Industrial Developers Say PG&E Delays Are Hurting Their Bottom Line

Industrial developers in Silicon Valley want to build more warehouse space for clamoring customers in the area, but they face limitations when they try to get power to those developments. They point to Pacific Gas and Electric Co., the sole utility provider for much of Northern California, as the culprit. 

“If you ask the principals anywhere in the Bay Area if they could wave a magic wand and change one entity, every single principal is going to tell you that they would change PG&E with not one single exception,” Bora Ozturk, principal with March Capital Management, said during a May Bisnow event. “PG&E is the primary cause of delay, and that delay means a lower [internal rate of return].”

Ozturk said the delays are costing developers serious money. 

“Delay means lower profits,” he said. “Delay means higher interest expense, and delay means that you do not catch up in this market, but you have to wait for the next.”

While office space and research and development facilities have taken a hit from the pandemic, industrial properties have remained fairly steady. But the growth of that sector is circumscribed by its ability to get power to its properties on time. 

“The problem we are facing now is about what we can do to power limitations,” said Razmig Boladian, managing partner for Rubicon Point Partners. 

Will Parker, a principal with Trammell Crow, said certain industrial projects in his portfolio have been forced to wait as long as 18 months before they can get the power they need. 

Jeffrey Rogers, president of Briggs Development, said a year and a half is expeditious compared to some other clients he is working with. 

“There are some sites in the valley that are multiple years before power is coming on-site,” he said. “We are talking five, six, seven, even eight years.”

While Parker said he can manage the delays by taking care of other aspects of the development while they go through the PG&E process, when repositioning existing buildings, the economics are different. 

“If you are working with an existing site and you don’t have the power, you’re just sitting there empty for a long time, and it just becomes crippling,” he said. “We cannot afford to wait three or four years. We do not have that luxury.”

Jennifer Robison, a spokeswoman for PG&E, said the company is aware of complaints in various industries related to commercial real estate, including the trades, and is working on gathering concerns and formulating solutions. 

“We know that our new-service connection process has fallen short of some customers’ expectations and that delays have real-world effects on our customers,” Robison said. “We are working hard to fix our processes and deliver projects on or before the expected completion date for each customer.”

The issue comes as industrial has proved a relative bright spot in commercial real estate, particularly in Silicon Valley.

“It’s certainly a very challenging time, but there are reasons to be positive about industrial,” Parker said during an April Bisnow panel. 

Industrial vacancy was 2.6% in Silicon Valley in the first quarter, according to CBRE’s quarterly report, miniscule compared to research and development in Silicon Valley, with a vacancy rate of 9.8%, and office space, which maintained a vacancy rate of 15.6%. The average asking price for industrial space increased slightly in the quarter to $1.57 per SF. 

The problem isn't unique to Northern California, as industrial developers in Southern California have also lodged complaints about costly delays to projects as a result of utilities failing to provide power to industrial projects in a timely manner. 

While Southern California Edison has been forced to answer questions about capacity and timely delivery, the situation with Northern California’s utility provider is unique. 

PG&E has been beset with lawsuits in the aftermath of several destructive wildfires caused by the utility’s dilapidated grid. In 2019, the utility pleaded guilty to 84 counts of involuntary manslaughter related to the Camp Fire, the deadliest wildland fire in California’s history, which investigators determined was caused by PG&E’s faulty equipment. The company has paid out more than $5B in wildfire settlements since 2015 and has twice filed for bankruptcy, prompting some industry leaders to wonder whether it has the capital to improve power capacity for industrial customers.

Robison said PG&E will continue to invest in improvements. 

“PG&E is spending more on capacity expansion than ever, including investing nearly $1B in capacity upgrades between 2015 and 2021,” she said. “We plan to invest $15B in capacity and asset health over the next decade and beyond.”

It can’t come soon enough for contractors like Craig Rossi, president of Rossi Builders. 

“We just had a life sciences project where the lab was ready to do their science, but the power wasn’t ready,” he said. “In my experience, when they share the deadline, it’s like they just don’t care.” 

Robison said the utility company does care and is eager to deliver for its business customers. 

“Under current business conditions, we expect customers to see substantial improvements this year,” she said. 

Specifically, the utility company is looking to upgrade the Bay Area’s transmission system, bringing more power to the South Bay and Silicon Valley. The California Independent System Operator, the nonprofit corporation that operates California’s electricity grid, approved two high-voltage projects focused on the South Bay. One is a transmission line extending from the Metcalf substation to the San Jose substation, and the second will connect the Newark substation to Silicon Valley Power’s Northern Receiving Station substation. Each is expected to bring 500 megawatts of power to the area, Robison said. 

Industry players are hoping the projects make a difference because they don’t have much of a choice.

“Who do you go to if you can’t get the power turned on by PG&E?” Ozturk said. “Generators?”