Bay Area Developers Investing In Offices Along Transit Boast Higher Rents, Lower Vacancy Rates

Transwestern Vice President of Investment Sales Sade Ghorban has lived in the Bay Area for decades and has never seen traffic as congested as it is today.

“[There was a time] you could leave San Francisco at 1 p.m. and make it to the East Bay without traffic,” he said. “Now, if you leave at noon or 1 p.m., you still get traffic.”

As the Bay Area’s economy has boomed and population grown, freeways and streets are getting more congested and commutes last longer. Based on a recent report from the Metropolitan Transportation Commission, traffic congestion is up 80% since 2010.

“We’re a victim of our own success with the economy. If you have to drive from San Jose to San Francisco at 4 p.m. on a Friday, good luck,” Transwestern Vice President of Leasing Services Zac Monsees said.

Traffic and the future of commuting will be discussed during Bisnow’s West Coast Office Leasing & Development Conference Sept. 13.

Gridlock has led to an increase in office and multifamily development close to mass-transit hubs and developers are able to garner higher rent for developments close to transit. Millennials and their employers don’t seem to mind paying for higher rents if it means a shorter commute time.

“This is a new generation,” Ghorban said. “They want to be within a half mile or a quarter mile of transit and want a job fairly close to that as well.”

Traffic is only going to get worse. Ghorban said one projection expects the Bay Area to add 2.1 million new residents in the next 30 years.

With San Francisco having some of the highest multifamily rents in the world, workers have had to move farther away from the urban core, resulting in additional traffic. With an ongoing shortage of housing not likely to be solved any time soon, additional residents will only mean more commuters.

The Benefits Of Being Near Transit

Transit-accessible offices make up almost 60% of the 59M SF of proposed and under-construction office development in the Bay Area, according to a recent Transwestern report. Transwestern defines transit-accessible as buildings within a 10-minute walk of a subway, commuter rail or light-rail facility.

For the Bay Area, 18.3M SF of the office development proposed is in car-dependent areas compared to 26.4M SF in transit-accessible areas, according to data from Transwestern. About 6M SF of office under construction is car-dependent, while about 8.2M SF of transit-accessible office is under construction.

A recent Transwestern report found that buildings in Bay Area transit-accessible locations garner an average rent of about $64 for a triple net lease, about 30% more than any other transit-oriented metros in the U.S.

Nationally, rents in transit-oriented office buildings are 65% higher than average market rent and vacancy rates are 8.3% in transit-accessible buildings compared to 9.1% in all properties.

“The ability to recruit and retain top talent is at the forefront of many companies’ location decisions and community options are central to that discussion,” Monsees said. “The option to move via mass transit can mean the difference between being on time for a meeting or stuck in traffic for an hour.”

Many developers and architects have shifted their focus to transit-oriented developments and are reaping the benefits. New office buildings close to transit also are leasing up quickly. Much of the new inventory at San Francisco’s Transbay District is delivering fully pre-leased. Hunter Storm’s Coleman Highline project next to Santa Clara Caltrain has leased a third of its 1.5M SF office with only two out of eight office buildings delivered.

“We don’t work on many projects that aren’t centered around transit,” brick founder and principal Rob Zirkle said during a recent Bisnow event.

Being close to transit also means redesigning parking and reducing parking ratios, which lowers the overall cost of a project.

Zirkle said at 23andMe’s headquarters in Mountain View, his firm designed the office with only 32 parking spaces, but there are about 100 employees. About 77% of the company’s employees take Caltrain, which is 200 yards away, he said.

Employers that aren’t right on transit lines are now considering last-mile solutions.

“Employers that are 3 to 5 miles out from transit-oriented centers are definitely going to have a harder time gaining a stronger workforce,” Ghorban said.

Stanford University architect and Director of Campus Planning David Lenox said during a recent Bisnow event that much of the university’s staff live 5 miles away and it ends up being easier to drive since there aren't a lot of direct and easy transit options to get to the office.

The university has been looking into innovative transportation such as an electric bike program, shuttle program and van pools to find other alternatives than just the bus or train. He said the university also is piloting remote working locations.

Monsees said electric scooters have started to pop up around the Bay Area as a last-mile solution and make it a lot easier for people to get around the city. He said private projects like hyperloop are gaining funding as well and mass-transit extensions are helping extend the reach of different transit options.

The New Transit-Centric Neighborhoods

Access to transit has started to transform neighborhoods. Those areas with transit access have increased occupancy and rents. Monsees said the South of Market neighborhood in the early 1990s and 2000s was a hip place and offered cheaper offices.

After the downturn, capital started to come back into the community, and developers realized the neighborhood had a distinct advantage being closer to Caltrain and BART, Monsees said.

“Folks started to realize driving was not necessarily an option, especially during a Giants game,” he said.

SoMa’s rents are among the highest outside of the central business district and asking rents were about $70/SF as of the second quarter, according to data from Cushman & Wakefield. It also has one of the lowest vacancies of any district at 4.6%  

As office rents have risen in Oakland, the push for affordable rents has moved east, which is why every Class-A building has traded in the last few years in Walnut Creek except two, Ghorban said.

Hines is buying the Ygnacio Center in Walnut Creek for $221M ($420/SF) and will benefit from a Class-A office building next to transit that will have long-term appreciation, Ghorban said. Seller LaSalle Investment Management owned it for two years and could gain a profit of $60M.

“I wouldn’t say Walnut Creek is very expensive yet, but it’s more expensive than it was three or four years ago,” Ghorban said.

As BART extends into San Jose, offices and multifamily have cropped up along future BART stations in Fremont, Milpitas and San Jose's Berryessa. Google is planning to build an 8M SF transit village next to Downtown San Jose’s Diridon Station. TODs are even cropping up in the car-centric North Bay now that the region has the Sonoma-Marin Area Rail Transit.

Central SoMa's Transit Upgrades

Transit accessibility also will have dramatic impacts on San Francisco’s Central SoMa given it is the last office submarket with room to grow and a new mass-transit line coming to the area.

“If people can’t get to and from and around Central SoMa, all of that development won’t be viable,” San Francisco Municipal Transportation Director of Transportation Ed Reiskin said.

He said the $1.6B subway will connect Southeast San Francisco to jobs and downtown commerce and provide a direct link between Chinatown, downtown and South of Market, Mission Bay, Dogpatch, Visitation Valley and Bay View. He said these areas represent the city’s fastest-growing neighborhoods.

Additionally, the Central Subway will directly link to BART, Muni Metro at Powell Station, Caltrain at Fourth and King streets and have a transfer to the Powell Street cable car line, Muni buses and electric trolley routes, he said.

The subway will help attract more employers to South of Market and growth of the tech and digital media hub is expected to continue, Reiskin said. Residents along the Central Subway already have low rates of auto ownership and 72% don’t have a car. Citywide, 29% of residents don’t own a car.

“Great transit will be essential to supporting the new development in SoMa,” he said. “It’s an area that already experiences heavy car use by people accessing the Bay Bridge.”

The Central Subway team is focusing on completing the construction of the Chinatown Station now that the team has completed the final excavation of the 12-story cavern that will house the station, Reiskin said. The team also will focus on building out the trackway and integrating the automatic train control system, he said. The projected start of services is December 2019.

“The vast majority of the workers and residents in Central SoMa will need to be able to rely on transit, and we need to be able to provide high-speed, high-capacity options for them,” he said.

Find out more about transit in California during Bisnow’s West Coast Office Leasing & Development Conference Sept. 13 in San Francisco.