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The current market cycle has not seen too much speculative projects, Sanford said, yet Kilroy decided to do one because of certain factors in the Redwood City site not found in many other places.
The Crossing 900 location is in an urban setting, close to a train station and surrounded by retail businesses and restaurants, he said. “You feel more comfortable starting a spec on this site” compared to other spots that offer less transit-oriented energy.
“It is unusual to see something that size go up on spec,” said Mike Cobb, a Redwood City-based senior vice president for the real-estate services firm Colliers International. “But I think the market conditions warrant it. There’s pent-up demand from larger users.”
By definition, a speculative development is stepping “out on the ledge,” Cobb also said. But he agreed that Crossing 900’s proximity to mass transit and numerous amenities makes the project more than viable.
“This thing will be a homerun,” he said. “I’ll put money that it’ll be leased before it goes far into construction.”
Having Hunter Storm on the project team is smart, he added, because that developer has been a key player in Peninsula development for years and knows Redwood City well.
Hunter Storm managing member Deke Hunter pointed out that the firm has worked in Redwood City for 16 years and Crossing 900 is its eighth project in town.
Another element in Crossing 900’s favor is that Kilroy, as a REIT, has an easier time financing projects compared to local developers that go at it alone. “With our capital structure,” Sanford said, “we can fund a project off our balance sheet, or by cash, without needing to raise equity or go to a bank for a loan.”
Besides Crossing 900, Kilroy’s office portfolio includes the 450,000-square-foot high rise at 350 Mission St. in San Francisco, which has been pre-leased to cloud-computing company Salesforce.com, and a 587,000-square-foot headquarters in Sunnyvale for professional-networking leader LinkedIn. In all, Kilroy has invested in 5 million square feet of development in the Bay Area since 2010, according to Sanford.
Kilroy was drawn to the Bay Area because of the region’s dynamic demographics and growing workforce, Sanford said, adding, “This is the center of innovation, and we wanted to be here in a big way.”
While the tech boom has benefited the region overall, Redwood City has done a good job capturing the employment overflow from Palo Alto and Menlo Park due to their lack of available office space.
Offices in Redwood City’s Pacific Shores and Redwood Shores areas “continue to stay near capacity,” said Ryan McCarthy, Bay Area research manager for the commercial real-estate services firm CBRE. “Downtown Redwood City is really thriving due to the train access, amenities and developers willing to build or rehab older projects. This stable demand and constricting availability have pushed rates steadily over the past few quarters in Redwood City.”
According to a CBRE market report, the asking rate in Redwood City was reaching $4 a square foot per month at the end of this year’s second quarter – up from about $2.50 in the fourth quarter of 2010. The occupancy rate has risen from 84 percent in late 2010 to 92 percent this year, the report said.
Redwood City’s general and downtown-precise plans, which were both updated in recent years, have also encouraged development. Those plans call for increased density and building height in downtown with the overall goal of creating walkable mixed-use neighborhoods. According to Ekern, the city is anticipating up to about 1,800 new housing units—equating to some 3,000 residents—in the downtown area in the next three years.
The office development and residential growth should lead to even more retail in downtown—all three parts working together for the continued vibrancy of the area, Ekern said.
“The city has got it in people’s radar that downtown is a good place to invest,” he said.
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Zazzle photography by Jasper Sanidad courtesy of Studio O + A