Essex Still Bullish on San Francisco
By Jon Peterson
Essex Property Trust Inc. just can’t get enough of San Francisco.
But events are coloring its outlook, and Essex has been moving in. “We think San Francisco is a place that we need to be,” Chief Executive Michael Schall told analysts Feb. 1, according to Seekingalpha.com.
On Feb. 15, Essex announced its latest deal: Along with partners San Francisco-based Avant Housing LLC and nonprofit developer Bridge Housing, it hopes to build a 41-story, 563-unit apartment complex in the heart of San Francisco’s South of Market district, with delivery in the next three years.
The partnership contemplates 450 units of market-rate housing and 113 affordable units developed by Bridge.
Essex would provide most of the equity for the market-rate development, which is pegged to cost between $250 million and $300 million. For its equity, the public REIT would be the majority owner.
Avant Housing is a joint venture between San Francisco-based AGI Capital Group, TMG Partners and the California Public Employees’ Retirement System. It targets urban housing projects in the San Francisco Bay Area.
As things stand now, there are no plans to have any debt placed on the project. “We are leaving this as an option for the future if we want to find some debt for it,” said Eric Tao, development principal of Avant.
The partnership has been selected to enter into exclusive negotiations with the successor agency of the San Francisco Redevelopment Agency to reach terms to buy a 31,000-squre-foot parcel adjacent to the city’s new Transbay public transportation terminal and related office buildings. The development partnership hopes to start construction on the apartments a year from now and to occupy two years later.
The deal is the latest San Francisco venture for Essex. In the last 60 days the company acquired the 147-apartment Bennett Lofts, spending more than $650,000 a unit in two transactions. In June the company bought a 55 percent interest in two proximate developments, also from Avant, at Folsom and 5th streets where Avant was starting construction on 463 apartment homes. Essex projected a $250 million investment cost.
And a year ago, Essex partnered with the State of Wisconsin Investment Board and made a seven-year, $175 million preferred-equity investment in Parkmerced, the city’s largest single apartment complex with 3,221 units, which is slated for redevelopment and expansion.
Tao is not concerned that the San Francisco apartment market might change for the worse over the next three years as the Transbay apartment complex is planned and built.
Apartment rents are flattening in the city after robust growth, and the pipeline of new apartment development is large.
At the same time, nearly all new multifamily development in the city is entitled to be completed as either apartments or condominiums, making the actual size of the pipeline for each property type difficult to gauge.
“The San Francisco apartment market is very resilient,” Tao said. “We also underwrote the development with very low rental growth. We have seen that rental rates in recent months have been flat and not the double-digit growth the market has produced over the past two to three years.”
Avant expects to incorporate high-end shared amenities at the new Transbay housing to appeal to tech workers who want to live in the city and work in Silicon Valley and for whom the good transit access is especially crucial. The amenities would include a chef’s kitchen where residents could cook for special occasions and entertain and a dedicated bicycle repair shop.
“Many high tech employees are choosing to live in San Francisco instead of places like Cupertino or Mountain View. It’s our belief this will continue,” Tao said.
The development’s smaller units will be around 500 square feet with the larger units ranging from 1,100 square feet to 1,200. Rents are likely to range from $4 a square foot to $5 a square foot.
Rendering by steelblue for SOM
Tagged AGI Capital Group, Avant Housing, BRIDGE Housing, CalPERS, Cupertino, Essex Property Trust, Mountain View, Multifamily, Palo Alto, REIT, San Francisco, Silicon Valley, SoMa, State of Wisconsin Investment Board, TMG Partners