For months, the San Francisco development world has been “aTwitter” about the “technology effect” hitting the region’s real estate markets.
Technology ventures, including social media firms such as online social networking and microblogging service Twitter, have led the resurgence of the Bay Area real estate sector, says Greg Martin, partner and real estate national practice leader in the San Francisco office of Seattle-based tax and consulting firm Moss Adams.
“The Twitter-fueled office and housing boom along San Francisco’s midmarket neighborhood is a big factor locally and a microcosm of the region,” he says. “It is not just about office or research space, but also residential, retail, and multifamily, spilling over to nearby submarkets and increasingly to the East Bay. Technology is a driving force in San Francisco real estate, as well as in Oregon and Washington state.”
Add Canada to that list. Robust entrepreneurial growth, coupled with continued in-migration and the weakening Canadian dollar, is powering Canada’s real estate expansion, says Sheldon Chandler, principal of Vancouver, British Columbia–based design firm Chandler Associates Architecture. “Redevelopments of existing buildings to serve tech companies and other firms is a growing trend as land becomes less available and municipalities are more welcoming of added density and other uses,” he adds.
The real estate markets in northern California, Oregon, Washington, and Canada continue to be strong for a variety of reasons, including a diverse economy, healthy investor interest, strong job growth, and a shortage of developable land. Technology is also a major driver.
“Last year, the San Francisco area reported a number of tech milestones, including Twitter going public,” says Michael A. Torres, chief executive officer and portfolio manager at Adelante Capital Management, based in Oakland. “The Bay Area continues to be a magnet not only for technology innovation, but for corporate and engineering talent who want to continue to drive the next piece of technology innovation. We believe 2014 will be another big year for technology initial public offerings, whether cloud computing, big data, or applications, and that will have a beneficial effect on the real estate markets.”
Thanks to the tech surge, the Pacific Northwest—northern California, Washington, and Oregon—has become a new real estate “Gold Coast,” says Martin. “Developers have become nimble to attract tech firms and small businesses that want to be close to the action, and that’s increasingly becoming downtowns, arts and entertainment districts, and anything near a transit stop,” he continues. “It is driving residential and retail and entertainment markets, too.”
In San Francisco’s commercial tenant improvement sector, market competition from tech companies affords clients only a small window of time to view and select space and begin lease negotiations, says Michael Pattinson, a principal in the San Francisco–based architectural and planning firm Bull Stockwell Allen. “Inquiries regarding the development of new office space in the South Bay have also seen a marked upturn,” he says. “Our sense is that although the market is still strong, the rate at which rents are increasing seems to be leveling off.”
Pattinson’s firm reports increased interest in both new building and adaptive use of existing structures in the hospitality, commercial, and mixed-use/residential sectors. “We are currently involved with a number of hospitality projects, including a large hotel and conference center for the city of Roseville, as well as hospitality developments in the Napa/Sonoma region and central California coast,” Pattinson says.
The tech effect is also powering residential activity in the region. San Francisco leads the Pacific Northwest area with prices more than 16 percent higher than last year, trailed by Seattle, where prices have increased almost 10 percent over the same period, says Paul Zeger, principal of Polaris Pacific, a sales and marketing firm based in San Francisco. “With the growing availability of project financing for new condominium properties, supplies will increase within two to three years, but the gap in delivery is likely to drive prices higher through 2014 and into 2015 before satisfying demand,” he says.
High-density residential development has seen a tremendous resurgence in the Pacific Northwest, Zeger says. “In 2013, the majority of unsold condominiums were absorbed and the majority of new projects under construction were rental, not condo,” he says. “With the supply imbalance, condominium prices rose dramatically—and market pressure on values continues intensifying.”
As prices increase, so do efforts to remake neighborhoods that are past their prime. In Sacramento, transit-oriented development is being planned on land that was first developed shortly after the California Gold Rush of the 1840s. The city is seeking to partner with a yet-to-be-named developer to turn 240 acres (97 ha) of former Southern Pacific Railroad yards into a transit-oriented village called the Railyards.
