Real estate in California is a tale of two states, says Constance B. Moore, president and CEO of BRE Properties Inc. of San Francisco, which develops, acquires, and manages multifamily communities. “Northern California is very strong, particularly the Bay areas and Silicon Valley, where tech is on fire.

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The Los Angeles Trade Tech College
construction technology building.

We’re seeing significant job and wage growth for the knowledge worker,” she says. “However, in southern California, Los Angeles is our weakest market. There is limited job growth in the L.A. area, so when we try to increase multifamily rents, we get pushback. San Diego is coming along: it’s a market that didn’t go down as much as some others, so there isn’t as much to come up. Orange County is starting to see strength in office and that is enabling us to push rents on the apartment side.”

High tech is going to be on the leading edge in the Golden State, Moore adds, “but we’ve got a ways to go for homebuilding. Construction of single-family homes is a laggard. What is helping the market is that all real estate in California has been repriced. Housing has never been more affordable, so that is good news, too. It means that people are starting to think about growing their business in California rather than moving away, and that will be good for the economy.”

After a rough couple of years, real estate in California—particularly in the northern part of the state—is recovering. Spurred by a strengthening economy, a vibrant high-tech sector, and renewed confidence in the Golden State by businesses inside and out, California is rising from the doldrums. Although the nation’s largest state is not out of the woods yet, things are looking up and there is a more positive feeling in the state.

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BRE Properties’ 482-unit, six-story mixed-use development at Wilshire Blvd.
and La Brea Ave. in L.A.

 

 

 

 

 

 

 

Though there are still bumps in the road, there are numerous reasons for optimism for the San Francisco Bay area and southern California, says Alan -Chamorro, senior vice president of the San Francisco office of Grosvenor Americas, an international property development and investment group.

“Despite California’s budgetary problems, the economy appears to be re-bounding and the Bay Area is rumbling back,” he says. “On the jobs front, Silicon Valley and San Francisco are percolating nicely, and with some additional momentum, we hope that this economy will continue to expand over the year. The Bay Area is the innovation capital of the world, and we do not see that changing anytime soon. Technology, and all of its permutations—biotech, social media, green tech, cloud computing, etc.—is the bright spot, and with it will come significant job creation. Companies in Silicon Valley, San Francisco, and the East Bay have steadily continued to create jobs, and we expect this trend will continue to gain momentum in the coastal communities of the Bay Area, and southern California.”

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Grosvenor Americas is working on entitlements for several projects in the Bay Area, Chamorro adds. “We are about to break ground on a boutique luxury residential condominium project in San Francisco’s Pacific Heights neighborhood,” he says. “In Los Gatos, we are working with the town of Los Gatos to create the specific plan for a nearly 40-acre [16.2-ha] mixed-use development site which we believe is one of the best development locations in the Bay Area. We see the opportunity to create a vibrant, mixed-use, sustainable neighborhood that serves the local community and also a wider regional area.”

Northern California will continue to benefit from the strong presence and profits in Silicon Valley, as well as San Francisco’s focus on the biotech industries, says John Ashworth, principal at Bull Stockwell Allen, a San Francisco architecture and planning firm. “This means the Bay Area’s office market, including interior renovation and modest new builds, will reinforce a stabilizing commercial real estate market,” he says. “While new residential development will be a challenge both north and south, a strong rental market should lead to renewed interest in rental-based multifamily residential development. California’s leadership in the high-tech and information exchange industry is an economic engine, primarily in the northern California Bay Area. Apple, Google, Twitter, and Facebook are synonymous with Bay Area innovation. They are collectively fueling high profits and reinforcing the area’s better-than-average economy.” 

California is also experiencing an increase in public/private partnerships, points out Mike Pattinson, principal at Bull Stockwell Allen. “With continuing restrained capital markets, state and local governments have joined with the private industry on an increasing basis to assist with infrastructure and regeneration projects that revitalize the economy and help local and state job growth,” he says. “Public/private partnerships appear to be playing a real role in stimulating business while at the same time helping jurisdictions finance public projects that would otherwise be on hold.”

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Caruso Affiliated’s 8500 Burton
Way project in Los Angeles.

While ground-up development is still sluggish, says D. Jamie Rusin, principal at Berkeley’s ELS Architecture and Urban Design, his firm is involved in several projects that reposition and refresh existing retail properties. “This work includes solving problems, such as vacant department stores, and improving properties with capital investment that was deferred during the downturn,” Rusin says. “This trend will escalate as property owners become more able to invest, tenants gain momentum to expand, and as well-capitalized new owners buy bankrupt properties. ELS is also involved in early master plan and entitlement efforts with clients who are looking forward to project openings in 2014, 2015, and beyond.”

Troubling signs, however, are the very poor financial condition of state and city governments and continued high unemployment. “The current improvement in business conditions may, to some extent, reflect deferred improvements and available capital more than sustainable growth in consumer demand,” Rusin says.

