Ritchie: Will it happen again?

Starting quietly around 2010, extending wildly into 2019 and ending with a dull splat post-pandemic, there were a series of absolutely astounding flips of Bay Area commercial real estate assets that made investors unheard of returns no one expected or had seen before.

Those days are entirely over for the time being, as we are witnessing a near value extinction event for office buildings plunging under $200 per square foot that is now spreading into other asset classes—perhaps more of a steep decline versus extinction within multi-family and land.

Even the stalwart industrial market is feeling the pain with a cooling of tenant demand and value appreciation in that bright darling of the recent market. Amazon and others consumed the planet, moving all retail out of the corpses of shopping malls into thrumming automated distribution warehouses across the globe. Retail itself is entirely a case-by-case basis as that universe transforms, just look at the soon totally dark San Francisco Nordstrom mall versus the record-breaking Santana Row/Valley Fair Truman Show triumph in post-pandemic store sales and foot traffic.

Single-family housing for anyone other than billionaires or beachfront dwellers I will let the other guys write about, but I have my suspicions.

The free money used to cure the Great Recession of 2008 is at the root of all this history. When interest rates are at or below inflation, the money is essentially free. Lacing steep interest rate increases with the remote work era was the office building doom whoop.

I was party to several of these wild appreciation deals split between San Francisco and San Jose, as is the story of my life, so I will include examples from both markets. I prefer the personal stories as opposed to asking Mr. Chat to chime in, I know my facts are real as I was there.

The premise of this all is: Can it happen again? To save you reading to the end, the short answer is yes and it will. Might be a longer stretch of time for this round, but not if the Fed decides we need free money again, entirely possible in the current political season.

In spite of endless red state and red media attempts to celebrate California’s hopeful fall into the abyss, it simply won’t happen. Keeping up with the daily (hourly?) artificial intelligence boom news is a full-time job at this point, and that just hatched the largest AI office lease in the world last month when Open AI took roughly 500,000 square feet of space in San Francisco as a sublease from Uber. Plenty of irony within that deal, as a company like Uber in the post-AI world likely needs no humans to run it at all.

The percentage of the AI world emanating from the Bay Area is flabbergasting. San Jose alone last year had just under 10,000 new patents issued in artificial intelligence versus about 6,000 for all of New York City at 10 times the population. If we were one of the centers of previous tech innovations followed by employment booms, this one is The Duesy—Chat that up, younger readers. No cultural offense intended toward that most wonderfully American of all cities, Chicago, but I have quipped that out that frozen way AI is still mostly thought of as a steak sauce.

A few personal battlefield notes and some data from CoStar on what did actually happen in the golden era of appreciation:

San Jose:

• 152 N. Third St. office building sold in 2012 for $9.2 million, flipped in 2018 for $40 million, thank you We Work. Now in foreclosure.
• 2 W. Santa Clara St. office building sold in 2013 for $5 million, flipped in 2017 for $14.4 million. Now looking to convert to housing as the office market has dried up.
• Camera Cinemas 210 S. Second St. purchase of existing long-term movie theatre land lease for approximately $5 million, subsequent land purchase from the shuttered Redevelopment Agency for less than $1 million (owning the land lease shut out any other bidders) then a flip for $24 million, all within three years. Looking forward to the opening of Urban Putt there soon.
• Presbyterian Church site purchase at 49 N. Fourth St. for $4.4 million in 2019, flipped in 2021 for $16 million, part of the land assembly to allow the future Icon/Echo 1 million-square-foot development.

San Francisco:

• 351 California St. office building 2010 for $35 million, 2019 for $108 million.
• 246 First St. office building 2012 for $17.65 million, 2014 for $39 million and 2019 for $131 million.

Recall these are only the ones that passed initially through my hands or those within my firm. There were too many others to tell.

We are now working with one of the largest sovereign wealth funds in the world to do it all over again. If an investor can last the next 7-10 years, near-term income be damned, fortunes will be made again.

San José Spotlight columnist Mark Ritchie is the owner of commercial real estate brokerage firm Ritchie Commercial, and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Mark at [email protected].