Five Point Holdings Reveals Ambitious Commercial Expansion for San Francisco Development in IPO Filing

Five Point Holdings, San Francisco, Lennar, Proposition M, Proposition O, Candlestick Point, San Francisco Shipyard, Kofi Bonner

Earlier this week Five Point Holdings, a California master developer spin-off company of Miami-based home builder Lennar, filed form S-11 with the Securities and Exchange Commission and registered a public offering of its shares in an attempt to raise $100 million. The offering, which is led by Citigroup and JP Morgan, is for a company that today is the largest owner and developer of mixed-use, master-planned communities in coastal California, based on the total number of residential homesites permitted to be built under existing entitled zoning. The proposal also calls for a 60 percent increase in commercial development in San Francisco, with development growing to approximately 6.6 million square feet unencumbered by the city’s restrictions on office development under the 1986 Proposition M.

Five Point Holdings is in the process of completing three communities across the state. These are the Newhall Ranch in Los Angeles, which is projected to have 21,500 home sites and 11.5 million square feet of commercial space; Great Park Neighborhoods in Irvine, which is looking to develop 9,500 home sites and 4.9 million square feet of commercial space; as well as the San Francisco Shipyard & Candlestick Point development, which is planning to complete 12,000 home sites and initially-planned 4.1 million square feet of commercial space.

In the Bay Area, the Shipyard & Candlestick Point developments have garnered a lot of attention in the past couple of years. The location is effectively between downtown San Francisco and San Francisco International Airport. It is build on approximately 800 acres of bayfront property, which is in many ways unique in the city. The project broke ground in 2013 and by April of 2015, the first homes were already sold. During the construction period, the company also announced a partnership with The Macerich Company to develop and construct nearly 550,000 square foot urban retail destination at Candlestick Point. Vertical construction is expected to commence in 2019 and the retail district is expected to open to customers in 2021.

The San Francisco development successfully gained approval from voters in November of 2016 through Proposition O to exempt the San Francisco Shipyard and Candlestick Point from restrictions on new office development applicable to all other projects citywide. As a result, Five Point Holdings is looking to seek approval from authorities later this year to increase its total commercial space by more than 60 percent, from 4.1 million square feet to approximately 6.6 million square feet.

The full amount of permitted commercial square footage at The San Francisco Shipyard and Candlestick Point may be constructed as the company determines, including all at once, even though the citywide controls may delay new office developments elsewhere in San Francisco. Five Point expects this will provide it with a competitive advantage in the marketing and sale of land at The San Francisco Shipyard, particularly to potential large-scale institutional or campus-type users who seek a large volume of predictably timed new office space.

The developer also has a lot of flexibility in building the home sites. “Our existing general plan and zoning approvals give us varying degrees of flexibility in determining the types of homes and commercial buildings that will be constructed, as well as the location of such buildings in different development areas within our communities. As a result, we are able to modify our planning in response to changing economic conditions, consumer preferences and other factors,” stated the company in the filing.

Five Point had entered the home development at an incredibly advantageous time. Housing demand in the Bay Area Counties currently exceeds new supply being added to the market, as evidenced by an employment growth-to-homebuilding permits issued ratio of 5.45 for 2016 (well above the typical balanced market ratio of 2.6), stated the filing. As of December 2016, the median existing home price reached an all-time high of $1,148,100, and the median new home price was $1,020,400, reflecting a 16.4 percent decrease from the prior year. New home prices in this environment of compressed new home sales volume can be heavily influenced by the mix of home types being sold at any given time. As a result, resale home prices are a better indication of housing market trends in the metropolitan area. As of December 2016, only 1,070 homes were listed on the market, which equates to only 0.9 months of supply (well below the typical equilibrium of 6.0 months).

The company plans to utilize the net proceeds from the offering to fund horizontal development of all three communities, however it will also continue to utilize multiple public and private financing strategies, including secured mortgage financing for vertical construction projects, community facilities districts (“CFDs”), tax increment financing at The San Francisco Shipyard and Candlestick Point and state and federal grants, to reduce the privately funded portion of total development costs.

West Coast Commercial Real Estate News