• San Francisco

Bay Area Research Rant: A Hard Landing for Prop M?

By Robert Sammons, Regional Director – Northwest U.S. Research

SF Financial with Embarcadero_grayAnother year has come and gone. The San Francisco market continued to perform positively though maybe not at the supersonic speed we saw in 2014. That might be a good thing but more on that in another post; meanwhile, for the latest and greatest Q4 office market report for San Francisco from Cushman & Wakefield, fly to this link.

Moving forward into 2016, one of the most intriguing local commercial real estate issues will be, not if, but when the City will hit the Prop M cap. Now many of you follow local San Francisco real estate (or you likely wouldn’t be receiving this!). But for those that don’t or those that want a very quick review on Prop M, I’ll give it my best shot.

There are a lot of nuances so let’s stick with the main points in this regulation which is specific to commercial office development. What better place to get that explanation but straight from the horse’s..umm…city’s mouth. According to the San Francisco Planning Department, “The Office Development Annual Limit (‘Annual Limit’) Program became effective in 1985 with the adoption of the Downtown Plan and associated amendments to the Planning Code. It was subsequently amended by 1986’s Proposition M and 1987’s Proposition C…A total of 950,000 gsf of office development potential becomes available for allocation in each approval period, which begins on October 17th every year. Of the total new available space, 75,000 gsf is reserved for Small Allocation projects (projects with between 25,000 and 49,999 gsf of office space), while the remaining 875,000 gsf is available for Large Allocation projects (projects with at least 50,000 gsf of office space). Office space not allocated in a given year is carried over to subsequent years.”

The Small Allocation continues to glide along without any real turbulence. BUT the Large Allocation is coming in for a hard landing and very quickly. In fact, there is no way that all pending projects in the queue (see our chart) will be approved in 2016. At least one of them will be pushed out into late 2017 when another 875,000 square feet is made available. And those six projects in the chart aren’t the only ones vying for development rights – just the first ones in line. There is another 7.3 million square feet (msf) in the pre-application phase and another 5.0 msf behind that. Since this is really the first time this will happen in such a big way (with so many project pending and so many more in the pipeline) it’s unclear how all parties – the City, developers, tenants – will react. Of course, perversely, we could be on the verge of at least a mild downturn which will tamp down demand. But if the economy continues to hum along and rents continue to rise thanks to an ever-tightening market, expect employers to look elsewhere for their growth. Are you listening Denver (and Salt Lake City and Phoenix, etc.)?

This post is guest commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing robert.sammons@cushwake.com.

Robert_SammonsRobert Sammons is a Research Director for Cushman & Wakefield. Based in San Francisco, Robert’s principal roles include working closely with the C&W research teams across the Northwest – including Northern California, Portland and Denver. Robert is author of numerous documents that delve into a wide variety of real estate and economic trends. He has been a quoted source for all manner of real estate and related economic information in many widely known media outlets across the country. Robert has 29 years of real estate experience as both an appraiser and researcher. He earned a BBA in Real Estate from The University of Georgia and an MS in Real Estate from Georgia State University. Robert is a member of the Urban Land Institute.

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