“The concept of transforming the rail yards and a multimodal transit center into a transit village has been a longtime vision of the city,” says Fran Halbakken, the rail yards project manager in the Sacramento city manager’s office. “Originally, the city planned to construct one large transit center against the backdrop of the rail yards.” The idea of a transit village concept with smaller, urban-scale buildings that are compatible with the historic buildings evolved from the ULI Daniel Rose Center for Public Leadership in Land Use fellowship program in 2010, he says.
Sacramento is also seeing revitalization with its Entertainment and Sports Center, a public/private partnership expected to invigorate downtown and connect the city center to places like Old Sacramento, the historic downtown district. The centerpiece is the $448 million new arena for the Sacramento Kings NBA team, says John Dangberg, Sacramento assistant city manager. “In concert with the new arena, up to 1.5 million square feet (139,000 sq m) of additional retail and commercial space is expected to be developed.”
Transit-oriented development and technology are also key elements in Oregon. In Portland, entrepreneurial energy is spurring real estate demand, says Liam Thornton, managing director, investment and development, at Portland-based Langley Investment Properties. The city’s east side is showing strong growth, he says, with many industrial buildings being converted to creative office space to accommodate the burgeoning tech/media/design sector.
“Angel investor and venture capital formation is growing at a steady pace in Portland, resulting in startup companies in later stages of growth staying in the city,” Thornton says. “Innovative research and technology in the medical/biotechnology space led by Oregon Health and Science University is but one example. High-tech firms are locating in Portland, and there is also a lot of new company formation in the software/tech/media/digital industries. There is a lot of economic momentum occurring in Portland with respect to innovation.”
The expanding economy in the Portland area is adding to that economic momentum. The area continues to create jobs, says Don Hanson, principal at the Portland-based design firm OTAK. “We are seeing single-family development returning, thanks to expansions and job growth from companies including Intel, Nike, Sales Force, and Kaiser Health,” he explains. “Most of the new employees at these companies want to purchase single-family homes in quality new neighborhoods with great schools or rent new apartments near transit. There are a number of rental apartments in the central city and infill areas along transit and bus corridors that are being developed. These projects are typically four to five stories over ground-level retail uses.”
OTAK is designing several urban infill and suburban residential developments in the Portland area, Hanson says, including Lot 5 at the Yards, a multifamily development adjacent to the city’s historic train depot. The project achieved a Silver rating under the Leadership in Energy and Environmental Design (LEED) program because of the numerous sustainable elements incorporated into its design and its proximity to various forms of public transportation, Hanson says.
To the north, robust employment also continues to stimulate development, says Randy Daniels, executive vice president and commercial real estate lending director at Seattle-based HomeStreet Bank. The health of Seattle’s economy can be summed up in three words, Daniels says: jobs, jobs, jobs.
“Seattle is at full employment [with a jobless rate of 5.7 percent in January] after experiencing strong job growth of 2.3 percent and 2.9 percent over the past two years,” he says. “This job growth will fuel multifamily demand more so than in the past because of the type of jobs—highly skilled technology jobs in IT [information technology], database, media, gaming, and systems. These positions will be filled by younger millennial workers who prefer to rent in urban neighborhoods and most likely will relocate to Seattle from other regions due to our full employment.”
HomeStreet has funded a number of new ventures in Seattle and Portland, including the 38-unit Lexicon Apartments and the 57-unit ONEONE6 Apartments, both in Seattle’s hip and popular Capitol Hill neighborhood, and Gramor Development’s Kruse Village in Lake Oswego. Kruse Village is a 62,000-square-foot (5,800 sq m) retail project in six single-story buildings. In Portland, HomeStreet helped fund the 72-unit Albert Apartments in the emerging North Williams neighborhood. “We also helped fund the Saturn Building, a mixed-use project focusing on incubator office spaces for new and fledgling small businesses,” says Daniels.
