PALO ALTO, CA-Unless you have literally been living under a rock, anyone who lives or works in the San Francisco Bay Area recognizes that the development of new commercial real estate projects is booming. According to various industry sources, construction starts in Santa Clara, San Mateo and San Francisco Counties alone have risen from $606 million in 2011 to $742 million in 2012, with projections of close to $1 billion for 2013.
Although there are many theories for why commercial development has exploded in the region, there is no doubt that one of the primary driving forces is the increase in pending and planned infrastructure projects.
According to Infrastructure 2013: Global Priorities, Global Insights, a joint report from the Urban Land Institute and Ernst & Young, infrastructure is the “lifeblood of prosperity and economic confidence in the 21st century.” Put another way, Howard Roth, Ernst & Young's Global Real Estate Leader, noted that “[t]he US has a continuing substantial need to upgrade its infrastructure to keep up with global competitors. There is a clear and powerful linkage between investments in infrastructure and the future growth, real estate development and vibrancy of cities and regions. Capitalizing on these connections requires public leadership and investment as well as private initiative and capital.”
The Bay Area has its fill of both traditional infrastructure projects (e.g., transportation or transit centers) and public-private infrastructure projects (e.g., sports stadiums or entertainment centers). These include, but are certainly not limited to, the Transbay Transit Center, the electrification of Caltrain, the Giant's Stadium (AT&T Park), the BART extension, the new 49er's Stadium, the new San Jose Earthquakes' Stadium, the new Warrior's Stadium, the redevelopment of the Port of Oakland and California's High-Speed Rail. While many of these are years from completion (and others may never materialize as currently planned), property values near these projects are outperforming the market at large, and commercial developers are making significant moves to capitalize on the opportunities the projects present.
Scheduled to open in 2017, San Francisco's Transbay Joint Powers Authority's $4.2 billion Transbay Transit Center is driving private developers into the SOMA district at a frenetic pace. Over the next 15 years, the City of San Francisco, based upon its current pipeline, anticipates that more than six million square feet of new office development will be constructed by local and national real estate titans, including Boston Properties, Hines, KILROY Realty Corp., Jay Paul Co.and TMG Partners, to name only a few. Moving south, clusters of commercial development continue to form around the Caltrain line and the Highway 101 transportation corridor in: San Mateo (Wilson Meany and Associates has 1.5 million rentable square feet of office and retail space at Bay Meadows), Redwood City (over 800,000 square feet is under development for healthcare and office space by Kaiser Permanente Hospital, Sequoia Hospital and a KILROY Realty Corp./Hunter Storm Joint Venture), Menlo Park (Bohannon Development has approximately 694,726 square feet of office space, a 235-room hotel, fitness center, cafe/restaurant, and associated commercial facilities and FaceBook is building approximately 1,035,840 square feet for the next two phases of its new campus), Palo Alto (over 340,000 square feet is being developed by Stanford University and other local builders for new office and R&D space), Silicon Valley's Golden Triangle — the area between Highways 101, 880 and 237 (close to two million square feet is being developed for Google, Amazon, Microsoft, Samsung and Nvidia by the Irvine Company, Jay Paul Co., the Sobrato Organization and others) and San Jose (Ellis Partners and Lowe Enterprises are in the process of developing close to one million square feet of commercial space).
Whether your political acumen supports or abhors the use of public funds for infrastructure development, the Bay Area offers a real-world snapshot for how private resources will follow infrastructure projects (both pending and planned) and provide economic stimulus for the region's continued push to free itself from the doldrums of the great recession.
Michael C. Polentz is co-chair of the real estate & land use practice group at Manatt, Phelps & Phillips LLP's Palo Alto, CA office. The views expressed in this column are the author's own.
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