Sunny Forecasts, Spec Development To Greet New Year
Submitted November 15, 2011, 12:01 AM
Bay Area business executives from developers to economists are predicting robust economic health in the new year for the region, including the laggard, the East Bay.
Developers Henry Bullock of Menlo Equities and Matt Lituchy of the Jay Paul Co. told a Silicon Valley crowd Nov. 3 that they both are starting large-scale speculative office development in the South Bay.
“We think this is the golden age of Silicon Valley,” Bullock told the NAIOP Silicon Valley chapter. “I am extremely optimistic.”
So confident is his company in South Bay tenant demand that Jay Paul itself is financing construction of the final Moffett Towers building, Lituchy said: “We are going to end up coming out of pocket for a portion of time, but once we get some leasing we will get construction financing after that.”
Meanwhile, Christopher Thornberg, founding partner for Los Angeles-based Beacon Economics, told an East Bay audience Nov. 9 that despite persistently negative news reports on everything from the U.S. housing market to the European debt crisis, the national economy should expand by as much as 3.5 percent in 2012.
“American consumers are still overspending, and we need to shrink the federal and trade deficits. But I don’t see any major risks to the U.S. economy,” he said. “And California is not collapsing. It is surging forward.”
U.S. gross domestic product has grown for the last nine quarters, while California has added 250,000 jobs year over year, he said. That job growth is being led by the Bay Area, primarily Silicon Valley but also San Francisco.
For all the anguish surrounding the U.S. housing market, he does not buy the argument that housing sales and prices must rise from current levels for the larger economy to recover, though he admits that the slower homebuilding rate has left unused capacity in the country’s industrial production apparatus.
“What exactly is a real estate recovery?” he said. “Prices back up to bubble levels? Prices in 2007 were ridiculously high. Now they are back to where they should be.” Even with the declines in pricing, the biggest impediment to the Bay Area’s long-term economic growth continues to be the cost of its housing, Thornberg said.
Even in the hard-hit East Bay, the employment trend line is making a turn, led by a more than 8 percent surge in employment associated with wholesale trade over the last year; 2.5 percentage points of that increase came in the last three months alone.
Thornberg spoke at an afternoon session sponsored by law firm Wendel, Rosen, Black & Dean LLP and brokerage Grubb & Ellis Co.
The Oakland port overcame the port of Los Angeles in 2010 to become the second-largest port in the state as measured by the export value of California-made goods passing through it. According to a study by Thornberg for the East Bay Economic Development Alliance, Oakland’s port handled slightly more than $10 billion in California-made products last year, or about $60 million more than the Los Angeles port.
So far this year, Oakland’s export traffic including all goods has climbed more than 20 percent compared to the same time last year, hitting $11.6 billion in value, led by big gains in fruit, nut and meat exports. California exports as a whole through all of the state’s ports are up more than 30 percent year-over-year.
Maria Sicola, an executive managing director for Cushman & Wakefield and head of research for the Americas, says offices in the San Francisco central business district will fall to a single-digit vacancy rate next year. By 2013, rental rates will climb past their 2008 peak, she predicts, and both trends will continue unabated until at least 2015. Office rents outside the central business district are growing even faster, hopping up nearly 50 percent in the first three quarters of this year alone, Cushman shows.
“Rent growth is accelerating in the city,” Sicola told a Nov. 9 meeting of the San Francisco chapter of Commercial Real Estate Women, or CREW SF.
Silicon Valley offices will reach 10 percent vacancy by 2014. Next year, rental rates should stabilize at more than $28 a foot a year, then begin climbing, reaching nearly $35.50 by the end of 2015, Cushman estimates.
San Francisco, Silicon Valley and the Peninsula all rank among the top 10 markets in the country as measured by gross leasing activity in the first nine months of the year, Cushman research shows. The company tracks commercial real estate activity in 41 U.S. cities.
Jay Paul’s Lituchy said before the 2008 financial-market meltdown and stock-market crash, his company had been in discussions with users who collectively needed three million square feet of office space. That demand went unmet and now has come back, he said. At the same time, relative to the hundreds of millions of square feet of existing workplace stock in Silicon Valley, the area has seen only minor new construction in the last decade.
Moreover, there is widespread recognition that some portion of Silicon Valley’s existing workplace stock is functionally obsolete, which artificially elevates vacancy.
“Eleven years ago, technology markets and users consisted of the U.S., Europe and Japan,” Menlo Equities’ Bullock told his commercial real estate compatriots. “Now with cloud computing and mobile apps, the global dynamics have changed completely. There are users in China and India and Nigeria. These populations weren’t users of our tech products 11 years ago (in the final days of the dot-com boom). That’s why our companies can drive top-line (revenue) growth,” he said.
“The fundamental demand for our products is now global. I think this is going to go on for quite some time.”
