SAN FRANCISCO-Construction activity in the San Francisco and Los Angeles office markets has heightened, according to a recent Allen Matkins/UCLA Anderson Forecast. Market conditions in these regions are leading some investors to put their money in properties at all stages of development, and there is a willingness to incur expenses to tear down or rehabilitate a property to better suit a tenant, as well as a preference to acquire properties that have the ability to be developed from the ground up, a spokesperson for Allen Matkins tells GlobeSt.com.
Delmar Nehrenberg, an attorney with the Los Angeles-based firm, is currently involved in eight Bay Area projects with construction costs estimated at $1.5 billion, including Transbay Tower, which is being developed by Boston Properties. Its development has created a scramble for properties in close proximity to the tower, such as the purchases of 355 Mission St. and 333 Brannan St. by investors like Kilroy Realty who are looking to have assets situated close to the transportation hub.
Nehrenberg tells GlobeSt.com that much of the development boom has to do with confidence in the economy. This confidence helps real estate, which is helping construction. “Typically, there is a lag on construction after an economic downturn because it takes time to gain confidence and get construction projects moving as opposed to selling or leasing properties that are already constructed. I’ve never been half as busy as I am on construction now. We’re getting more and more, and the deals keep going through.”
In San Francisco, most of the construction projects Nehrenberg is seeing are commercial office-based, with a few mixed-use projects added in. In the L.A. market, these projects are occurring in West Hollywood and Downtown. Many of the construction projects coming up are speculative.
A new twist to the construction puzzle is that there’s lots of competition among owners to get contractors because there are so many more projects in the works as opposed to the past few years “where you could get them to do anything because they didn’t have anything else to do,” says Nehrenberg. “Typically, an owner would hire an architect and have them develop plans and then get bids from contractors. But in this fast-paced market, we’re seeing a lot of owners almost immediately start looking for contractors before plans are being done. They get preliminary pricing, but they’re not locked in at all. So they hire them on early with a sort of budgetary price that they verify and confirm and agree to later on. It’s kind of like a benchmark for a price that’s just an estimate.” Nehrenberg adds that he has several large-scale construction deals being done in this manner.
In fact, some of the bigger contracts are being done with a collaborative mix of contractors. Nehrenberg says these joint-venture jobs are so new that the parties involved are still figuring out how to manage them.