2/13/2025 Item # 1
City of ULl San Francisco
Santa Clara
The Center of What's Possible
State of Santa Clara Real Estate
and Development Market
(Special City Council Session)
1mL
STUDY SESSION AGENDA
PUBLIC COMMENT (30 MINS)
(Audience real estate & development questions)
Short Break (5 Mins)
URBAN LAND INSTITUTE PRESENTATION (90 MINS)
Break (10 Mins)
Q & A (60 MINS)
Council Questions
Audience Questions (notecards for submitting questions) MEETING ENDS (9 P.M.)
NETWORKING
POST MEETING MAI
Santa Clara City Council
Mayor District 6 District 1 District 2 City Manager
Lisa M. Gillmor Vice Mayor Councilmember Councilmember Jövan D. Grogan Kelly G. Cox Albert Gonzalez Raj Chahal
District 3 District 4 District 5 Glen R. Googins
Councilmember Councilmember Councilmember City Attorney Karen Hardy Kevin Park Suds Jain
3 City of
City Development Team Santa Clara
The Centere Whats Postch
City Leadership
• Elizabeth Klotz, Assistant City Manager
• Reena Brilliot, Director of Economic Development & Sustainability • Elycia Knight, Development Project Manager
Department Leadership
• Afshan Hamid, Director of Community Development • Gary Welling, Director of Water & Sewer • Ahmed Aly, Principal Engineer
• Lesley Xavier, Planning Manager
• Armand Lobao, Building Official • Damon Sparacino, Director of Parks & • Craig Mobeck, Director of Public Works Recreation
• Michael Liw, Assistant Director of Public Works • Gina Saporito, Parks & Recreation Analyst • Brian Lee, Public Works Division Manager Ruben Torres, Fire Chief • Manuel Pineda, Director of Silicon Valley Power (SVP) Jenn Panko, Battalion Chief • Chris Karwick, Assistant Director SVP • Jake Tomlin, Fire Marshall • Sachin Bajracharya, SVP Utility Engineer
4 Snapshot of Santa Clara
• 131,062 Residents
• 45% Foreign Born
• 34 years Median Age
• 6 Districts
• Approx. 4,700 Businesses
Santa Clara: Five Lines of Business
City of Santa Silicon Valley Stadium Convention Regional Clara Power Authority Center Wastewater
Facility*
*Co-owner with City
of San Jose
Businesses & Institutions
APPLIED intel
MATERIALS..
MISSION
COLLEGE
NVIDIA. AMDA SANTA CLARA
Ning KAISER PERMANENTE.
MARVELL®
Santa Clara
servicenow Agilent Technologies University
7 Development Landscape
Santa Clara
City of
Santa Clara
The Center of What's Possible
Growing City
• 7,208 housing units under review or
construction
• 4.46M sq ft of new nonresidential under
review or construction
• Office buildings, data centers, commercial
• Since 2023, Seven 100% affordable
projects completed + one under
construction = 1057 units
-City of Santa Clara
City-Wide Map
Planned Growth Areas
20,000+ Units
Adopted Plans
• Lawrence Station Specific Plan
«does Cirite Focu
• Patrick Henry Drive Specific Plan
• Downtown Precise Plan
• Mission Point by Kylli
Amendments to Adopted Plans
• Tasman East Specific Plan
• Related Santa Clara
• Freedom Circle Focus Area
Under Developtem
Plans Under Development
• El Camino Real Specific Plan
• Santa Clara Station Area Specific Plan
2025 Multifamily
Construction Bumper Year
• 2,810 multifamily units under
construction. 1,101 of which
have been recently completed
or soon will be completed in
early 2025
• These projects received their
first planning approvals as far
HE S
back as 2019/2020
Data Centers
• Began construction in early 1990s
West Coast Data Center Capital
58 operating or recently constructed data
centers
• Limited near-term capacity for new data
centers until transmission infrastructure
completed
Non-Residential Slowdown
New Construction Square Footage Tenant Improvement Square Footage 2,000,000
2,500,000
1,800,000
1,600,000
2,000,000
1,400,000
1,200,000
1,500,000
1,000,000
800,000
1,000,000
600,000
400,000
500,000
20000
0 # 2023 = 2024 # 2023 # 2024
13 Development Yielding to
Economic/Market Conditions
• Newly Approved Projects Are Not Breaking Ground: YIELD In adopted Plan areas, only Lawrence Station & Tasman East have any units constructed or under construction
• Tasman East Specific Plan: Half the planned units are under construction & half are waiting financing
• Related Santa Clara: Amendment to consider Light
Industrial alternative East of Lafayette in lieu of Campus Office development
• Patrick Henry Specific Plan Out of 12,000 units of
planned capacity, only two projects approved, nothing under construction
• Downtown Precise Plan City eager to rebuild. No projects on file. Developing City land can be a catalyst. Are these the right market conditions to solicit offers?