As Seattle’s technology sector continues to grow, it provides well-paying jobs for people with higher disposable incomes, says Steve Harmon, a principal with the Callison architecture firm. “The ripple effect of this hits the housing market, the retail market, and at some level impacts all of the local market sectors,” he says. “The Seattle real estate industry has benefited from a relatively robust local and regional economy, as well as increasing interest from national and international investors. Several large, phased, mixed-use projects have broken ground or are about to break ground, and that adds some further predictability and long-term stability to the market.”
Harmon says a continuing trend toward a more urban lifestyle is resulting in the densification of Seattle and Bellevue. “The result is a strong, multifamily market sector, which also supports related markets, including industrial and retail,” he says. “In particular, we are seeing emphasis on retail renovation, reposition, and expansion in our regional market.”
Mirroring its neighbors to the south, Vancouver continues to experience a healthy real estate industry, says Chandler. “The availability of developable and affordable land continues to be a major challenge in Vancouver and the lower mainland,” he adds.
Chandler’s firm is working on a number of projects, including the Uptown Shopping Centre, an 875,000-square-foot (81,300 sq m) mixed-use, sustainable urban development on an 18-acre (7.3 ha) former brownfield site near Victoria, and Central at Garden City in Richmond, British Columbia, a 375,000-square-foot (35,000 sq m) planned lifestyle center integrating a multilevel Walmart with a wide variety of commercial retail units and medium-sized tenants. Construction of the projects is expected to begin this fall.
Canada’s expanding technology and financial services sectors also are fueling continued economic and real estate activity in Toronto, the nation’s largest metropolitan area, adds Toronto City Councilor Michael Thompson, who also chairs the city’s economic development committee. “Toronto continues to move forward in a positive direction,” he says. “It’s certainly like every other economy in the sense that while we move positively, there are elements that adjust and reflect a cyclical nature.”
Real estate activity in the region continues to grow, Thompson adds, not only in the condominium sector—Toronto has been North America’s high-rise building construction capital for a number of years, according to construction data firm Emporis—but also on the commercial side, thanks to more companies relocating their corporate headquarters to the city’s downtown.
Coca-Cola has moved its Canadian head office back to the city from the suburbs and into a new three-story, 100,000-square-foot (9,300 sq m) office built on top of the Toronto Sun building, says Thompson. “Coca-Cola’s move reflects a positive perspective about the city and shows strong growth in terms of investment,” he says. “Relocations require commercial facilities for businesses to create employment and increased housing stock beyond condos.”
Toronto’s office market continues to be resilient, with several new office towers opening in recent years thanks to the vigorous financial industry and a vibrant high-tech/entrepreneurial sector, adds Jeffrey L. Davies, a partner in the Toronto law firm of Davies Howe Partners. The firm has been involved with obtaining approvals for major developments across the Greater Toronto area, including a recently announced proposal for a mixed-use project in the heart of the downtown involving an expansion of transit facilities, retail and office space, and heritage redevelopment, Davies says.
“One of the big questions facing the industry in 2014 is the condo phenomenon, which has run since 1996,” says Davies. “Thousands of condo units are scheduled to close this year, and if values don’t hold up, the concern is that buyers might walk from their deposits. Builders are no longer rushing new project offerings to the market.”
The strong job growth and a robust tech sector are inspiring confidence in the real estate market by Davies and others throughout Canada and the Pacific Northwest. “It’s hard to find short-term weaknesses,” says Daniels. “A sense of ‘renewed normal’ is taking hold, and market conditions are beginning to reflect this state of affairs.”
Adds Torres of Adelante Capital: “People are feeling pretty good about the economy and the real estate business. The biggest question will be, ‘Are we being too optimistic?’ That results in too much new supply.”
Mike Sheridan is a freelance writer in Parsippany, New Jersey.