| By Sharon Simonson |
Will they or won’t they?
It is the question du jour: Will the echo-boomer talent (in particular the educated echo boomers) fueling corporate demand for real estate in downtown San Francisco ever embrace the suburban lifestyle characterized by Silicon Valley?
On one hand, the desire for walkability, good public transit, easy commutes to work, school and daily errands seems unlikely to abate, said Charles J. DiRocco Jr., director of real estate research at PricewaterhouseCoopers LLP. “I really see this being an ongoing trend.”
“But that doesn’t mean the suburbs are done,” he adds.
Even today’s urban-bound echo boomers—the nearly 85 million Americans aged 25 years to 34—won’t all want to stay in the city once children arrive in their lives. But as they leave, the generation behind them will swiftly fill their shoes near the bright lights and 24-hour, seven-day-a-week urban cores, he said.
“Echo boomers are important. They are the next-biggest generation after the baby boomers, and they are a key attribute for investor capital,” DiRocco said.
Washington might be fixated on the fiscal cliff, but Silicon Valley landlords are worried about a cliff of their own: the chasm now separating rents and tenant demand in Palo Alto, Mountain View and on the Peninsula from markets farther south on U.S. 101.
The strong preference for urban living shown by the educated echo boomers has pulled technology companies to San Francisco’s downtown and South of Market district like never before as the enterprises seek the city’s brainy, single, digital natives graduating from the region’s and country’s most elite schools. Parts of the Silicon Valley like Palo Alto, Mountain View, Sunnyvale, portions of Santa Clara and San Jose (along state Highway 237 in particular) have participated in the current tech boom. But regions farther south and to the east have been less lucky so far.
DiRocco spoke in Palo Alto as part of the release of the “Emerging Trends” report produced annually by PwC and the Urban Land Institute. The report, now in its 34th year, identifies San Francisco and San Jose as the No. 1 and No. 3 markets nationally for real estate investors, developers and homebuilders. The study defines San Francisco as a metropolitan area of 4.5 million people, encompassing not only the city and county of San Francisco but also adjacent markets. The San Jose metro region has 1.9 million people.
Perhaps not surprisingly, the report finds a strong correlation between the markets preferred by real estate professionals and markets with higher than average concentrations of echo boomers. Nationwide, echo boomers represent 13.6 percent of the U.S. populace, according to the report. But, in the top 10 real estate markets nationwide they constitute 15.3 percent of the population on average. In San Francisco and San Jose, they represent 15.5 percent and 15.4 percent, respectively.
The study also notes exceptionally high levels of education in markets where echo boomers are abundant. In the top five most-educated American cities —as measured by the numbers of people 25 years and older with a graduate degree—echo boomers represent 15.4 percent of the population. Those cities in order are: Washington, D.C., San Jose, Boston, San Francisco and Baltimore.
The poor reputation suffered by San Francisco’s public schools will ultimately be what sends the echo boomers to the ‘burbs, said Mark Kroll, managing director and co-founder of Sares Regis Group of Northern California LLC and Regis Homes Bay Area LLC.
“Walkability today is a huge trend. When you have focus groups with the Millennials, that is the only thing they think about,” Kroll said. “But when they have kids, education is the driver, and the problem is that our education system is appalling. I can’t send my kids to public school in San Francisco.”
The best public-schooling alternatives in the Bay Area are cities where the housing remains expensive, he said. “It is a huge problem. It is beginning to be tackled with charter schools, but until you fix education, it is back to the suburbs.”
Kroll moderated a panel of developers who spoke of their own businesses within the context of the “Emerging Trends” report and its findings on Northern California. Deke Hunter of Hunter Properties, a retail property developer that co-invests with institutional capital partners to build large shopping centers in the Bay Area, said he expects to develop a million square feet in the next year. Four hundred thousand square feet of that will be at a Target- and Safeway-anchored shopping center in far South San Jose. The site, familiarly known as the Hitachi parcel, is part of a larger master-planned community with several thousand homes planned.
The company is trying to bring in a new retail tenant to the Bay Area, one that occupies sites of 150,000 square feet and does sales of as much as $1,000 a foot, Hunter said. “Big tenants want to come in, but it is hard to find sites for them.” He did not identify the tenant.
Also speaking was Alfred Pace, co-founder and chief executive of Pacific Urban Residential, an apartment owner with 6,500 units that is based in Palo Alto. He is watching for reduced investor demand in the apartment sector as Equity Residential and AvalonBay Communities Inc. digest their huge acquisition of Archstone, Pace said. At the same time, he is keeping an eye on new supply and demand as the for-sale housing market gains steam effectively taking renters out of the market and thousands of new units are built locally. “We need job growth, and we need high-paying jobs to take on those high-cost units,” he said.
Kroll and David Cropper, a managing director for TMG Partners in San Francisco, agreed that whatever its manifestations this time around, the real estate cycle remained alive and well. Based on the industry’s favored baseball analogy, TMG believes conditions in the office and research and development building markets put the sector in about the fourth inning, Cropper said.
“We think there is quite a bit of room to run. But the next five innings won’t be as high scoring as the last four,” in part because so many investors are trying to break into the Bay Area market, Cropper said. “There is a tremendous amount of first-time capital in San Francisco and down here [in Silicon Valley] as well.”
In this cycle, TMG started buying in San Francisco in 2010, paying $60 a foot to $100 a foot—well below current prices, Cropper said. In the last 18 months, it has sold three million square feet and is now buying vacant buildings in Fremont, Sunnyvale and San Jose where it believes there is the potential to completely remake the property. It has searched for sites along the Caltrain corridor as well, though the pickings are slim and the competition stiff, he said.
As far as the San Francisco-Silicon Valley divide, Cropper did not seem especially worried. He predicted as much as 20 million square feet of obsolete valley real estate would be demolished. “We won’t bet against Apple, Google or Facebook, and we have not historically,” Cropper said.