Many Are Gazing Into the Downturn Crystal Ball

SIOR Northern California chapter recently held its annual kick-off event and panelists addressed the challenges and opportunities in the CRE market, and when will the slowdown occur.

Developers weighed in on challenges, popular markets and slowdown predictions at the SIOR event (credit: Jeff Weil).

SAN JOSE — What are the challenges and opportunities in the Northern California commercial real estate market? And of course, the burning question is when will the next slowdown occur?

The SIOR Northern California chapter held its annual kick-off event at the Silicon Valley Capital Club last week to address some of the most pressing issues in the market today. Moderator Jordan Schnitzer, president of Harsch Investment Properties, peppered the group with questions on market trends, popular markets and slowdown predictions.

Panelists included Scott Lamson, president, Northwest region, Prologis; Don Little, senior vice president of development with Trammell Crow Northern California; Steve Briggs, chief investment officer, LBA Realty; and Chris Freise, managing partner and cofounder at Lift Partners. The panel began by offering a 30,000-foot view of their companies and/or where growth opportunities are occurring.

Freise explained that Lift was started four years ago. With a start-up, of course, there are challenges.

“We have to hustle for deals. There is pressure with construction costs and higher taxes in California,” Freise said. “But there is a lot of opportunity in Seattle and the Bay Area. There is a great quality of life in Northern California.”

Little pointed out there are a lot of jobs but not enough housing in the Bay Area. As a result, affordable housing burdens are often put on a project, he said. Lamson concurred, saying the cost of living in the Bay Area makes it difficult to raise families.

In looking at projects represented by the four firms, Lamson outlined that Prologis has 30 million square feet under construction, averaging 25 million square feet per year for the past three years. He said Prologis has the infrastructure in place for projects in Tracy, where the firm has 250 million and 600 million under construction, with 1 million permitted.

Specifically, Prologis has 160 million square feet in the West, broken down as follows–65 million square feet in Southern California, 40 million square feet in Northern California, 15 million square feet in Seattle, and 10 million square feet in Denver and Reno.

“I thought Tesla would hurt the Reno market but that hasn’t happened in our project there,” Lamson says.

Lamson went on to discuss the phenomenon of multi-story industrial buildings; a development technique that is commonplace in Japan. It makes sense because all floors affect each other, he observed.

“On every project, we ask, ‘can we build multi-stories?’” Lamson pondered. “I’m not sure where our next multi-story building will be: either the East Coast or California.”

Briggs says 15 to 20% of LBA’s business is e-commerce and the Denver, Reno and Tracy markets constitute a “young business” for the firm.

When discussing the hottest areas and trends, it is no surprise that the topic of opportunity zones came up. Freise said Lift is taking advantage of those projects, in addition to industrial and urban development opportunities.

Little also chimed in on the cautions and benefits of opportunity zones.

“Opportunity zones are frothy but the advantages are gravy,” he indicated. “It opens the doors to entrepreneurial capital.”

Little went on to say that Trammell Crow was not a big believer in Livermore or Morgan Hill but now has a project in Morgan Hill scheduled to break ground in fourth quarter 2019. The project is 16 miles from San Jose. Still, labor woes continue to be an issue.

“Labor has become a factor, especially in Oakland but even in Tracy,” Little says.

Freise pointed out that areas of interest for Lift are Oakland, Redwood City and San Jose’s downtown, which is “on a trajectory and there is a lot of room to run in general. However, San Francisco is tight as a drum,” he observes.

Briggs said interest rates and liquidity have a big impact on the market but in general, Seattle and West Los Angeles are the most robust. LBA is cautious about San Jose, however, transit-oriented walkable space is in demand.

Also of caution is exactly when a slowdown will occur, but some are not as concerned as one might think.

“We’d love to see a nice little recession: a good old-fashioned hiccup, not a 2008,” Briggs said.

Little pointed out that the difference in 2008 and now is that banks are more disciplined and the market is forward looking. Lamson agreed that the economy is on more solid footing but says technology may be out over its skis.

“Tech is concerning because it reminds me of 1999 and 2000, but we are in a better position,” Lamson said. “And, e-commerce won’t slow down.”

Future Blue Bottle building in San Jose sells to major developer, but buyer assures retail lease is not on ice

The future home of the South Bay’s first Blue Bottle coffee shop in downtown San Jose sold this month, but the property's new owner — the venerable developer Jay Paul Co. — says there’s no reason to fret: the popular third-wave coffee shop is still set to open in the space.

