Here's Why It's Hard To Develop In Silicon Valley

With construction costs rising, complicated and lengthy permitting processes and labor shortages, developing in Silicon Valley is a battle of perseverance. Developers, consultants and construction firms came together recently in San Jose during a Bisnow event to discuss projects they are working on and many of the challenges they expect heading into next year.

Event moderator Ropers Majeski Kohn & Bentley partner Matthew Zumstein discussed how recent projects are being shaped by local trends with panelists SteelWave CDS managing director Edward Nazaradeh and Hunter Storm director of development Curtis Leigh. The panel spoke before a crowd of about 175 industry professionals.

Construction Costs Are Soaring

Hunter Storm Properties director of development Curtis Leigh (above with Preston Pipelines VP of sales Dave Heslop) said construction costs have doubled within the last five to seven years and a lot of that is from a push from Title 24 to incorporate materials and systems to improve energy and building efficiencies. The energy-efficiency standards set up by California have pushed Hunter Storm’s buildings into LEED status and beyond.

Hunter Storm is building two five- and six-story office buildings next to Avaya Stadium in San Jose, which are expected to be completed during Q2 2017. It's also working on a retail center in South San Jose anchored by a Bass Pro shop. The firm also built an office in Redwood City fully leased to Box in recent years. Curtis said given the current market trends, his firm is starting to look into self-storage projects.

Hunter Storm also is reviewing various parking systems for its office projects, Curtis said. In Redwood City, it did a simple parking counter. It is considering lift systems, parking systems with cameras and a system like in Santana Row where every stall is marked.

He said driverless cars may impact parking and could result in the creation of five or six lanes in front of an office for cars to drop people off rather than large lots.

Location, Location, Location

For Edward Nazaradeh (above with Enovity director, corporate development Christopher Hazen), location is among the most important aspects of a project. He said if a project doesn’t pencil out because rents are flat and construction is too high, then he won’t go after the project.

SteelWave is building two mid-rise buildings in North San Jose expected to be completed next October. Edward anticipates these buildings to be successful and is already talking to major users. One of the biggest aspects of that project is amenities, which both Ed and Curtis agreed are important for office development these days.

SteelWave recently completed a project in Milpitas where it repositioned a single industrial building into a creative office space. It is actively leasing tenants, Edward said.

SteelWave also has several acquisitions in the pipeline and will continue to consider acquisitions from San Francisco down to the South Bay since this area along the transit corridor is desirable for users and investors.

Slow Permitting, Approval Processes

Both panelists also discussed how much longer the approval process takes than previously, and Curtis said it has a lot to do with San Jose's high turnover rate and a skeleton crew processing applications and permits. Edward said the market sizzling making cities busier and slower to respond.

Edward said San Jose is doing a great job for small tenant improvements since the city has an efficient and easy process for these small improvements.

Along the lines of getting approval, Edward said cities have a more favorable view of mixed-use residential and commercial projects since they have less of an impact on traffic. Otherwise, developments often go through years of traffic impact studies and approvals.

CORRECTION, DEC. 15, 10:30 AM PT: The Hunter Storm project mentioned in the article is Coleman Highline, which is near Avaya Stadium in San Jose. The story has been updated.