SoMa: The New Downtown
SoMa must be on a different tectonic plate because activity south of Market is causing a big shift, according to the panelists at our Summit last Thursday. (We chose seismic imagery since the event took place on the anniversary of the 1906 earthquake.)
Jane Kim has attended lots of groundbreakings lately--including one a few weeks ago for a little project called Transbay Tower. (Usually giving a shovel as a gift is tacky, but here it's practical.) She's the Transbay Joint Powers Authority chair and District 6 supervisor.Citing the incredible response to her first piece of legislation--attracting companies to the mid-Market corridor--she says the challenge now is integrating existing residents with their new neighbors. She challenged the community to be "unified in making sure that high-speed rail happens." They'ddo well to listen--the super has a black belt in tae kwon do.Videocourtesy of Allen Matkins.
Our moderator, Allen Matkins partner Tony Natsis, kicked off the panel discussion by dealing with the "elephant in the room"--the Transbay Tower--and whether the panelists would build it.Other topics: Will we see investment activity in 2013 and '14, when will the frenzy in SoMa end, what will be the next hot market, and how about that lizard lease clause he executed for a client's pet reptile?
Noting that the Transbay Tower "has been my life" for the recent time being, Hines director Charles Kuntz says the three-year project includes a year in the hole, driven by the need to line up the tower's basement with the bottom of the Transbay Transit Center. "We're putting 40-plus 8-foot-diameter caissons down about 250 feet to bedrock, and that takes a long time." The company has two years to deliver once it's completed the garage and is talking to tenants about partial occupancy, whereit can open up the bottom half of the building while completing the top. Video.
As you know by now, Kilroy Realty is under construction on 350 Mission: San Fran'sfirst ground-up, LEED Platinum high-rise. SVP Mike Sanford says the company started buying core properties like 100 First St, then got into value-add with acquisitions like 303 Second and 201 Third as rents started up.Now that SoMa's matured and replacement costs have increased, Kilroy is focused on development. Initially, Mike also oversaw Kilroy's Seattle market, whereMicrosoft and Amazon were in high-rises, and wondered why we don't see more of that in San Francisco. Then Salesforce leased 100% of 350 Mission, demonstrating it's possible.SoMa still has some room to go, but "It's tough on the acquisition side." Video.
TMG Partners managing director Matt Field says his company has made 18 investments in SoMa since the late '80s, including SoMa Grand, a condo tower that"actually made money" in the last cycle. There's still lots of room for growth,but it's block by block, and finding investments is very different today. He says a lot of the palpable change in SoMa has to do with the investment that's been made culturally. "It's truly the 24/7 part of town." Being flat also makes the area very walkable. Video.
Clarion Partners managing director Richard Pink says the company paid $600/SF for 475 Brannan, and the market's already seeing $800/SF deals. Withrents 30% below market and cap rates around 4.5%, most of the return is going to come from the exit in five or six years. While Clarion aggressively seeks additional buildings in that $500 to $650/SF range, it sold 100 Spear in SoMafor $100M, anon-brick and timber,corporate type building it didn't believe could be repositioned. Right now, there's a scarcity premium for "anything that comes to market that looks like it can be repositioned or (where) there's a value-add with bringing rents to market." Video.
According to president Howard Stern, Hudson Pacific Properties took a leap of faith when it acquired 1455 Market in mid-Market at the end of 2010, "when many people wouldn't even reduce their speed to 30 mph" as they drove past.HPP saw an opportunity to buy an asset that was north of 1M SF for $90/SF,but the challenge was that half of it was a podium data center. Little did theynow that the "fat boy 90k SF footprint" would be attractive to techies. Since acquisition, HPP has done a deal with Square for more than 300k and has leases for another floor in the podium. HPP hopes togrow in SoMA but "it's going to be more challenging based on the frothiness of the market." Video.
You can't yell "fire" in a crowded theater, but you can talk about FIRE tenants in a crowded hotel ballroom--some 450 attended our eventat the Fairmont on Nob Hill. Our panelists discussed whether Transbay Tower will manage to attract traditional office tenants in finance, insurance, real estate, and law. Mike reflected the consensus: The building will be so iconic, he said,that both tech and non-tech users will want to be there. Richard predicted buildings north of Market will get extremely competitive to retain those FIRE tenants. The challenge will be to create some kind of non-corporate image, extremely difficult in a high-rise, but the convenience of transit will probably outweigh everything.
