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NAIOP SFBA’s weekly ZOOM-IN webinar on May 21st focused on the state of Bay Area multifamily market and featured some of the region’s most prominent developers and investors. Moderated by Jason Parr, Managing Director, Multifamily Advisory Group, Cushman & Wakefield, the program included a market overview by David Bitner, Vice President America’s, Head of Capital Markets Research, Cushman & Wakefield. Panelists included: Pat Calihan, Senior Vice President of Investments, Prometheus; Mike Ruiz, Vice President, Investments, Northern California and Pacific Northwest, Carmel Partners;and  Zach Felson, Vice President, Investments, Prado Group.

Bitner’s Quick Market Update

National context

• We are in very bad recession / worst in living memory
• Not however, a great depression
• Q2 expecting GDP to fall 30% annualized rate
• Good news – that is the bottom
• Expects to see slow recovery starting in Q3
• Limited to a permanent solution to COVID crises
• Not likely to put us back to pre-crisis output until late 2021 or mid 2022
• Lots of debate about the pace and potential for double dip from a second wave
• Some of most positive news – relatively limited increases in cases for states that have reopened

Bay Area – Bad news/Good news

Bad news

• Relative high density area means greater difficulty reopening and renormalizing
• Near term head wind due to conservative approach to reopening economy
• Policies less than landlord friendly
• Highly tied to start ups / will see large number of failures
• SF is marquee tourism market
• Cost of living staying high while incomes decrease / more people exiting market
• High end impacted by less over the top wealth generation

Good news

• Acting early and robustly flattened the curve quickly
• In better position than many areas to reopen
• GDP dependent on jobs that can work remotely
• Global center for largest tech occupiers no indication of massive lay-offs / companies have stability and cash
• VC sector flush with cash / will put war chest to work saving companies
• More demand for multifamily with people renting longer due to changing financial situation
• Competitive advantage of Bay Area will continue to drive fundaments for multifamily

Key panel discussion points

Given shift to work from home, how has the pandemic changed your thinking on multifamily design and development post COVID?

Calihan    

• Currently pipeline is too difficult to change given length of approvals
• Looking for ways to adjust current floor plans / adding extra bedrooms, converting closets
• Already build on larger side of amenities offered
• Have been spending a lot of time on redesign of retail elements
• Expects to transition to different plans on future projects

Ruiz

• Not making wholesale changes to projects currently under construction
• Will be spending a lot more time in the next six months looking for ways to improve new buildings to meet the changing demands

Felson

• Has stuck to neighborhood developments avoiding super high density downtown product
• Thinks having ground floor retail as “front porch” for residents is important
• Looking at changes for new productMulti-entry and exit points rather than one main lobby
  o    Cross ventilation and HVAC systems
  o    Balconies and wider corridors

What is the future of ground floor retail?  More or less demand?

Calihan

• Viewing retail as an amenity now more important than ever
• Helps to not force yourself to jam the highest rent on the ground floor
• Problem is heavy food and beverage on retail base and heavy investment in TIs already made
• Working to keep the best retailers in place based on sales – recover together

Are you active in the market for land?  Looking to buy entitled or unentitled sites?

Calihan

• Thinks everyone is preferring unentitled
• Shovel ready sites are tough to get comfortable with now
• Rents are too much in question

Ruiz

• Open for business and would love to fill up the pipeline
• Finds fully entitled sites in difficult markets for entitlements really attractive
• If taking on new entitlements now there has to be clear path to the entitlements
• Have to have conviction about rents and hard cost which is tough to do now

What are your thoughts about rent?

Felson

• Have taken a 15-20% discount on assumptions on some projects now
• Depends on product and location
• Hard to look at today as leasing velocity is not there
• Short term – tenants are moving out

What has surprised you in the last 60 days in terms of asset management?

Calihan

• Shocked at how well occupancy has held up over the last month
• Negative impact of corporate tenants

Felson

• Collections pretty good on multifamily side

Ruiz

• Rent role hit the hardest by corporate tenant exposure

 What opportunities are you seeing to repurpose retail sites?