Jay Paul Co. purchased the four-story building at 1 North First St. in downtown San Jose earlier this month for $46 million, or about $455 per square foot for the approximately 101,000-square-foot building, on the heels of another massive downtown purchase.

The North First Street property, which is more than 70 years old, has been reimagined repeatedly as it has traded hands, so confirmation that Jay Paul is staying the course is valuable insight.

The building served as a J.C. Penney’s department store for the first three decades of its life. Later, it was a well-leased office building filled with popular tenants like the Lincoln Law School. But the aging structure fell out of favor with office tenants in the early 2000s and struggled to keep its four floors full.

For a time, one investor imagined the property at the corner of First and Santa Clara streets as a residential rehab, past Business Journal reporting shows.

In 2016, Lift Partners and Westbrook Realty Management purchased the property for about $16 million and embarked on an ambitious plan to restore the old office building to make it attractive to creative tenants.

“Basically the only thing that won’t be new [in the building] will be all of the great pieces that you want to keep, which are the floors and the old steel and the board-formed concrete on the inside,” Chris Freise, a partner with Lift Partners told the Business Journal at the time.

The partnership secured the South Bay’s first ever Blue Bottle coffee shop slated to open in the ground floor — an announcement that caused plenty of fanfare last year when the Business Journal broke the news.

Now, the newest sale to prolific San Francisco developer Jay Paul, which has leased buildings across the Bay Area to some of the biggest tech titans in the Valley, appears to be continuing with those plans, but the transaction may launch the property on a new trajectory.

“Just given the profound extent of [Jay Paul's] tenant base and presumed relationships, I think when he moves, he is moving with some of these tenants in mind,” Mark Ritchie, president of San Jose-based Ritchie Commercial, said in an interview late last week. “That seems to be his M.O., and the fact that he struck so fast and so deep [in San Jose] tells me that they’ve got to be doing it with some of these tenants at his side.”  

Industry insiders say that beyond the Blue Bottle, no other leases have been made public for the property so far.

Baristas make pour-over coffees at a Blue Bottle Coffee shop in Washington, D.C.'s Georgetown neighborhood. The popular third-wave coffee chain is based in Oakland, where it was founded.

But finding quality tenants hasn’t traditionally been a problem for Jay Paul, and company officials told the Business Journal last week that San Jose was a “natural extension” of the developer’s growth strategy.

“We feel that San Jose is ripe for investment and development,” Matt Lituchy, chief investment officer for Jay Paul Co., said last week. “It has all the qualities that tenants are looking for: It is a vibrant and urban environment with transit.”

The purchase at 1 North First St. comes weeks after Jay Paul Co. purchased CityView Plaza, a block-sized mixed-use office and retail campus in the heart of downtown San Jose, for a whopping $283.5 million.

That property had been owned by Equus Capital Partners for more than a decade. Prior to the sale, Equus was also shepherding through city hall a proposal for a new 24-story residential and retail tower that could rise on the corner of the 11-acre property, a prospect that could increase the site’s value to a savvy developer.

Now, real estate insiders are buzzing with curiosity about what the prolific developer will do with its new trappings in San Jose — and whether more purchases are on the way.

Meanwhile, the San Jose deals come on the heels of Jay Paul Co. leasing 1 million square feet of office space to Facebook in Sunnyvale in the year’s largest deal so far.

The company also leased hundreds of thousands of square feet to Amazon in the same still-under-construction Moffett Park complex known as Moffett Towers II. Jay Paul has worked with Newmark Knight Frank Executive Vice Chairman Phil Mahoney to lease its Moffett Park developments, which have been taken up by giants like Facebook, Amazon, Google and Microsoft.

“Jay Paul, to me, he is the Keyser Soze of the development world,” Ritchie joked in an interview on the San Jose purchases late last week. “He’s this man of mystery, but I don’t know that anybody has done anything at the scale that he done; it is just remarkable.”

Lift Partners Raises $50MM Discretionary Fund

Lift Partners, a real estate operating company headquartered in San Francisco, is pleased to announce the closing of Lift Real Estate Partners Fund I, LP. The $50 million discretionary vehicle has the potential to grow to $100M in equity commitments based on market conditions and opportunities. The Fund will target value-add and opportunistic investments in the industrial and office sectors. Lift Partners will continue to utilize its local expertise and extensive relationships to acquire, reposition and operate assets in Bay Area and Seattle MSAs which has been its practice since forming the company in 2015.

