San Francisco Bay Commercial Market Forecast

Corporate lay-offs have plagued the United States ever since the onset of bad debts that reared their heads in late 2007, and Silicon Valley has of course been no exception. A poignant reminder of the sheer carnage inflicted upon the distressed commercial property market is found in the recent acquisition of the Sherman Clay Building in Kearney Street, San Francisco. After initially being destined for conversion from office space to loft style apartments, development plans were reconsidered and the property was relisted on the commercial market at $18.5 m in 2007. Unsuccessful in selling, the property was foreclosed upon and Sierra Maestra Properties have picked it up in 2010 for a cool $4.3m.

Indeed the plethora of balloon payments falling due of late is astounding. Given the unexpected collapse in demand, economic activity has turned tail with many owners of commercial property sliding down the slope of foreclosure after reaching maturity of term and being unable to meet the final balloon payment. Page Mill Properties have lost 1800 apartments in the East Palo Alto area after failing to meet their $50m balloon payment in August of 2009, and this saw investors lose $30m with the Californian Public Employees Retirement System losing a massive $100m in the defunct developer.

To some extent it is the transformed financial landscape which has seen traditional conservatives in the industry such as Wells Fargo emerge as a bastion of policy & procedure in the turbulence of the Credit Crisis. Wells have observed what are arguably some of the soundest lending practices in the banking industry, and with their acquisition of Wachovia have evolved from a West Coast bank to one with national presence coast to coast. Therefore, when their Wachovia sourced client Page Mills defaulted on the $250m loan, the prudential discipline of Wells Fargo was not far behind. Given investors have named Keiretsu property fund managers as defendants in legal proceedings pardon the pun but much credence has been lent to their decisive action.

Even given these types of recessionary fallout, economic activity in the San Francisco Bay is led by example. The Public Utilities Commission has completed 55 out of 86 planned infrastructure projects, the latest of which is a $61.4m water system improvement program installing a pipeline from the East Bay to Fremont and Newark. Apart from another $56.3m pipeline project on the Peninsular, a gigantic $215m pipeline underneath the Bay itself is expected to create 1.3milion construction craft hours of work that translates into billions of dollars in household income. The San Francisco Planning Commission has also approved just now, a 248 unit tower on 555 Washington Drive, SF. Combined with San Francisco having 173 energy efficient buildings, the 3^rd largest in a US city, long term investment does not need to be speculation – it’s already here.

The types of infrastructural development undertaken in the Bay area are creating jobs and economic growth which will lead to strength in the commercial sector to follow. Even the insolvent General Growth Properties who owned a number of large malls in the Bay area has emerged out of receivership with new financial restructuring models and a clean bill of health. On the verge of a recovery, when revenue gains momentum, the lucrative Silicon Valley will be sure to also release billions into the economy which will maintain the cash flows that commercial property is so heavily reliant upon. This being the case, the broad outlook for commercial property and commercial short sales in the San Francisco Bay area could hardly be better placed.

Posted by Arnold Balthazaar on Apr 30 2010. Filed under Bay Area, Featuread Area, Headlines, Market Updates. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry