Developer Heavyweights Make Big Bets on Central SoMa

San Francisco, Bay Area, Alexandria Real Estate, TMG Partners, Tishman Speyer, CIM Group, Mitsui, SKS, SoMa, Central SoMa, Hanson Bridgett

 

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Some of the largest developers, all of which have significant holdings in San Francisco and broadly around the Bay Area, have been shifting their attention to the central SoMa neighborhood where the next development boom in the city is coming. Tishman Speyer, Alexandria, Kilroy, Mitsui, SKS and CIM all have lined up developments around a narrow corridor between 4th and 6th streets and between Bryant and Townsend streets, adjacent practically to the 4th Street Caltrain terminal.

The impetus for this extraordinary activity is the Central SoMa Plan, which is under consideration by the San Francisco’s planning department to allow a series of rezone changes that would allow increased office density and propose new building heights in the neighborhood. The plan has not been finalized, and experts expect it to go through an environmental impact review in early 2016, with final considerations reached as early as late 2016.

“The plan is still probably a year away at least from approval, yet the major developers are already making very significant capital investments in the area in terms of land purchases or transactions,” said Tony Crossley, executive vice president of Colliers International in its San Francisco office who spoke at an event organized by San Francisco-based Hanson Bridgett, a law firm that specializes in real estate transactions, among other practices. The event, titled San Francisco’s Central SoMa Plan: Development Opportunities and New Directions in the Plan, also featured Brett Gladstone, partner with Hanson Bridgett; Michael Antonini, a commissioner with the San Francisco Planning Commission and Tracey Grose, vice president, Bay Area Council Economic Institute.

“Most of the sites are already spoken for. Optioned, purchased, permitted, etc.,” said Gladstone as he and Crossley outlined the blocks where the largest developments will likely take shape even thought the plan is still not finalized. But Crossley did not feel developers were concerned about that.

”None of [the developers] believe that there is any risk the Central SoMa [Plan] will not get approved. It’s the question of how it’s going to get approved and what the final rules are going to be,” he added.

There are a total of eight sites in this neighborhood that will transform the current landscape of SoMa.

Tishman Speyer has two of the eight. The first one (1 above) is at 655 4th Street, which is also known as The Creamery site. Today it is home to The Creamery coffee shop and Iron Cactus Mexican restaurant, which will make way for an over 900-unit residential building with nearly 10,000 square feet of ground-floor retail space. Currently, the zoning caps the building heights at 85 feet, which under the proposed changes would lift the limit to allow the building to be up to 400 feet.

Tishman’s second site (5 above) is just a couple of blocks away on the block of bounded by 4th an 5th streets and Brannan and Bryant streets. Tishman is reportedly close to securing most of that block, according to Gladstone and is planning a 1,000,000 square foot office campus. The current owners of various parcels of land on that block include the city of San Francisco and the Hearst Corporation.

Alexandria Real Estate Equities has made news recently when it announced a partnership with San Francisco-based TMG Partners (3 above) to develop the 135,000 square foot 505 Brannan Street office building. The 39,000 square foot site currently holds a Bank of America building that is roughly 8,500 square feet with an adjacent parking lot. Public records indicate that the site closed on April 30th of this year, and the sale price was $12.5 million.

The larger opportunity on that block is the location of the Bay Club Tennis Club at 645 5th Street (4 above). This 114,000 square foot lot is rumored to be going to Alexandria, as well, where the company is planning to demolish the club and develop an 800,000 square foot office and residential complex.

Diagonally across the street from the tennis club on the large portion of a block on the corner of Brannan Street and 5th Street, is the location of Kilroy’s Flower Mart (7 above), for which the company paid $27 million last July and plans to redevelop the location into a 1.5 million square foot office campus. The 1.9 acre land site, however is under some controversy, and the company is working hard to make progress with a group of flower vendors who have threatened to pursue a November ballot measure that could block the project.

Right next to the Flower Mart is a lot on the same block that is owned by Mitsui Fudosan and San Francisco-based SKS (6 above), where the two firms plan to develop a 500,000 square foot office complex.

Around the block on Buxome Street, CIM Group is planning a 400,000 square foot office development (8 above), just a few doors down from the 55,000 square foot 85 Bluxome Street development, which is under construction now.

The eighth project is the one on 490 Brannan (2 above). It is just across the street from the TMG/Alexandria 505 Brannan development. The 36,000 square foot lot presently holds a Starbucks coffee shop and a Wells Fargo Bank branch in a roughly 6,000 square foot building. The public documents list Debra L Estrin Family Trust as the owner as of January of 2015. The plans call for a 300,000 square foot, 14-story building with a 200 foot height limit on the site. While Crossley acknowledged that he worked on the transaction, the only feedback he would provide is that the owners are looking to realize 700 to 800 percent increase in value based on the up zoning that the new plan is proposing.

While these projects may seem impressive in scale, the development opportunity is targeted to a relatively small footprint of the SoMa neighborhood. “Not a lot is designated for very intense growth,” said Gladstone. “If I have any concern about the plan, it’s that they haven’t concentrated enough growth immediately a block or two around each of those [new Central Subway] stations, and that the plan probably allows too little height, especially if we want to look beyond 2040.”

Yet, the activity in the market remains mind-boggling.

“For the thirty years that I’ve been here, we’ve never seen the equilibrium we’ve got with the competition for land between condo buyers, apartment buyers, office developers, hotel developers. It always seems historically one of these has risen to the top and could pay more. Right now, it’s fair to say, each of those four groups compete in just about everything,” said Crossley.

A few condo developers are starting to underwrite deals at $1,400 per square foot, he added. ”Some of the recent comps in SoMa have given the condo developers the confidence to dive in and pay that little bit more.”

Graphic source: The Registy research, Colliers International