Living and working in the San Francisco Bay Area is incredibly special; we get to experience the most exciting fundamental technological shifts of our time in the epicenter of where they are occurring. As Marc Andreesen stated a few years ago, "software is eating the world." The real estate industry may be a bit late to the game but is in the process of being massively disrupted and improved at the same time.
I’ve put together a set of key themes based on what I’m seeing at the intersection of technology, venture capital and real estate capital markets. Over the course of the coming months, I hope to be able to explore and expand upon some or all of these points in greater detail.
San Francisco Bay Area Commercial Real Estate Themes for 2018
- "Big Tech" Moves New Markets: The consolidation of the big five technology companies continues to be the largest driver in new job growth. Google’s move to downtown San Jose, Facebook’s jump across the Bay and Amazon’s expansion up the Peninsula to San Francisco have the potential to transform these submarkets over the next five years.
- The Dry Powder Overhang: The amount of capital sitting in closed-end funds that needs to be put to work in the next three years is at an all-time high (approximately $160 billion). Value-add and core-plus deals should become increasingly competitive as the lack of available product only exacerbates this phenomenon.
- Everyone Loves Debt Funds: The large number of new entrants to the debt fund space searching for risk-adjusted yield has created an extended period of historically low spreads and allowed for increased leverage, even as regulatory pressures are tapping back on what lenders are willing and able to underwrite.
- Retail’s New Normal Sets In: As e-commerce as a percentage of total sales continues to increase and the large amount of debt that private equity firms forced on retailers comes due between 2018 and 2020, we will see our next round of bankruptcies and additional challenges felt by the retail space. Retail innovation will be born out of this chaos; however, there will be few soft landings in the near-term as major conversions for distribution, housing or mixed-use will prove to be the highest and best use.
- Housing Affordability and Aging Millennials: The outsized growth within technology markets has created major housing affordability issues. This, combined with the renewed interest by millennials to be homeowners, has recently created a steady migration to more reasonable lifestyle areas such as Denver, Austin, Portland, Santa Monica and Salt Lake City. The Bay Area would do well to create massive regional housing solutions to avoid putting a ceiling on the desirability to start and build future businesses.
- Artificial Intelligence Begins to Impact Jobs: Robots and drones need a place to work. The hybrid coordination between humans and machines will become more important than ever, and space will still be necessary for many required tasks. As machine dexterity and sight become more common, we will see an inflection point.
- Real Estate Crowdfunding’s Deal Flow Problem: With hundreds of real estate crowdfunding websites claiming to be the next "Amazon of real estate" doing less than a couple actual deals per year, we’ve reached part two of the hype cycle for this space: the "trough of disillusionment." Over the next 24 months, we should see a majority of these sites quietly close down or pivot away from individual deal syndication to raising their own funds instead. Only a small minority will double down on the curated deal flow model. Time will tell who survives and ultimately thrives.
- Co-Working’s Limitations Tested: WeWork and other coworking models have become more accepted within the real estate community. Landlords use coworking as a feeder for small- to mid-size expanding companies, and companies of all sizes are beginning to take advantage of the convenience and flexibility offered. As the novelty of this type of space wears off, we may see limits to the percentage of coworking space needed in a project or even an individual building.
- Last-Mile-Served Oligopoly: Mobile phones and last-mile served logistics have given consumers the expectation of on-demand delivery. This has driven an increased demand for urban proximate industrial space from both tenants and real estate investors. Despite the interest in the space, it has largely been driven by the current competition for scarce space and long-term potential desirability from groups like Amazon or Walmart.
- New Paradigm of Super-Sized VC Funds: The venture capital space has changed. Softbank’s $200 billion growth fund and YCombinator’s accelerator and Continuity fund have started to institutionalize and formalize the production of new super companies. The venture capital space, once a cottage industry, is more competitive than ever. The bookend nature of this capital will likely still limit the amount of companies that make it through Series A and B.
Other Commercial Real Estate Trends to Watch
- Cryptocurrencies Speculation Challenged, but Blockchain Validated
- Construction Costs Tempering
- Alarming Increase of Cyberattacks
- Call it a Non-Traded REIT Comeback
- Machine Learning Drives Biotech Revolution
- Autonomous Vehicles Early Impacts
- Augmented Reality Becomes Reality
About Thomas Foley