2018 To Be Another Positive Year For San Francisco CRE

San Francisco’s commercial real estate market shows many positive signs for growth in 2018. Multiple CRE products are going up right now, which is relatively uncommon, according to Vanguard Properties Director of Investment Sales Alex Kolovyansky, who spoke during a recent Bisnow event. 

Office, industrial residential and hotel are all experiencing up cycles, Kolovyansky said. 

“The San Francisco residential market has been growing by leaps and bounds,” he said.

In 2017, 6,500 transactions were completed in the residential market, of which 35% were for homes and 51% were for condos. A very small percentage of the transactions were for investment properties and 2.3% were for apartment buildings. Kolovyansky said 147 old and new apartments traded last year. 

While rents have moderated since 2016, they are starting to increase for several reasons, he said. San Francisco is one of the most expensive cities in the country, and California has six out of seven of the most expensive cities in the country, according to Kolovyansky. Median home prices were $1.5M in December and condos are selling for $1,300/SF new and $1K/SF as resales.

With office demand so high there is almost no new inventory for office, he said. Another 6.5M SF of office is nearing completion, but 91% of this new product is pre-leased.

Lincoln Property Co.'s 350 Bush is among the new office developments to deliver fully leased, Lincoln Property Executive Vice President John Herr said. The property will be fully occupied by June.

With companies expanding into larger spaces, there will be an increased need for places to live, he said. The Bay Area is supposed to grow significantly within the next few decades, according to the Association of Bay Area Governments and Metropolitan Transportation Committee. Plan Bay Area 2040, a report by these agencies about the future of the Bay Area, anticipates a 38% increase in employment, 33% increase in population and 31% increase in households by 2040.

“I don’t know where we’re going to put everybody,” Kolovyansky said.

Developers Remain Positive About Cycle

Grosvenor Americas Senior Vice President Steve Buster said the market is not showing any signs of overheating with the exception of some residential prices. He said this is the first time he has seen a real coordinated global recovery since the Great Recession.

“We feel very, very good about where we are, especially on the residential side,” Buster said.

He said the company is so confident about the market that it began a new residential project in December.

Buster said while the next recession or contraction could occur in 2020, it would be mild if it does occur and would be less than 2% of a contraction in gross domestic product. Comparatively, the GDP contracted by 4.1% in 2008.

Where New Opportunities Exist

The finalization of the Central SoMa plan will be instrumental to building more high-density projects throughout the city.

TMG Partners is planning to redevelop the San Francisco Tennis Club at Fifth and Brannan in Central SoMa into a mixed-use project with about 850K SF of office in two buildings, according to TMG Partners Chief Investment Officer Matt Field. The tennis club will be rebuilt underground and beneath a parking lot.

The project will include retail, fitness and production, distribution and repair space. A new recreation center with two pools will be donated to Parks and Recreation. It also will build a platform with 100 units of affordable housing. 

San Francisco also is presenting FivePoint with several opportunities to build out communities. FivePoint was able to opt out of Prop M and will be able to deliver 5M SF of office at The Shipyard and Candlestick, according to FivePoint Chief Operating Officer and Vice President Ivy Greaner. These projects also will offer retail, parks and 12,000 units of housing, which will include 30% affordable.

“We have lots of space,” Greaner said. “We have the opportunity to really design something and build something that fulfills a ton of needs.”

Because FivePoint’s Candlestick and The Shipyard projects are so large and have long business plans, FivePoint has had the ability to plan and execute them well and has the ability to weather cycles, Greaner said.

Catering To Large Office Users

FivePoint also will repurpose buildings with huge floor plates, which would cater to large users, including ones looking for a campus-like setting, according to Greaner.

Large floor plates with access to transit and community amenities will be instrumental to continuing to attract large tech companies, which have been key to San Francisco’s strong office leasing activity.

Yelp Head of Facilities John Lieu said the biggest challenge for tech companies is they have difficulty projecting what their headcounts will be beyond two years, so many are finding buildings where they can grow.

Bradac Co. founder and CEO Amy Bradac said the market just cannot build enough space fast enough.

Lieu said the amount of space Yelp needs often depends on the market and which departments are housed in the offices. In New York, Yelp has about 70K SF to 80K SF, while it has 200K SF in Chicago where its merchandising team is based. Sales teams typically do not need large floor plates because they want to be closer together and often collaborate and build off each other’s energy. He said placement of teams is key as well since engineering does not want to be next to sales.

He said every 10 years office design changes and the current open-office plan has been the way to go for the last decade. 

Bradac said companies are still figuring out the right size and whether 125 SF per person is appropriate. She said the open-office plan revealed that some people, like lawyers, still need offices. Some executives or lawyers were using a conference room for private calls, taking a conference room offline.

“It’s a constant juggle and balance of space,” she said.

Tishman Speyer Managing Director Adam Voelker said one of the next big trends for landlords is figuring out if they need to partner with a provider of co-working space or provide it themselves.

WeWork’s growth has been staggering, and it has become one of the top tenants in San Francisco, he said. Landlords are figuring out what percentage of their portfolios will be designed as co-working space.

In addition to considerations for co-working, Tishman Speyer has created the Zo amenities package to provide tenants amenities for wellness, on-site health screenings and medical services, food and catering and other amenities.