By Meghan Hall
Demand for both housing and commercial office space in the City of San Francisco has taken precedence over the development of industrial properties over the course of the current market cycle. This has left San Francisco with a critical shortage of industrial space, which has become a densely urban technology employment center. With industrial vacancy rates remaining tight, the redevelopment of industrial-zoned properties presents unique value-add potential for those who see opportunity in such properties. DECA Companies is one of those developers, having recently submitted a planning application to construct 54,028 square feet of PDR and 407,000 square feet of self-storage space at 800 Cesar Chavez St. in San Francisco’s Central Waterfront neighborhood.
“We liked the supply and demand dynamics associated with that market,” said Matt Stern, partner and co-founder at DECA Cos. “More specifically, we believe that urban industrial is the only asset class that has growing demand and shrinking supply.”
Vacancy rates for industrial space in San Francisco were around 2.8 percent at the end of 2018, according to Kidder Mathews’ fourth quarter San Francisco Peninsula Industrial Market Review. According to to the report, limited availabilities are constricting the leasing market throughout the region and especially so in San Francisco where much of the old industrial product was slated for alternate uses, like life science or office developments. During most of the of the year, there was very little, if any construction of industrial product in the city, which has for years lost kraft and production space.
The opportunity for development has not been lost on investors or the City of San Francisco. In its Preliminary Project Assessment, city officials encouraged DECA Cos. to increase the proposed amount of PDR space to 122,000 gross square feet as well as utilize the rooftop — which is expected to accommodate 320 off-street vehicle parking spaces — for PDR, as well.
“The facilities, including the rooftop, should be designed to retain or attract PDR firms, serve PDR employees and expand PDR jobs,” said the City in the assessment.
Currently, the 2.81-acre property is developed with a two-building industrial asset totaling 54,027 square feet. Tenants leasing the property have in-place rents that are below market rates, are month-to-month leases or have minimal time remaining on them. Executive Choice Transportation has a lease in the building that runs through 2022, while Penske has a lease that expires in 2023, according to previous reporting by The Registry.
The property, previously owned by a private trust, hit the market in June of 2018. According to Stern, there was a fair bit of competition for the property, and DECA Cos. acquired the site in October 2018.
“We closed very quickly; we actually put hard money down at the signing of the purchase and sale agreement, which is atypical,” explained Stern. “We wanted to do that to make our offer as compelling as possible and show that we had already done all of the research and due diligence we would need to do on the property in advance of the bid.”
Stern said the firm placed $1 million down to help solidify the deal. Stern did not disclose what DECA Cos. paid for the property, but previous reporting done by The Registry when the property went up for sale indicated that the site could fetch up to $25 million.
“Broadly, we are excited about PDR space in San Francisco,” said Matt Stern, partner and co-founder at DECA Cos. “The market is growing — both organically and as the City expands the universe of tenants that qualify.”
The timeline for the project is highly variable, said Stern. Entitlements are expected to take another 12 to 18 months, with construction adding another 12 to 18 months. The entire project, including land, hard costs, impact fees and carrying costs is expected to come in at $125 million.
“We’re particularly excited about the opportunity, and on our site we want to deliver brand-new state of the art PDR on the ground floor, which will replace an existing PDR building that is from the fifties and in poor quality,” Stern said.