Friday, January 18, 2019

What People Were Talking About In Bay Area CRE In 2018

 This year in Bay Area commercial real estate, the hot topics ranged from a continued housing crisis to the specter of rent control to cracks that shut down the new transit center. Here are some of the stories we were following in 2018:

Continued Housing Crisis

Throughout California, the housing crisis was a leading topic of conversation this year. Some people continued to move to the Bay Area, particularly for high-paying jobs such as those in the tech industry. But with high rents, high home prices and a high cost of living, some people left. Many of those leaving the area were workers with lower incomes who could not afford the cost of housing and could not find adequate workforce housing. The housing crisis has affected all sectors, from how much affordable housing is demanded of multifamily developers to the looming affordable housing crisis for seniors. Residents who have been displaced and are now homeless create new issues on the streets of San Francisco and Oakland, steering the local conversation and, in some cases, affecting tourism and the hospitality market. Several bills were introduced in 2018 to help address California's housing crisis. Efforts such as allowing Bay Area Rapid Transit to develop housing, office and retail around its stations should help address that need, as should the passage of a streamlined process to move forward projects with an affordable housing component that meet all relevant criteria. In the Bay Area, the Sand Hill Property Co.'s Vallco Mall project in Cupertino was the first in the area to receive approval through the streamlined process. The project had been stalled for years by a vocal group of community opponents. The process also has been put to use in Berkeley for an affordable housing project. It can only be expected that the housing crisis will continue as a top story in the coming year.

Google's Growth

Google made headlines with its $1B purchase of a site near its Googleplex headquarters in Mountain View. The price was the second-highest in the U.S. this year, with Google's $2.4B purchase of Chelsea Market Square in New York taking the highest spot. Google was also busy elsewhere in Silicon Valley this year. It spawned the "Google effect" in San Jose with plans to build a transit village in the area, and other companies responded by buying up nearby property and projects. The city of San Jose approved selling some city-owned property to Google to make the project a reality. Of course, Google isn't the only tech giant growing: Facebook signed San Francisco's largest office lease ever this year, and had leased over 3M SF in the Bay Area by mid-year.

Rent Control Rears Its Head

The debate over rent control went into high gear this year as Proposition 10 was placed on the ballot and would have allowed cities to expand rent control at their discretion. Those in the industry actively sought to sway voters against the measure. Some buyers shied away from California multifamily properties in the months leading up to the proposition, while others saw an opportunity in the market. While Prop. 10 ultimately failed, many in the CRE community worry that expanding rent control will come up again and want to take a lead in shaping that discussion.

Modular Construction Boom

With the need to build faster and more efficiently to address the rising costs of labor and materials, more Bay Area developers are looking at modular construction as one way to address that need. In the Bay Area, there are multifamily projects, student housing and hotels being built with modular construction. San Francisco is pushing for more modular construction of affordable housing and city leaders are hoping to have a modular factory built in the city. Local modular technology firms like Katerra, which is vertically integrating the modular unit process, and RAD Urban, which is building steel modular units for high-rise construction, have received funding and are expanding and opening modular unit facilities. Modular still has its challenges — it is not for every project and developers say there is still need for a better understanding of how inspections and permitting are handled by cities and the state. But for those where it makes sense, modular construction is offering a new way to speed developments along through off-site work that is not affected by weather.

Cracks, Tilts and Troubled Buildings

The Transbay Transit Center, also known as Salesforce Transit Center, opened this year to great fanfare as a hub that would route through a large part of the city's transit, offer a future home for high-speed rail and welcome a rooftop park open to the public. But less than two months after it opened, cracked beams were discovered in one part of the transit center. They appear to have been caused by weld access holes cut into the beams. The cracks resulted in a shutdown of the center while it was inspected for any additional problems and short- and long-term solutions were worked out. There is no date yet for when the center will reopen. Any mention of troubled buildings would be incomplete without San Francisco's sinking, tilting Millennium Tower. The Millennium Tower saga that started in 2016 continued this year with the added concern of fire dangers and cracked windows, the inspection of which gained additional attention when the drone sent to inspect the windows crashed. The cracks were determined to be an issue separate from the sinking and tilting. The high-rise luxury condo tower's homeowners association is now suggesting a nearly $100M fix that would drive 50 piles into the bedrock below to stabilize the building.

Salesforce Moves Into Tallest Tower

Salesforce employees moved into Salesforce Tower, which, when it opened in January, became San Francisco's tallest tower. The tower design raises the bar in employee wellness design, with the Ohana floor (the very top floor of the building, which is open for employee use and soon will be available for community use) and meditation rooms on each floor. It also breaks new ground in sustainability, bringing the first blackwater system to the city and creating one of the area's most sustainable buildings. The company's move into the new tower means it freed up office space in San Francisco. Google, in its continued push for growth, signed a 300K SF lease for Salesforce's former HQ.

Coworking And Flexible Office Providers Grow

While tech companies continue to dominate the area's large office leases, a large part of leasing up the smaller office spaces goes to those coworking and flex space providers that provide the flexibility companies are looking for. WeWork has leased six locations in San Francisco for its HQ by WeWork, which targets midsize companies. In Oakland, WeWork signed the city's largest office lease this year for 68K SF. Knotel now operates nearly 200K SF in 20 San Francisco locations, having added six locations earlier this year and signing three in December. Around the Bay Area, coworking companies are offering innovative models that address everything from childcare to green office space. Some have even expanded into vacant retail space and restaurants in off-hours to offer a new working environment.

Opportunity Zones

Opportunity zones were the topic of discussion this year as those in the industry tried to figure out the best way to invest and develop under the program. Many potential investors had a lot of unanswered questions surrounding the program most of the year until new guidance was issued (though finalized guidelines have yet to be released). Cities that could benefit from increased interest in their designated opportunity zones are now working to attract the kinds of investment that could be most beneficial for those neighborhoods.

Wildfires

While the wildfires that burned in Paradise and Southern California this year didn't directly affect buildings in the Bay Area (though the Camp Fire smoke created some of the worst air quality in the world as it moved into the Bay Area), they once again reinforced the idea that fire is an increasing threat in California. Areas that burned in the 2017 Wine Country fires are still recovering, and this year's fires will add to the burden on an already strained construction industry.

By Allison Nagel

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