San Francisco Moving Past Manhattan?

Phone:  (310) 614-9329 kmay@grs-global.com

Kevin May is a Director at
GRS | Corteq
(310) 614-9329
kmay@grs-global.com

It’s no secret that the San Francisco Bay Area commercial real estate market is on fire. Kevin May, a GRS Group business development director, was at the forefront during a recent discussion about that area, during Bisnow’s San Francisco Capital Markets Summit, where he led a panel discussion. It was mentioned that office-product demand in the area could soon outpace Manhattan. Driven by the thriving technology industry, multifamily in the region is also very hot. May recently shared his views of what went on at the show.

Are you surprised that the San Francisco office market is said to be overtaking Manhattan in demand and pricing or was that obvious to you?

It’s pretty obvious when you have protestors blocking Google buses as they are picking up employees in the city, so I wasn’t really surprised. The tech boom is really driving prices up throughout the Bay Area and only tech companies seem able to afford them. The one concern in the office market are the large leases. Tech firms are taking over entire buildings with much more space than they need, so at some point there will likely be a lot of subleases of space they’re not using.

Is multifamily strong because people basically can’t afford to buy?

Well, that was one of the big questions and the panel agreed that the only people who can afford to live in San Francisco right now are the people working at tech firms making plenty of money. Regular people just can’t afford to live there any more, so they’re forced to live out in the suburbs.

Was there any concern of a bubble?

One of the panelists pointed out that valuations are above where they were in 2006 and 2007 at the height of the last bubble. Large assets are now about 45 percent above the peaks during that time. Nobody wanted to use the dreaded “B” word, but it has all the signs of a bubble. If something were to happen to the tech industry, they feel the bubble would definitely burst.

How are the needs of your clients different in that region than others?

If somebody’s acquiring a property there, it’s a much shorter fuse than other parts of the country just because there’s so much competition. It’s not unusual for us to be asked to turn reports around in under a week. We’re also seeing that in other markets like Houston, Denver and Seattle, which are pretty frothy as well.

What was the overall mood of the conference that you took away?

Overall, it was very positive and the prediction is it will get even better. According to Trepp, about $1.4 trillion of CRE debt is set to mature between 2014 and 2017; much of it originated at the peak of the past market cycle in 2005 through 2007.

Although there are tons of deals getting done, there is also a large amount of capital out there and the competition is fierce.  In the CMBS market alone there are almost 40 lenders now. Add to this the Life Companies, Commercial Banks, and Agency lenders and a borrower has numerous places to find debt. That being said, all of our panelists still think underwriting standards are relatively strong. Let’s hope all this competition doesn’t lead to loosening of standards and a race to the bottom like we saw before the last crash.

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