Allen Matkins recently held the 14th Annual View from the Top alongside several industry experts. One of the discussions, moderated by Allen Matkins partner Crystal Lofing, covered predictions and updates in the Western region from the investment side. Panelists included Eliott Trencher, Senior Vice President, Chief Investment Officer, Kilroy Realty Corporation; Stephen W. Van Dusen, Managing Director, San Francisco, Eastdil Secured; Kevin A. Shannon, Co-Head of U.S. Capital Markets, Newmark; and Jonathan Lange, Vice President, Regional Property Manager, Boston Properties.
The following are five takeaways from the discussion:
1. THE PRODUCTS AND MARKETS THAT ARE HOT
The recovery after the dark days of the COVID-19 pandemic has seen clear winners and losers. Investors are looking for data points so they can make decisions, and the markets that have the clearest data points are the ones that have the best velocity. Some of the hot markets now include Seattle, Bellevue, Burbank, UTC, and Sorrento Mesa. But each area has a different driver. For example, Bellevue and Seattle are seeing an increase in jobs, which is creating heated competition over land sites to build spec offices. On the other hand, UTC and Sorrento Mesa are seeing growth in life sciences. Many who have been working from home will likely return to work in a more traditional environment. The Class A product will benefit the most, and that's where most of the demand is.
2. SAN FRANCISCO AND SILICON VALLEY ARE WELL POSITIONED FOR RECOVERY
Many tech companies in the Bay Area have seen record stock price performance and record top-line revenue performance. Hiring has been robust. Official return-to-work dates have consistently been delayed for most companies, but the number of employees in many offices continues to rise. That is crucially important to the performance of capital markets and capital profiles.
3. CAUTION IS NEEDED WITH LIFE SCIENCE CONVERSIONS
Life science transactions as a percentage of office transactions are double what they were pre-pandemic. And while blue-chip companies build their own buildings, it's faster and less expensive for other companies to buy an existing building and convert it. Because life sciences is such a hot commodity, it's only natural for clients to want to portray their properties as well-suited for conversion. However, such factors as ceiling height and floor load are important factors for life sciences properties, and some may not meet these requirements.
4. FOREIGN CAPITAL IS JUST ONE TOOL IN THE TOOLBOX
While capital partners are important, it isn't necessarily important where they're located. What matters more is the most efficient way of accomplishing the strategy. So foreign capital is just one tool in the toolbox. If overseas investors prove successful in executing a company's strategy, those partnerships can be grown. But capital can also come from domestic investors or from monetizing an existing asset. Actually, in today's market, capital is not the main challenge. It's finding the right deals and the right investments with the right risk-return profile.
5. PREDICTIONS FOR 2022
The panelists were asked their predictions for 2022. While no one has a crystal ball or can see into the future, their comments were insightful.
- Pre-pandemic trends in multifamily, industrial, and life sciences will continue. The pandemic has only acted as an accelerant to these trends.
- Interest rates will be higher than they are now but still comparatively low.
- Low-rise buildings are being bought up quickly in Southern California, and this trend will continue. Buyers are more interested in the land than the buildings, as property is at such a premium. Many of these buildings will likely be torn down so new structures can be built.
- Construction costs will come back down, and more capital will gravitate towards ground-up development in industrial.
- More and more people will return to the office to be part of a team and to be more collaborative. The urban core will be much more attractive a year from now.
- As people return to the office, there will be an inverse relationship with life science conversions. People have gone to life sciences as a kind of safe haven, but as things return to a pre-COVID-19 environment, many assets will remain office property.
All of the panelists were bullish on the post-COVID-19 recovery in the Western region. Plenty of capital will be available, and the multifamily, office, and life sciences spaces will continue to grow. Each major market has its own drivers, and Class A products will benefit the most from this growth. No one knows exactly what the future holds, but current trends point to a promising year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.