Six months ago, developers were seeing major headwinds when it comes to developing new multifamily housing in Silicon Valley, but now confidence has jumped, according to a new report.
Ironically, the reason confidence has now increased is the same reason some developers were feeling uneasy about multifamily building in mid-2019: rent control.
“It seems counter-intuitive,” acknowledged John Tipton, a partner at Allen Matkins, one of the groups behind the report, called the Commercial Real Estate Survey, which is released semi-annually by prominent California law firm Allen Matkins and the UCLA Anderson School of Management.
The report gauges how developers feel about the market looking three years to the future and tallies the types of projects those companies plan to build in the coming years.
“Although optimism does not always translate into new construction projects, this sentiment is a prerequisite for it,” notes the report, which has a history of accurately predicting market trends.
Tipton said that though developers and multifamily property owners may not all love rent control, the passage of statewide rent control bill AB 1482 creates a sense of certainty about the market for investors in risky development projects that wasn’t there in early 2019.
“If there’s one thing that risk capital hates more than anything, it’s uncertainty,” Tipton said. “If you don’t know what the rules of the game are, or think that the rules of the game may change in the middle of your investment, that makes it really hard to make a decision to invest risk capital.”
Though rent control has been addressed through the state law, development is still facing some challenges, including high land and construction costs, which will continue to make new development challenging, Tipton said.
Retail confidence slumps
Six months ago, the Commercial Real Estate Survey was generally rosy in Silicon Valley, even showing an uptick in confidence in the future of bricks-and-mortar retail. While the overall outlook for the coming years isn’t bad, many developers are expecting an economic slowdown this year.
Despite the projected slowdown, most respondents in the survey said they were expecting the market to pick back up by 2022, and therefore weren’t halting their investments completely. In fact, many indicated they wanted to get in on the “ground floor of the next commercial real estate expansion cycle,” the report said.
“Even though most forecasters are looking at 2020 as a pause in the growth in this expansion, commercial real estate developers in California are seeing a growing market and improving market conditions,” said Jerry Nickelsburg, director and senior economist for the UCLA Anderson Forecast, in a statement.
But one area where, confidence dipped significantly was retail development looking out to 2022.
That relative pessimism in retail has “likely been fueled by the stronger-than-expected shift to online shopping and the weaker-than-expected start to the 2019 holiday shopping season,” according to the report, which was written based on December 2019 survey responses.
Even so, some developers are still pushing forward with specific projects in high-demand markets and locations, Tipton said.
Industrial remains hot
One part of the market that hasn’t changed over the past year is developer and investor confidence in industrial and warehouse spaces, which have virtually no vacancy in the South Bay.
Those spaces, once primarily used for manufacturing in the semiconductor industry, are increasingly being transformed into research and development hubs for big tech and the automotive industry. Tech companies have also scooped up warehouse and industrial buildings as fulfillment hubs for online retail orders or to store supplies for a massive office footprint nearby.
In an interview with San José Spotlight late last year, Erik Hallgrimson, vice chairman at Cushman & Wakefield, said demand for warehouse and industrial space won’t likely change soon, even as vacancy spiked to nearly 4.2 percent in the third quarter last year — a number that is still incredibly low, but the highest it had been in four years.
“There’s incredible demand for (industrial space) and I would say generally there is not enough,” Hallgrimson said. “That vacancy is going to go down because there are a lot of big transactions that are about to be announced.”
Office space will remain in demand
Office space optimism in Silicon Valley also remained relatively strong, aligning with recent reports that even as many Bay Area companies increasingly look outside of the region for expansion space, commercial buildings in the South Bay remain a hot commodity compared to other major metros, driving demand for more.
“The tech industry’s growth in Silicon Valley has reached a new, higher level with the largest tech firms making major real estate commitments to accommodate growth over the next 10 to 20 years,” Todd Husak, managing director of CBRE’s Palo Alto office, said in a statement last year.
Indeed, the Allen Matkins and UCLA report notes that developers remain optimistic about new office development in Silicon Valley, especially as rental rates for office space are expected to climb.
“The two main drivers of what makes a good place to invest: one is rising rents and, and one is of course, will people actually lease out your space,” Tipton said.
On both counts, Silicon Valley developers seem to be feeling confident, the Commercial Real Estate Survey shows.
Contact Janice Bitters at [email protected] or follow @JaniceBitters on Twitter.