Co-Managing Partner Patrick Fisher who led the fundraise process on behalf of Lift said “The new Fund allows us to deploy approximately $150M of discretionary capital when leveraged. We’re very excited about this milestone for our company.”

Goodwin Procter LLP advised Lift Partners on the fundraise. No placement agent was involved in the fundraise.

About Lift Partners
Founded in January 2015, Lift Partners is a full-service real estate investment company focused on the adaptive re-use and repositioning of commercial properties. Lift concentrates primarily on value-add, infill opportunities and opportunistic development along the West Coast. Our expertise is bringing the necessary skills through brokerage relationships, construction and market knowledge and thoughtful execution to create value for our investors. We apply our approach to industrial, office and mixed-use properties often times with challenging structural, environmental or historic designation hurdles to overcome. Take the best of the old and refresh new. Lift’s portfolio to date has included over $230M+ in gross investment, $50M+ of construction projects and 1.2M+ square feet of assets in Bay Area, Seattle & Southern California.

Lift Partners Sells 2619-2629 Seventh St in Berkeley, CA (Berkeley Brass)

CBRE announced today that is has sold 2619-2629 Seventh St in Berkeley, CA (“Berkeley Brass”) on behalf of a joint venture between Lift Partners, Acre Valley Real Estate Capital and Blackbird Investments for $9.5M ($436 PSF).   Berkeley Brass is a +/- 21,800 sf warehouse / R&D building that was acquired in 2016. 

Located in West Berkeley the property is 100% leased to four tenants including Enchroma, Mar Structural, Mosswood and Home Base Spirits.

“This is a unique asset,” said Mike Raffetto of CBRE who brokered the sale and also leased the building from 20% to 100% occupancy. “With tall exposed structural steel ceilings, radiant heated flooring and outdoor patio amenity space, Berkeley Brass is a bullseye for creative industrial and office space.

The Berkeley / Emeryville market remains one of the strongest in the nation. A dearth of new supply has led to record-setting land prices, rents, and property trades in core Bay Area submarkets.

About Lift Partners
Founded in January 2015, Lift Partners is a full-service real estate investment company focused on the adaptive re-use and repositioning of commercial properties. Lift concentrates primarily on value-add, infill opportunities and opportunistic development along the West Coast. Our expertise is bringing the necessary skills through brokerage relationships, construction and market knowledge and thoughtful execution to create value for our investors. We apply our approach to office, industrial and mixed-use properties often times with challenging structural, environmental or historic designation hurdles to overcome. Take the best of the old and refresh new. Lift’s portfolio to date has included over 230M+ in gross investment, $50M+ of construction projects and 1.2M+ square feet of assets in Bay Area, Seattle & Southern California.

Long-Shuttered Downtown San Jose Venue Gets New Life.

Once one of the busiest and loudest street corners in San Jose, two neighboring properties at the intersection of Second and Santa Clara streets, for more than six years, have sat empty, dark and silent.

Previously home to nightlife venues Voodoo Lounge and Toons, the combined 12,000 square feet of space provided a crash course in sound throughout the aughts. Voodoo hosted punk and rock shows as well as notable touring acts in hip-hop and R&B, while the latter blended genres as a piano bar and Top 40 dance club.

Since 2011, however, when both businesses shuttered, the corner has been an entertainment abyss. That should change soon.

Renovations are underway to transform the old Toons lounge, a 5,528 square-foot property at 52 E. Santa Clara St., into a bar and arcade come spring 2018. Last month, business partners George Lahlouh, Dan Phan and Johnny Wang officially closed on a lease of the property with Lift Partners.

The proprietors of the high-end yet unstuffy cocktail lounge Paper Plane on South First Street—Phan and Wang own the neighboring gourmet hot dog and craft beer shop, Original Gravity Public House—nabbed the venue to capitalize on an industry trend they’ve seen in other major markets, such as Barcade in New York City, Ground Kontrol in Portland, Brewcade in San Francisco and Button Mash in Los Angeles.

