Being There First: Next Neighborhood

How do you spot the “next neighborhoods” targeted for real estate development?

“By tracking jobs, creating a truly compelling and different product, and seeking transit access,” says Oakland, California–based, serial new-neighborhood developer Rick Holliday of Holliday Development. “Urban transit today is the freeway of the 1950s,” he explains. “‘Next neighborhoods’ are becoming a phenomenon of transit access—especially rail—in contrast to the freeway-spawned next neighborhoods of 1950s suburbia.”

Holliday should know.

During the late 1980s, he created San Francisco’s South of Market (SOMA) loft developments that led the Bay Area loft phenomenon, followed a decade later with similar warehouse conversions in the East Bay’s Emeryville former industrial zone. In the latter 2000s, he created more in the emerging neighborhood of Oakland’s waterfront.

Today, Holliday is still at it and his insights and experience could help entrepreneurs and developers pinpoint the next hot spots for buildings. He says he looks for creation of jobs within striking distance of possible new developments or property turnarounds. One jobs announcement does not a “surge” make, he emphasizes, but developers who are monitoring a market should be tracking company expansion news, hiring announcements, office leasing, and other news.

Rick Holliday Greg Martin

“For example, at 5800 Third at Carroll Station—a property we’re finishing for Goldman Sachs and Citibank just ten light-rail stops south of downtown San Francisco—we identified incremental hires and expansions of tech firms growing in the southern reaches of San Francisco: Twitter, Zynga, and a host of smaller startups,” says Holliday. “It’s gone over the top with recent news of med-tech expansions and a new Salesforce.com headquarters getting underway in Mission Bay, which is in the path of progress south from the Financial District toward 5800 Third.”

Next neighborhoods are becoming a phenomenon of transit access in contrast to the freeway-spawned future neighborhoods of 1950s suburbia. “Research shows that people will seek out housing that’s within 30 minutes of transit travel to their jobs or desired destination, using only one mode of transit,” Holliday says. “Taking two modes—say, a bus to the train—and you lose a large percentage of the demand. A study by the National Association of Home Builders earlier this year concluded that younger homebuyers are willing to pay more just to be in a close-in, walkable neighborhood. One-third of respondents said they will pay more to walk to shops, work, and entertainment; two-thirds said that living in a walkable community is important; and more than half of these Gen Y buyers would trade lot size for proximity to shopping or to work.”

ULI member Greg Martin, partner and head of the real estate group at San Francisco’s Moss Adams LLP, agrees. “Identifying the emerging neighborhoods and emerging buyers is always the challenge, and even more so in a soft market. The developer’s or manager’s research and experience are the premium here. For example, a recent Urban Land Institute study had San Francisco’s tech-employed base in mind in concluding that those kinds of young workers like urban living and city amenities.”

Among other tips for pinpointing the next areas for development:

• Blaze your own trail; don’t follow the herd. “For bold, experienced developer-investors who capture a next, new neighborhood opportunity, the project has a high potential for success,” says Holliday. “First-movers do take on more risk, but the reward of a well-executed property can be significant, in part because the base investment is often below [that of] other urban opportunities. At Clocktower Lofts in San Francisco, a radically new product type was welcomed with a line of buyers around the block upon opening in 1989, and a sellout within weeks. At the time, the Clocktower alone accounted for more condominium sales in San Francisco than all other condominium projects combined.”
• Location is key, but so is creating a truly impressive and different product type. “People are willing to buy a home or lease space at a community’s leading edge or in a transitional neighborhood if they have something compelling as their reward,” says Holliday. “Can they get this home elsewhere? Is the ‘new’ product bigger and more spacious? Unusual and engaging architecture? Features distinctive to the project or neighborhood?”
• Seek secondary rewards: Plan follow-on deals. “Even if the first-mover project is only a mild success, follow-on projects may be the more important end game,” says Holliday. “Sometimes, a cutting-edge project in an emerging neighborhood needs to be loss-leader priced to create a catalyst of broader interest, and then a follow-on project that was purchased and conceived along with the first project becomes the primary return on investment. Option properties, joint ventures, and other structures can minimize upfront risk while the first-mover property plays its hand.” His first project in San Francisco’s South of Market area—601 4th Street—brought the first lofts and housing to the otherwise industrial and blighted neighborhood. Proving the market in this transitioning neighborhood, Holliday was able to be the first to tie up the sites for future undertakings such as Clocktower Lofts and 355 Bryant, capitalizing on the market the firm had created with 601 4th Street. “It’s not rocket science,” he says. “It’s just careful preparation, thoughtful timing, and loads of research.”