option to revisit the requirement every couple of years based on the economy.

But that review was intended with a November ballot measure in mind. With Mayor Ed Lee and Supervisor Jean Kim's competing amendments headed for a June vote, it doesn't allow time for analysis, John told the crowd. So now the mayor's office and Board of Supervisors are in discussions to see if they can reach an agreement.

Also tied to affordable housing are the city's efforts to allow density bonuses for projects that meet affordable and middle-income housing needs in certain parts of the city.

Then there's the challenge of Prop M restrictions on new office space. Knowing that a ballot measure may be difficult to pass, Mark asked about the suggested remedy of crediting back $1.5M for office space that has been converted to residential space. John said the wording of the measure makes it unclear whether such an adjustment would be allowed. He hopes to see a compromise that could go on the ballot.

One piece of news that was certainly disappointing for those expecting the Central SoMa plan to move forward this year with changes to support new development in that area: John said it will likely go before the Board of Supervisors during Q1 next year.