?4 reasons Bay Area developers are souring on real estate boom

“The biggest challenge for us is the cost to produce housing. Part of me wants to shut down our shop for six months (and just manage what we already built). Everything’s too expensive,” said Eric Tao, president of developer AGI Capital.

2. Political warfare

It’s getting riskier to pour time and investment into projects that may not get built as the political climate for development darkens.

Just ask Maximus Real Estate Partners, the developer of the residential project next to the 16th Street BART that opponents call the “Monster in the Mission.” The developer sued the landowner last week after a deadline passed to close the deal on the land. Maximus said it would be out the $8 million it already spent trying to get a project entitled that isn’t even done with environmental review.

The proposed 18-to-30 month moratorium on market-rate housing construction in the Mission has developers not just wringing their hands – but fighting back and paying up.

In a letter obtained by San Francisco magazine, Emerald Fund chairman Oz Erickson urged developers to donate $10,000 to $20,000 to fight the Proposition I ballot measure. Maximus and another embattled Mission developer – Nick Podell – have reportedly agreed to donate a half-million dollars to fight the measure.

“If we let Maximus and Podell go down in flames even if they were in part responsible for the mess, we jeopardize development throughout the city,” Erickson said in the letter. “The mood against construction is getting hysterical.”

Developers are also hedging their bets. I’m told that pending land deals in the Mission, for instance, now have “moratorium clauses” that would kill or table agreements if the ballot measure passes.

3. Getting late in a hurry

Real estate is, of course, a cyclical business. That’s in part why San Francisco office developers surveyed by law firm Allen Matkins and UCLA earlier this month reported their lowest levels of optimism since 2009 about how rental rates will fare in three years. The confidence of residential builders also declined.

Tony Natsis, partner at Allen Matkins, said that most of the Northern California developers surveyed were still “fairly optimistic” about the market considering optimism levels were still at about 50 percent across the markets. But there’s some concern that the South of Market office market – which is about to see a boom in construction– will soon become “saturated,” he said. Plus, residential rents will have to “flatten” soon – good news for tenants, but less groovy for developers.

Rents are “outstripping the incomes of the San Francisco residents and a lot of it is the higher end,” Natsis said. “You’re going to run out of people that will have that kind of money.”

4. Oakland skepticism

A slew of proposed market-rate housing is making its way through Oakland’s approval process, buoyed by the city’s “specific plans” that clear environmental hurdles for development. A surge of companies escaping San Francisco rents for cheaper Oakland space is also helping the office market tighten, raising speculation that office construction could follow.

So where’s the angst? Well, one of the Bay Area’s biggest office bulls isn’t biting. Neither are other big-time office developers.

John Kilroy, CEO of Kilroy Realty Corp., said office rents in Oakland still don’t justify new construction. Class A office asking rents in Oakland’s commercial district are $37.80 a square foot annually, significantly less than San Francisco.

“I have to tell you personally I am not a big fan of the Oakland market. …If you build a building in Oakland, you are going to pay the same price which you pay for a building in San Francisco, the only deal is going to be the land cost,” Kilroy said on the company’s earnings call earlier this month. “Ultimately that’s a very small market over there.”

That said, the major renovation to the Sears building in the Uptown neighborhood could ignite the market, provided it grabs a major tenant. But Oakland hasn’t seen a new Class A office building constructed since 2002. Shorenstein Properties’ large site in City Center still has no reported movement after a decade of delays.

Article source: http://www.bizjournals.com/sanfrancisco/blog/real-estate/2015/08/market-correction-sour-developers-san-francisco-sf.html

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