Construction Around Bay Area Surges
Billions of dollars in new construction—public and private—defines commercial real estate in 2013.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN AUGUST 2013 By Robert Celaschi
It doesn’t take a ream of statistics to prove that there’s a surge of construction from San Francisco through Silicon Valley. The cranes, rising buildings and proliferation in construction-related news illustrate bountifully what the numbers detail: New development and construction has been sustained and expanding over the last three years and continues on the same path in the fourth.
From $552 million in commercial construction starts during 2010 in San Francisco, San Mateo and Santa Clara counties, activity swelled to $606 million in 2011 and to $742 million last year, according to a report compiled for The Registry by McGraw-Hill. Projects starting in the first quarter have put 2013 on track to see construction valued at nearly $1 billion begin this year—and that doesn’t take housing into account.
“Whether it is infrastructure in the form of transportation or creating a convention center or sports team that’s attracting entertainment to a place, all those things drive capital investment.” Mike Straneva, Americas real estate sector leader, Ernst & Young
Look deeper and the picture sharpens even more. From San Francisco’s booming South of Market neighborhood down to North San Jose, access to Caltrain public transit correlates strongly with new development. Caltrain ridership from San Francisco to the Silicon Valley has doubled since 2004, with more than 47,000 passengers on average each weekday. With the train’s electrification, service is to expand again. Property values near stations are clearly rising faster than the market at large.
Beginning at the new $1.6 billion Transbay Transit Center in San Francisco, scheduled for a 2017 opening, transportation-linked development nodes are forming along the Caltrain line from San Francisco’s Mission Bay and SoMa to Redwood City’s Depot Circle and San Mateo’s Bay Meadows, to clusters of development in Menlo Park, Palo Alto and Mountain View. All demonstrate a public-transit consciousness that has emerged with ferocity since the 2008 bust, the aging of the echo boomer generation and economic recovery. In deep Silicon Valley, higher-density redevelopment at Santana Row and in North San Jose is driving the suburban version of a transportation-served urban renaissance.
The largest commercial project in all three counties to start in 2013 is the Sunnyvale campus for LinkedIn Corp. JP DiNapoli Companies Inc. got the green light to re-do the existing research and development campus, then sold the site and build-to-suit contract to Kilroy Realty Corp. at the end of last year. Kilroy is investing about $315 million to develop 538,000 square feet of offices in a trio of buildings, and a 480,000-square-foot parking garage. Kilroy is aiming for a 2014 completion.
The South Bay’s Westfield Valley Fair mall is also upgrading, replacing an existing parking garage with a modern version and adding more than a dozen new stores.
But developers are finding opportunity nearly everywhere from San Francisco to North San Jose. Redwood City has more than 800,000 square feet of construction approved or under way, much of it health care related. Menlo Park has approved construction of 110,000 square feet of commercial space near downtown and the Menlo Park Caltrain station. Facebook Inc. has approvals to build over 430,000 square feet at its West Campus on Constitution Drive. In Mountain View, four office projects are in the works totaling 178,000 square feet.
Palo Alto has more than 340,000 square feet of offices going up in three projects, plus nearly 600,000 square feet of parking garages. “Things are booming here,” said Chief Planning Official Amy French. Deep-pocket developers don’t shy from the expensive real estate, she said, and while none has revealed profit margins to her, “We have $6-a-square-foot retail space, and I don’t see anyone crying.”
Roxy Rapp is shedding no tears. Roxy Rapp & Co. has developed more than 30 projects from mixed-use buildings to high-end offices. “I feel very lucky that over 90 percent of the properties I own are in Palo Alto,” Rapp said. The area, while not recession-proof, tends to get sniffles when other cities are laid low. Even in the worst of the recession, he saw only a 2 percentage point drop in occupancy and rents, he said. “And we are already back up where we were before.”
Palo Alto and Menlo Park are equally stiff places to get projects approved, but Palo Alto yields higher rents, he said.
