There is perhaps just one group of commercial real estate professionals that is more perennially optimistic about the state of the market than the brokers — the developers. In this month’s Bay Area Developer Forum webinar, we interviewed four of them, spanning office, residential, life science and mixed-use projects, and it was clear that while the risks of the pandemic have not subsided entirely, signs of an active, and actively expanding, market are all visible.
The web event was hosted by a trio of industry leaders: Allen Matkins, a California-based law firm specializing in real estate; Longfellow, a growing national life science developer and property owner; and Saint-Gobain | Sage Glass, an international construction and development firm with deep roots in the commercial real estate space and also an industry leader and manufacturer of electrochromic glass that tints automatically.
Allen Matkins’ partner, Mark Hartney, who specializes in construction contracts, land use, litigation & counseling and real estate disputes, among other areas, led the conversation and moderated the panel that included: Peter Fritz of Longfellow (life science), Trece Herder of Brookfield Residential, Connor Kidd of Swig (commercial office) and Mollie Ricker, partner at Dostart Development (mixed-use and office).
The general mood of all the speakers, to a certain extent, may have been predicted. A group of professional developers who put considerable effort and funding to construct some of the world’s most impressive structures will by definition be optimistic about the industry. However, the driving force behind their impressions was deeper than that. Actual experience of what they are seeing across the board helped shape their impressions that things are starting to turn around in the commercial real estate industry.
In Ricker’s case, some of the announced changes to offices and the massive investment needed to transform those physical spaces never materialized. While everyone was hoping that there would be touchless technologies deployed across offices and investments made to create a totally different way of working, in reality almost none of the tenants were ready to pay for that and instead looked at the trends around vaccinations to determine a safe timeframe to return to the office, she explained.
Kidd saw a similar behavior and called on two large build-out projects that Swig was in the process of completing during the shutdown. One was for Bank of America in New York, and another for Asana in San Francisco, where the latter company’s new headquarters will be based. In both cases, the companies did not deviate much, if at all, from their previous plans on office layout and design. The only trend, which Kidd attributed to forces in play prior to the pandemic, is the increase in the size of area per employee in the office. Cramped spaces that in some cases were below 100 square feet per employee were not very productive, and he began to see changes in that area already take shape before 2020.
The life science market, which for the past decade has been steadily growing, but in a more subliminal way, really exploded since the start of 2020. According to Fritz, companies that in the past were only known to industry insiders became household names, and spurred by the global pandemic, National Institute of Health and venture capital funding came in droves toward an industry looking to get the world back to some normalcy. The challenge for Longfellow became how to deploy property faster to meet the growing demand from the biotech companies growing by leaps and bounds.
In housing, too, the change has been profound, and Herder saw pricing of homes in secondary and tertiary markets skyrocket, in some cases by as much as 50 percent since the end of 2020. Flexible work environments will continue as long as COVID is around, and Brookfield Residential feels this will not change in the foreseeable future, making some of the demands on home design permanent. Dedicated spaces that allow work-from-home scenarios were one of those changes, including anything that creates a sanctuary for the family. People want more rooms as well as flexible space, whether that is in the garage, the laundry room or in the form of a nook in the kitchen. And anyone who lived in an apartment or a townhouse is now seeking more space in a detached single-family home, which drives them further from the core of the region but not necessarily out of the state.
On the office side, some markets have been quicker to rebound. Kidd explained that their vacancies in New York are dwindling down to zero. There is a general flight to quality, he said, which is also driven by the mentality of banks, which in New York, at least, are driving people back to the office much faster than in San Francisco. Ricker sees that the culture of the technology firms is different and because they are worried about losing workers they will not push them to return to the office any sooner than needed.
The biggest challenge, Ricker and Kidd agreed, does not come from the office as much as it does from the commute itself. Employees wonder how safe it is to travel on public transportation, what will commutes look like, and what will be safe while on their way to the office. Swig did its best, in the meantime, to alleviate any reason for doubt about safety and invested early on in Well Certification for its entire office portfolio. Employers are looking for amenities, safety, higher-quality space, and in some cases they still value views, so the company has done its best to ensure that across their assets.
On the housing side, Herder anticipates that trends of escalating pricing will continue, although at a much slower pace. This is why her company, Brookfield Residential, is looking where they can add value in master-planned communities across, which is where they are seeing the greatest interest from home buyers. While challenges around global logistics issues will remain, it is still difficult to get windows from China, for instance, which will likely only push demand into the future, and this is why she’s very optimistic about where things are heading in 2022.
Ricker just kicked off a project in Burlingame, a bustling suburban city on the Peninsula in San Mateo county. Her project is about two and a half years away from completion, so she’s really not focused on how fast the pandemic will impact us 6 or 12 months from now. Her feeling is that by the time the development is completed, we should be in a very different place. Adding to that is the fact that her firm’s focus is on developing projects in very supply-constrained submarkets where there is a lot of interest for leasing, hence she’s very optimistic about where they are heading in the future, as well.
For the life science sector and Longfellow in particular, the Bay Area will continue to provide a golden opportunity for growth. It is the second-largest life science market in the country behind Boston, and it is growing faster. The demand for space continues unabated, which means 2022 and beyond will make life science an industry of accelerated expansion.