Bay Area spec office construction is booming, but leasing at some sites has …

The decision to build speculatively is easier for a publicly traded real estate investment trust like Kilroy that doesn’t need to rely on an outside investor or lender to take a gamble with equity or a construction loan. Most other developers need major buy-in from investors.

In San Francisco, developers with entitlements and office space allocation under Proposition M can rely on new competition from other office buildings remaining relatively scarce. “It constrains supply, which really helps you if you have an approved project,” said Paul Paradis, senior managing director of developer Hines, which is building Salesforce Tower.

Hines, along with real estate investment trust Boston Properties, started to build the tower in the Transbay district about six months before its Salesforce lease was locked down. It still has about half the building to lease.

Would Hines make the same leap today? “Depends on how long it would take to build that building,” Paradis said. “If you’re late in the cycle, you might have an abundance of data to support good rents and demand, but you might not get your project in time before the cycle ends and you start to go down.”

Not every office developer is firing up construction cranes for spec office projects, particularly those bitten by that same mistake when the financial crisis hit seven years ago. Speculative development was also roaring just before the financial crisis hit, with several development plans hitting the skids.

South San Francisco’s high-profile Centennial Tower sat vacant for nearly four years before snagging tenants in 2012. It’s not surprising that developer Jack Myers hasn’t pulled the speculative trigger on the proposed second building. In Oakland, Shorenstein Properties has stalled for six years on construction of 601 City Center.

Both developers have reportedly been in talks with those respective cities to get the rights to build housing instead, a surer bet with potential office rents not allowing for new construction to make financial sense in those areas.

But while San Francisco and Silicon Valley seem relatively safe because of some of the lowest vacancy rates in the country, a few developers in the Bay Area’s secondary office markets are still bullish.

Developer Wilson Meany decided last fall to start construction on the first of five office buildings in San Mateo’s massive Bay Meadows Station project, a former racetrack site. It still hasn’t leased a tenant, but expects to ink a deal closer to an opening date.

“A truth about our market … is that tech tenants are also very much interested in making real estate decisions short term,” said Chris Meany said last fall. “It’s just the reality that our tenants in this market are moving faster than that. Doesn’t matter if I like that or not. That’s the reality.”


OFFICE SPEC PROJECTS

The majority of office developments under construction without an anchor tenant are in San Francisco, followed by the Peninsula and then the East Bay. A few major renovations, such as Latham Square and Uptown Station, will land in Oakland.

The Exchange on 16th, 1800 Owens Street

  • City: San Francisco
  • Year built: 2016
  • Owner/developer: Kilroy
  • Square footage: 680,000
  • Status: Under Construction

85 Bluxome St.

  • City: San Francisco
  • Year built: 2015
  • Owner/developer: Bluxome Partners
  • Square footage: 56,845
  • Status: Under Construction

500 Pine St.

  • City: San Francisco
  • Year built: 2016
  • Owner/developer: Lincoln Property Company/Gemdale
  • Square footage: 55,000
  • Status: Under Construction

181 Fremont St.

  • City: San Francisco
  • Year built: 2016
  • Owner/developer: Jay Paul Co.
  • Square footage: 435,000
  • Status: Under Construction

350 Bush St.

  • City: San Francisco
  • Year built: 2017
  • Owner/developer: Lincoln Property Company/Gemdale
  • Square footage: 370,000
  • Status: Under Construction

Concar, 400 Concar Drive Bldg 1

  • City: San Mateo
  • Year built: 2016
  • Owner: Hines/Pearlmark/Goldman Sachs
  • Developer: Hines
  • Square footage: 95,812
  • Status: Under Construction

Concar, 450 Concar Drive Bldg 2

  • City: San Mateo
  • Year built: 2016
  • Owner: Hines/Pearlmark/Goldman Sachs
  • Developer: Hines
  • Square footage: 100,000
  • Status: Under Construction

135 Hamilton Ave.

  • City: Palo Alto
  • Year built: 2015
  • Owner: Keenan Land Co.
  • Developer: Devcon Construction
  • Square footage: 28,085
  • Status: Under Construction

Bay Meadows Station, 3050 Delaware St., Station 4

  • City: San Mateo
  • Year built: 2016
  • Owner: Stockbridge Real Estate Funds/Wilson Meany
  • Developer: Wilson Meany
  • Square footage: 210,000
  • Status: Under Construction

Uptown Station, 1955 Broadway

  • City: Oakland
  • Year built: 2016
  • Owner/developer: Lane Partners
  • Square footage: 381,622
  • Status: Under Renovation


CORRECTION

The Business Times incorrectly referred to developer Wilson Meany but its former name, Wilson Meany Sullivan.


Article source: http://www.bizjournals.com/sanfrancisco/print-edition/2015/07/31/build-it-and-they-will-come-developers-are.html

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