“We are creating a cocktail-beer bar that will encompass the best of both worlds,” Lahlouh says. “The best that Paper Plane and Original Gravity have to offer.”

Gensler, the international architecture, design and planning firm, which has a San Jose office just down the street on West Santa Clara, will help oversee the design of the yet-to-be named “barcade,” which will have two bars, a separate kitchen, and arcade and pinball games in nearly every direction.

“It’ll all be coin operated, kind of like when you were a kid at Golfland,” Phan says.

Many of the machines were purchased at Captain’s Auction Warehouse, which is based in Anaheim. The barcade’s ownership group is clearly stoked about the selection of titles they’re acquiring, which include pristine condition games such Terminator 2 and NBA Jam. “We have no emulators,” Phan says. “The original cabinet is really important.”

The pinball selection, however, could be the crown jewel of the barcade’s offerings. They’ll feature titles such as Medieval Madness and Monster Bash, which can retail online for as much as $17,000.

“We like to think we have the six best pinball games ever made,” Phan says.

For now, the space previously home to Voodoo Lounge, located at 14 S. Second St., remains vacant. The music venue was a popular attraction in downtown San Jose’s nightlife scene for 11 years, before closing in February 2011. In its last month, Grammy Award-winning artist Miguel appeared at a surprise show, and a month before that rapper Talib Kweli performed.

Voodoo Lounge was pivotal in San Jose’s small live-music clique along with the Cactus Club and Blank Club, bringing live music downtown. Performers may not have been big enough to fill SAP Center, but they gave locals an opportunity to witness up-and-comers and the occasional prime-time act.

Both the Voodoo and upcoming barcade properties are under the ownership of San Francisco-based Lift Partners, which purchased the adjoining venues from Saratoga Capital in August 2016 as part of a $33.5 million package, according to the Silicon Valley Business Journal.

Many have wondered why the properties languished for so long, and it appears the new owners had a vision that didn’t entail waiting for a residential project to fill the space.

“Previously it was a challenging retail market, but there is a lot of good news in the last three years,” says Chris Freise says, manager and co-founder of Lift Partners.

Nate Echeverria, director of policy and operations for the San Jose Downtown Association,  suggests the long wait might have had something do with the interior. “The spaces that tend to stay vacant longer are a raw shell,” he says. “Whoever goes in there will have to install a new [heating and air conditioning system] and come up to all the green building standards.”

For small businesses, that’s a costly upfront challenge.

The city has been working with small businesses to give them a head start in this process, through the San Jose Storefronts Initiative, which offsets some city permit fees and taxes. This initiative was funded with $250,000 and it intends to divvy up the money to help offset the costs of city fees, permits and taxes, as well as exterior improvements of up to $5,000 for existing small businesses.

Freise says that Lift Partners, which have a go-getter reputation for retail projects after coming out of Seattle and working with Amazon, knew the space needed to add something vibrant to the well-trafficked downtown corridor.

“We are looking for authentic retail,” he says. “You know it when you see it. … 7-Eleven came knocking on our door—we did not accept. It doesn’t add to the overall story of downtown.”

Freise, now a resident of the area, has an idea of what community members are craving.“We want to see these places activated,” he says.

Echeverria notes that people have told the city they want to see a mix business in the old Voodoo space, perhaps even a collection of restaurants that offers an open space and food options throughout the day.

The barcade team intends to bring on executive chef Winson Duong to craft a diverse food menu with lunch hours available for all ages. In the late afternoon, the venue will go to 21 and over.

“There’s no reason why Silicon Valley won’t embrace it,” Lahlouh says. “The timing is right, the folks that grew up with these games are in their late 20s and 30s.”

Every member of the team hails from San Jose, and that hometown connection seems to have also resonated with local crowds. The intersection of Second and Santa Clara streets can be a haven for the homeless and corner boys in the evenings, Phan and Lahlouh acknowledge, but the same could have been said about the block of South First Street they helped reinvigorate with Original Gravity and Paper Plane. Bars such as 55 South and Nomikai also assisted in the SoFA District’s renaissance as one heads further down to the downtown arts district.

“Right now, if everything goes smooth—which rarely happens—we’re looking at February, March of next year,” Phan says.

Once that happens, a once-cracking venue will be reintroduced to the community through an equally familiar concept.

“We’re kind of reintroducing an old idea that’s been forgotten,” Lahlou says, “which is that arcades are social.”