Construction Around Bay Area Surges

San Francisco Bay Area Development Construction The Registry real estate

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

[dropcap]I[/dropcap]t 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.

[quote]”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[/quote]

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.

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Photography by Laura Kudritzki

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