California has a strong, educated, and skilled workforce, tremendous resources, and, most important, a forward-thinking, progressive populace, notes Steve Pellegren, vice president, preconstruction services, at Bernards. “California is still leading the world in technology and leading the country in a dedication to protecting the environment, which will result in a lifestyle that is clean, healthy, and productive,” he says.

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Perkowitz+Ruth Architects

Pellegren does not foresee any industry in California that will be robust. “If anything, with the current impetus to dramatically reduce government spending at the federal, state, and local level, we would see a decline in activity,” he says. “One of the problems with dramatically reducing government spending is that any recovery will be slowed.”

California continues to attract new industry. Utility-scale alternative energy projects—solar, wind, and geothermal—will bring significant amounts of investment and jobs to California, predicts David C. Michan, president of San Diego–based Strata Equity Group, a privately held and managed real estate investment and development company. “They have the potential to attract billions of dollars of investments into California and thousands of jobs,” he says. “Alternative energy technology will soon reach and surpass grid parity [on the cost to generate one watt of energy] with coal and other nonrenewable resources. In the meantime, the sector is relying on federal and state incentive programs in order to compete.”

Accordingly, Strata is repositioning some of its landholdings for utility-scale renewable projects, Michan says. “Strata is looking to become a major player in the industry by providing fully packaged solar projects to solar developers either for purchase or for joint ventures,” he says. “This will include solar project applications with the state, an interconnection point, power purchase agreements with a utility company, and entitlements.” 

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Strata Equity added rooftop solar equipment to this self storage facility inUpland, CA.   

Over the past 18 months, Strata has purchased a number of residential subdivisions with standing inventory and finished lots while also focusing on rebuilding its income-producing port-folio, and has purchased multifamily communities and a self-storage facility. “We are actively pursuing additional income properties and also raw or semi-improved land projects,” Michan says. “Up to now, we felt that it was too early to venture to unimproved or unentitled projects because of market conditions. We feel, with the lead time required to entitle projects, the time to enter new raw land projects is nearing, especially for projects near core and secondary markets.”

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A residential property by Strata Equity in
Apple Valley, California.

 Still, California cannot escape its past, says R. Zachary Wasserman, a partner at Wendel, Rosen, Black & Dean, one of the oldest and largest law firms in the San Francisco East Bay. He points out that one of the major issues in commercial real estate today is the sale of notes and projects involving developments that are underwater—that is, that have more debt than the assets are worth. “I do not think there will be a big rush of true foreclosures,” he says. “But I do think institutional lenders and trustees for securitized commercial mortgages are being realistic and starting to respond—a few working deals with their borrowers and more selling the notes to funds or the few well-capitalized commercial owners/developers.”

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BRE Properties’ Lawrence Station in Sunnyvale, California. 

 

 

 

 

 

 

Wendel, Rosen, Black & Dean is working on a number of developments, including a solar project for the Peralta Community College District, which is partnering with Chevron, and an energy-harvesting 35-story condominium project near Lake Merritt. 

“The two major issues in California will be legal challenges to foreclosures or sales of notes and the California Environmental Quality Act [CEQA]. With all the sales and foreclosures occurring, I believe some owners will bring legal challenges to foreclosure,” says Wasserman. “The CEQA issue will be significant because new owners will want to start moving projects, and the terrible length of time required for CEQA clearance will be seen as a major obstacle to both developing projects as well as buying some projects. Governor Jerry Brown is sympathetic to this problem and may well lead some legislative changes in this area.”

California also needs more innovative design because the market has radically changed as a result of demographic shifts and economic constraints, particularly in the residential sector, says Barry Berkus of Santa Barbara–based B3 Architects and Berkus Design Studio. Berkus’s firm is busy because it is becoming more inventive, he says.

“As we move through this market, we’re trying to reimagine things that have already been done before, striving to make them better and also creating a product that doesn’t now exist,” says Berkus. “For instance, we’re looking at a multigenerational housing product where there is a sharing of living space and costs, allowing people who can’t afford to live alone the opportunity to live comfortably with others. The household may be taking care of parents, grandparents, or grandchildren requiring care, as well as ‘bounce-back’ children unable to afford housing and coming back to live at home. There is a new family grouping, and we’re looking at how to house them all together with dignity so that they can each have their own individual enclaves while living together.”

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California needs more innovative desisgn,
particularly in the residential sector.

At Playa Vista, a new housing project in Los Angeles, Berkus is designing three-story housing units with bedrooms and bathrooms on every level in order to accommodate the diverse needs for today’s families. “People are sharing the house more: the kids are moving back home and sharing space with parents and grandparents who can’t afford $3,000 a month for a retirement home,” he says. “Designers have to adjust.” 

Adjust is what real estate entrepreneurs and development companies have had to do in California for the past several years. At the same time, the real estate sector in the Golden State is adapting to new realities of the marketplace. With an economy that seems to be on the mend and with more demand for real estate product now that the sector has been repriced, California may be experiencing more good times in the years ahead.