Berkeley’s Rosen Says Bay Area CRE Market Remains Rosy Despite Rocky Start

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By Robert Carlsen

Though 2016 got off to a rocky start economically in the U.S. thanks to the meltdown in China, financial markets are quite optimistic about the rest of the year, especially economic growth in the San Francisco Bay Area, according to economist Ken Rosen.

Rosen, chairman of Berkeley-based Rosen Consulting Group and also chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business, called San Francisco and Silicon Valley “the fastest growing region worldwide, basically the center of the universe” of the tech world, in a market forecast presentation on Jan. 21 at Electronic Arts’ corporate headquarters in Redwood City, hosted by the corporate real estate trade group CoreNet.

Rosen’s 2016 macroeconomic positives include increasing job growth, less unemployment and strong sales of vehicles and homes. Negative indicators include the financial problems in China, excess liquidity, chaos in the Middle East and volatility in capital markets. Overall, Rosen said there is a 60 percent chance that the U.S. will see moderate to “choppy” growth, a 35 percent chance that contraction will occur and a 5 percent chance that strong expansion will happen.

“The U.S. economy is very strong with job creation going really well—we added 14 million jobs since the Great Recession,” Rosen said. “Besides China’s current meltdown, other factors such as turmoil with oil prices can affect our economy. Oil was $107 per barrel 18 months ago and is under $30 today. One cause of the plunge was the shale revolution, which added up to 3 million barrels a day more than a decade ago. Low gas prices will be with us for a long time. I even suggested to Governor Brown to add a $1 per gallon tax for infrastructure projects, but that won’t happen.”

Rosen added that, “There is still risk out there and guess what it is? President Trump. Scary.”

Rosen also indicated that he believes the Federal Reserve will raise rates four times this year and that the stock market will bounce back. Regionally, he said IPOs will be slow this year and that even with new office construction in the Silicon Valley, tight vacancy rates will continue though there will still be “a lot of spec building.”

Rosen’s presentation was followed by a panel discussion that featured Rosen, CBRE’s Sven Pole, and corporate real estate executives from Oracle, Kilroy Realty and Google. The discussion focused on housing affordability, transportation and labor issues in the Bay Area.

Mark Golan, vice president of real estate and workplace services for Google, said that the continuing problems of high rents and clogged freeways will eventually force companies to establish multiple labor pools, moving certain workforce sectors to other regions.

But the Bay Area will still thrive, added Rob Paratte, executive vice president at Kilroy Realty Corp., because the Pacific Coast is a unique submarket and offers some of the best schools in the country, which produce the “best and the brightest” types of people these companies want.

Rosen indicated that half of the growth in San Francisco is from “unicorn” companies, or firms that race to a $1 billion-plus valuation based on venture investment. But limiting these companies’ expansion in San Francisco and constraining real estate deals is the infamous Proposition M, which was approved in 1986 and caps the amount of new office projects at 875,000 square feet per year and has resulted in a development pipeline of 8 million square feet. CBRE reports that the average price per square foot for office space in San Francisco in the fourth quarter of 2015 was $72.46, higher than Manhattan’s.

Michael Bangs, vice president of real estate and facilities at Oracle, said there’s a need for regional local governments to come together to address the transportation problems in the Bay Area. “BART ends in Millbrae and doesn’t even go to Marin,” he said, adding that perhaps public-private partnerships could be the solution to get future infrastructure projects off the ground.

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