Those Betting On San Francisco Foresee Roaring ‘20s 2.0 Ahead

Protracted coronavirus pandemic restrictions have given San Francisco a slow start in 2021 regarding its economic recovery relative to other U.S. cities that have taken a more lax approach to curbing the virus's spread. The Bay Area’s industrial and life sciences sectors continue on a robust track with capital flowing in, high demand and low vacancy.

However, office and multifamily are still languishing in S.F. especially. Yet many in commercial real estate think that this too shall pass and quickly at that with the region’s fundamental strengths still prevalent and early economic strengthening indicators sprouting.

Some other cities had a three- to four-month head start because restrictions were loosened before vaccinations commenced. Still, as California gains more ground on its vaccination campaign, it will come alive again, Northwood Investors Managing Director Daniel Palmieri said at Bisnow's Bay Area Capital Markets and CRE Financial Digital Summit on April 6.

"I don't think anyone has crossed the Bay Area off their list permanently,” Canyon Partners Real Estate Senior Director Frank Liu said at the summit. “If they have, it's a mistake. But there's definitely a trend among investors to really take a step back with respect to some coastal markets, including the Bay Area right now.”

The region has its share of problems. Like the corporate relocations that have occurred over the past year and population loss in S.F., some of them are viewed as temporary, while the serious and long-term issues of housing affordability, traffic congestion and homelessness seem to be a long way from being solved. However, Bay Area companies were in the top 10 of recent IPOs, and with the region still holding tightly to its reputation of being an innovation hub, capital won’t be a scarcity, Liu said.

As the recovery is expected to continue gaining steam, the interim holds its own set of possibilities, leading Nuveen Real Estate Managing Director Jason Hernandez to conclude that it is a great time to be an investor.

“San Francisco is at a point right now where there's pretty significant availability in the office stock, at least in downtown,” Palmieri said. “So, I do think that there will be some good buying opportunities in a market that has incredible strength in the long term. Certainly good supply-demand fundamentals and significant VC investment [continued] throughout 2020 and is still very high. So I think if you look at the drivers of the Bay Area as a whole, it will continue to be a big area of focus for us.”

Despite current conditions, there is a broad sentiment that the Bay Area’s qualities of having several high-caliber research universities, readily available professional talent in the science, engineering and tech fields, innovative culture and mild weather will draw in capital market activity over the long term.

The region is particularly unique with some of the most well-capitalized intellectual capital worldwide and serves as a global model for operating, Kilroy Realty Co. Senior Vice President Eliott Trencher said.

Once leading companies call employees back to the offices at least part time, there will be a trickle-down effect on the sublease market, leasing market, rental rates and capital markets, Trencher added.

Meanwhile, the outlook for S.F.’s office market isn’t completely dire, with an uptick in office tours, letters of intent and forecasts showing a possible resurgence in the second half of 2021.

“If you go back to 2008, 2009, 2010, there really was a definite impact to office valuations across the country. Values were down 10 to 30% — we've not seen that distress today,” Safehold & iStar Senior Vice President Tye Palonen said. “We’ve seen that stress but not to that extent.”

While retail and restaurants have also severely struggled over the past year, local and state governments’ progressively relaxing of restrictions should bode well for those businesses later this year as well.

“There is such an incredible hunger for people to get out of their house and go out to dinner, so I think we'll see a surge in retail, hospitality — certainly in travel,” University of California Berkeley Chief Financial Officer Rosemarie Rae said.

As for commercial real estate asset types that show promise, Liu is bullish on suburban multifamily, particularly projects that are close to urban employment centers, he said. While the growth of e-commerce hasn’t let up on pushing up demand for industrial, the aging demographic and the rise of certain diseases have pushed life sciences into the limelight.

In the Bay Area, as in other regions, cloud computing's growth due to remote working and learning has made data centers more critically important, Newmark Vice Chairman Steven Golubchik said.

“Over the last 15 months, we have over $2B worth of transactions we're either working on or have closed in Berkeley or in Emeryville — all in life science,” Golubchik said. “So it's amazing what a growth engine Berkeley has been.”

Golubchik said he is seeing a lot more capital flow in with an economic rebound expected for the region.

"It’s going to be the Roaring '20s all over again,” Palonen said. “Hopefully, without the Great Depression to follow. And if you live somewhere like San Francisco, or in the Bay Area, but especially San Francisco — it’s going to be real difficult to get a dinner reservation. It’s going to be really hard to get concert tickets and professional and college sporting event tickets.”