The end of the year is usually a time of retrospection and a time to evaluate the road ahead. For the real estate industry in the Bay Area 2014 was a pretty good year. In some instances a phenomenal year; all indications point to either new records or at least approaching records set in the period prior to the last recession.
According to an annual end-of-year research paper complied by Eric Von Berg, a San Francisco-based principal at Newmark Realty Capital, the economic engine of the Bay Area hummed along quite nicely. The region’s GDP of $616 billion grew by 3.6 percent in 2013, making the Bay Area the 21st largest economy of the world. If we were a country, we would find ourselves between Sweden and Switzerland. Average wages are approaching twice the level of the national average, and outside of New York, the Bay Area has the highest number of Fortune 500 companies at 30. Technology, which is at the core of that engine, continues to gain attention from venture capital firms—of the 134 technology startups worldwide that gained $1B valuation in the last decade, nearly half (52) were from the Bay Area. The industry drives the region with benefits showing up in hospitality, construction, trade and business services, concludes the research document.
“The news is so unrelentingly good that it scares me,” said John McNellis, principal at McNellis Partners, a Palo Alto-based developer who moderated Urban Land Institute’s annual Emerging Trends in Real Estate 2015 conference in Redwood Shores earlier this week. McNellis, who is a retail developer, tried as hard as he could to uncover some indications of concern as he interviewed five Bay Area industry leaders representing different sectors of the industry.
“I really believe we have an inherent level of vibrance now that is almost unstoppable,” said Jeff Birdwell, president of the commercial division at Sares Regis. Birdwell represented the commercial real estate industry on the panel, and he by and large saw today’s market being very different from the one leading up to the dot-com boom. On the demand side, the local economy continues to generate strong job numbers, pressuring the need of available physical space. At the same time, he sees too much of the existing stock of buildings approaching obsolescence, incapable of offering a modern technology company the kind of space and amenities it is seeking.
And these companies continue to grow and bring new bodies to the Bay Area. That is obvious to anyone riding Caltrain or driving on some of the region’s main highways. It’s also apparent to anyone looking for housing. The growth has brought both for-sale and for-rent housing to new highs. Katia Kamangar, executive vice president and managing director at Palo Alto-based SummerHill Housing Group confirmed as much. As a representative of the housing industry on the panel, she remains excited about the near term prospects in the region. “As long as the job growth continues, which we anticipate that it will, we feel pretty bullish on for-sale and rental markets in the Bay Area,” she said.
While she does see some signs of a slowdown, that seems to be mainly driven by the extreme pricing levels in the market rather than general economic contraction. “In the last 2 to 3 months, we have witnessed slower price appreciation and some releases of sales, not being sold out immediately, which is a sign that there might some price moderation in the for-sale market,” Kamangar added.
Those sales have led to condo prices in the $600 to $700 per square foot range across much of the region, according to Erin Kennelly, senior director of research at The Mark Company. The strong job market across the region has acted as the proverbial tide that helped spur pricing across the Bay Area, especially in San Francisco, which continues to be at the core of the regional recovery. In San Francisco, the average prices have jumped by 16 percent year-over-year, to $1,163 per square foot, according to Kennelly’s research. The city is in a league of its own when it comes to housing, and that is mostly driven by the demand created by the tech employees who are flocking to live and work there.
No news there. If all that the conference revealed was this very rosy information, it would have been a failure. Where it succeeded is in its ability to showcase how prevalent progress is across all product types in the region.
Greig Lagomarsino, executive vice president and corporate director at Colliers International summed up the state of affairs in the industrial market, “The market has never been more active. Rents are up 20 percent, land prices have nearly doubled in the last 3 years, vacancy rates are in the low mid to single digit range.”
And the information to support it is overwhelming. Cities like Richmond, which would not have garnered much attention in the recent past, had a deluge of development news announced in 2014. Sacramento-based LDK Ventures, for example, has paid around $11 million to acquire 42 acres at Pinole Business Park. The former site of the steel-products maker Steelscape could eventually support the development of about 700,000 square feet of industrial distribution center space. Nearby at Pinole Point, New York-based KTR Capital Partners has acquired 30 acres for $13.4 million that could become home to about 500,000 square feet of new Class A warehouse/distribution/manufacturing space. Also, Petaluma-based PB&J Acquisitions has bought a multi-tenant warehouse/manufacturing building at Point Richmond.
“What is different in this cycle from the previous ones is that there is spec development. There has been virtually no spec development of any meaningful amount in the last 10+ years. Now you’re seeing business parks go up,” said Lagomarsino who is working on such a project with Prologis in Tracy. The San Francisco-based industrial developer and owner broke ground last month on a spec development that is its biggest ever—on a 1,200 acre site it owns it’s starting development on a first structure of one million square feet purely on a spec basis. The central valley city has been on a tear recently, as several high-profile warehouse deals were announced in the last year—Amazon announcing a 1.2 million square feet fulfillment center, Costco acquiring the full 265,000 square foot facility it had been using and Bixby Land Company investing $31 million in a 517,000 square foot distribution center.
And the main driver of all this is e-commerce. Which brought the discussion back to its moderator and Dan Wald, executive managing director at Cassidy Turley, and one of the firm’s most successful retail brokers. Next day and same day delivery, as well as e-commerce in general are making the industrial market in and around Bay Area explode. It’s a fast paced world that is transforming very quickly, too. The intersection between clicks and bricks, an industry adage referring to e-comm and physical retail space, is only getting bigger as companies continue to successfully experiment with omni-channel retailing. This is only making the physical space more important as it becomes a physical representation of the brand itself. “Retailers will pass over a secondary center. All the retailers, all the national expansion plans demand to be only in the best centers, and if they can’t go there, they just won’t go to that market,” said Wald.
One thing on which the panel agreed is that they are all coming here, making the prospects for Bay Area real estate in 2015 very strong, indeed.