Availability of public transit is more important then ever for a commercial project to succeed, Rapp agreed. Young tech workers want a San Francisco home address to go along with a Silicon Valley paycheck. Cars stopping at intersections near the Palo Alto downtown Caltrain station have long waits for pedestrians to cross, he noted, and the region has streams of privately owned buses to take commuting workers to the campuses of Google and other tech companies.
The investments in large-scale public projects such as the Transbay Transit Center in San Francisco and quasi-public projects such as the new 49ers football stadium in Santa Clara and the Earthquakes’ soccer stadium in San Jose are likely to fuel more development still. “Whether it is infrastructure in the form of transportation or creating a convention center or sports team that’s attracting entertainment to a place, all those things drive capital investment,” said Mike Straneva, Americas real estate sector leader for Ernst & Young. He cited San Francisco’s AT&T Park as one good example. “That lit up the whole downtown. There was more shopping, more everything. People wanted to go. I think you are going to see the same thing with the new 49ers stadium. I think the Caltrain electrification will do the same thing.”
Not all public projects have the same sort of impact on development, though. A commuter rail station’s impact is likely to be limited to whatever land is within walking distance, while a stadium can have a regional impact.
But some places, and San Francisco is one, have become brands in and of themselves. Any major investment helps the entire brand. “When you put major dollars into an area, it elevates it in people’s eyes,” Straneva said. “Everything is about eyes. How many pairs of eyes will be there to shop, to dine, and in turn, to live.”
And while the Bay Area is notorious for high cost and bureaucratic complexity, Straneva said, when a developer does break through, it’s tough for competitors to match. That helps explain why Emerging Trends, a report from the Urban Land Institute, ranked San Francisco as a top region for real estate investment and development across all property types this year, citing a strong tech market where workers are leading a structural change away from suburban homes and toward downtown.
Looking ahead, Stanford University alone has about 1.5 million square feet in plan review in Redwood City, comprising 13 buildings and four parking garages. Menlo Park has approved a general plan amendment and rezoning for nearly 700,000 square feet of offices, a 235-room hotel, and various commercial buildings like fitness centers and restaurants on two sites near the U.S. 101 interchange at Marsh Road. Also in Menlo Park, SRI International has proposed a phased 25-year modernization of its campus on Ravenswood Avenue.
Silicon Valley’s Golden Triangle, bracketed by U.S. 101, U.S. 880 and state Highway 237, is gaining momentum. Besides the 49ers stadium, two new corporate campuses—680,000 square feet for Samsung Semiconductor Inc. and a million square feet for Nvidia Corp.—headline revival. Developers including Southern California’s Irvine Co., San Francisco’s Jay Paul Co. and Legacy Partners Commercial are remaking Highway 237 with Class A offices for companies such as Amazon.com’s Lab126, Microsoft Corp., Motorola Mobility (now Google), Polycom Inc. and Flextronics. In recent months, Trammel Crow Co. bought 57 acres and South Bay Development Co. acquired 30 acres from Cisco Systems Inc. for additional office and research buildings along Highway 237.
Nearby, developers are remaking and modernizing hundreds of thousands of square feet of existing research and development space along North San Jose’s Orchard Parkway. Lowe Enterprises and Five-Mile Capital Partners are laying the groundwork for a 2.8 million-square-foot, master-planned development in the same vicinity. So is Ellis Partners, which is pursuing 660,000 square feet of new office and research development at Orchard Parkway and Atmel Way.
Can the area sustain this construction boom? Very likely, Straneva said: “The big thing that you have to realize is that real estate is a lagging indicator.” Commercial real estate markets also don’t move in unison. Thriving tech companies create new jobs, so demand for apartments and housing usually comes first. That spurs retail, which in turn increases the need for warehouse and industrial space.
Around the country, some major metropolitan areas are seeing strength in some sectors. Office demand is up in pockets around Washington, D.C., and Texas has good growth in jobs and multifamily housing. But only the Bay Area is firing on all cylinders.