Calihan

• Up and down El Camino through Santa Clara Co. large parcels / 5 – 10 acre sites
• A lot of shopping centers should be half their current size
• Will be difficult as towns want the tax revenue and have too much retail in their general plans

Felson

• Trend of some malls/shopping centers dying accelerated by COVID, will continue
• Some have multiple stakeholders and are tricky to pull apart
• Many cities clearly don’t want to give up hope on dying malls

Do you think there will be a post pandemic shift in commute patterns?  Will it impact demand for urban product?

Calihan

• Number one issue for employers was commute time
• Eventually traffic patterns will go back to normal

Ruiz

• In the short-term, there will be more demand for suburban lower density product
• Currently seeing high demand for 3-4 bedroom townhomes in Alameda
• Over the next couple of years urban locations will still be desirable

Are you still in triage or do you feel like your portfolios are starting to stabilize?

Calihan

• Each week is better than the last
• Concerned about shuffle that will happen once people have the ability to move

Felson

• Has retail and office exposure and focusing on that
• Getting out of triage phase
• Heavy emphasis on stress-testing on vacancy and future leasing fronts
• Starting to have an eye for new opportunities

Ruiz

• Surprised how strong leasing as been in Fremont during current environment
• Downton Oakland slower as Carmel product tougher to differentiate with virtual tours
• SF is overall picking up a little each week

How are you looking at acquiring new investments today?  

Calihan

• Sees big buy/sell gap right now
• A lot of the capital that was waiting before remains today
• Needs to see tests to determine what bid/ask should be
• Will be asset by asset / in the weeds in the underwriting going forward

Felson

• Sold 60 apartment buildings in last 18 months
  o    Felt like market was priced perfection
  o    Had major legislative concerns which have not been alleviated
• Will have to be a big repricing exercise on existing assets
• On land side owners who don’t have to sell will hold
• Transactions will be slow

Ruiz

• On the offensive looking to buy
• Question is how to price risk until rent rolls stabilize
• Conservative on rent growth for next couple years
• Currently not including any rent growth / adding concessions
• Until there are data points it’s hard to jump in and set market pricing

How has your underwriting changed?

Calihan

• On a ground up sites underwriting rents down 8%
• 1/3 down on pre-COVID pricing on land

What level of discount gets you interested?

Calihan

• 10%

Felson

• 15-20% on existing in SF and a mismanagement story

Ruiz

• If Calihan says 10% then 9.5%...

What concerns you most today?  

Calihan

• How sticky land sellers are in the Bay Area
• How slow to change some of the municipalities are relative to retail and parking requirements
• City revenues will drop off a cliff and impact staffing causing even longer entitlements (near impossible to underwrite)

Felson

• Legislative / making investments and the game is changing
• How do we deal with this housing crisis? / What are cities going to do to spur on development

Ruiz

• Legislation / hearing rumblings of Prop 10

What out there is encouraging?

Calihan

• So much of the success is experience driven
• Good actors will be able to separate themselves coming out of this
• Long term very bullish
• Remembering the best deals in the last cycle were done 2 years coming out of the recession

Felson

• This is the top knowledge market in the country
• Having the best research universities and major employers will be key
• Believes companies will not leave Bay Area entirely
• Thinks Bay area will continue to be resilient

Ruiz

• Difficulty achieving home ownership in Bay Area will remain
• There is real value to having expertise in achieving entitlements
• Reduction in hard costs as construction slows
• Put hard cost saving back into additional land residuals to owners

When this is over do you see 2020 as a good vintage?

Calihan

• Doesn’t know how much wine will be left after we get out of shelter in place….
• Sees silver lining in learning to listen better from having to pay attention on ZOOM calls

Felson

• Market was priced to perfection going into this in every asset class
• Crisis is good for resetting the market on the sales and leasing side
• Will create opportunities for some groups to make a statement coming out of this

Ruiz

• Hard costs potentially decreasing
• Could be opportunities for qualified groups that have capital available
• Key is being disciplined, not over levering, sticking to fundamentals and not jumping in too quickly