City of UL San Francisco
Santa Clara
The Center of Whet's Focuble
State of Santa Clara Real Estate
and Development Market
(Special City Council Session)
2/19/2025
Urban Land
Institute
ULI San Francisco
Real Estate and Development Landscape
Study Session with the City of Santa Clara
February 13, 2025
uhan land
Insittule
Urban Land About Urban Land Institute (ULI)
Insfitute
• ULI is a 501(c) (3) nonprofit research and education
organization supported by its members.
• Our mission is to shape the future of the built
environment for transformative impact in
communities worldwide.
• The San Francisco District Council has over 2,100
members, and focuses on the following:
• Provides a forum for sharing of best practices
• Conieseunie with expertise in a learning
• Administers UrbanPlan program
• Conducts Technical Assistance Panels
• Creates opportunities for young professionals to
develop skills and build relationship
POST MEETING MATERIAL 1
2/19/2025
About ULl's Public Agency Offerings
• Technical Assistance Panels (TAPs): Industry
experts volunteer to assist on specific public
issues.
• UrbanPlan for Communities: An immersive
workshop for public officials using building
blocks!
• Development Fundamentals: A session or
series of courses designed for public sector staff.
• Housing for Bay Summit: An annual summit
focused on building housing for all.
Urban Land
instilute About Today's Presenters
Libby Seifel Eric Tao Drew Hudacek
Seifel Consulting L37 Sares Regis
President & Founder Managing Partner Chief Investment Officer 4 2
2/19/2025
Urban Land
Agenda for the Presentation
institule
1. Risk, return, and value
2. Real estate trends and outlook
3. When does a deal "pencil"?
4. Land residual value
5. What policy makers can do
5 Urban Land
insiitute
ULI San Francisco
Chapter 1
Risk, Return, and Value
urban Land
J Institute
3 2/19/2025
Urban Land
Chapter 1 - Risk, Return, and Value
Inslitule
Money is impartial and efficient.
It seeks the highest returns
for the least amount of risk.
7 Urban Land
Institute Chapter 1 - Risk, Return, and Value
A universal truth of all investment is that capital strives to generate the highest return for the least amount of risk If investors can stuff money under
the mattress for a good yield
(like buy 10-year T-bills at 4.5%),
Return they demand a much
higher return for new RE
development given all of its risks
Risk
8 4
2/19/2025
Urban Land Chapter 1 - Risk, Return, and Value
Institute
Developers must significantly increase Future Value
the value of a property to
Return
pursue new development.
• Funding must be obtained to support
New
ALL project costs (including purchase of Project
Costs
property and construction costs)
Existing Value
• Future value must exceed total costs, so
capital receives a risk-adjusted return. Existing Existing Value Value
9 Trian Lal
Chapter 1 - Risk, Return, and Value
nstitul
Value for a projected $100/yr in Net Operating Income (NOI) Cap Rate is an indicator of
value based on stabilized NOI
reflecting the perceived market
risk of the investment
$100/4% = $2,500
$100/6% = $1,667 Higher returns on low-risk
$100/8% = $1,250 investments (e.g. T-Bills) is
Asset Value On Fixed $100 Return on Investment driving up return requirements on new real estate construction
and therefore driving down
Apartntenction. values and discouraging
investment.
Ne
$100 Net Operating Income
4% 6% 7%
< lower-risk Going-in Cap Rates higher-risk
10 5
2/19/2025
Urban Land Chapter 1 - Risk, Return, and Value
Institule
What happens if T-Bills go back to 2% (2019 Rate)?
RE Values go up and investment flows to new RE Production Low interest rates = low cap rates = high CRE values
$100/2% = $5,000
$100/4% = $2,500
$100/6% = $1,667
Value On Fixed $100 Return on Investment
→ $100 Net Operating Income
2% 4% 6%
< lower-risk Going-in Cap Rates higher-risk -
11 1 Urban Land Chapter 1 - Risk, Return, and Value
institute
How real estate investors label their pools of money
Opportunity
(New Development)
Return Value Add
Core Plus
Core
Risk
12 6
2/19/2025
LS30
Urban Land Chapter 1 - Risk, Return, and Value
Instilute
Financing Real estate development
Construction Market is inherently risky
Operations
Environmental
/Insurance
Political/
Time
Community
What risks do
developers
Entitlement Other
and investors
take ?
13 Urban Land
Institute
ULI San Francisco
Chapter 2
Real Estate Trends and Outlook
mUban Land
WInslitute
14 7
Slide 13
LS30 Replace prior slide or add this slide?
L Seifel, 10/14/2022
2/19/2025
Urban Land Chapter 2 - Real Estate Trends and Outlook
Instilule
Pre-Pandemic (Before March 2020)
• Interest rates at all-time lows
• Occupancy and rental rates in apartments and offices at all-time highs • Real estate values for income producing properties at all-time highs • In real estate, income producing properties valued by cap rates • When cap rates are low, values are high compared to revenue generated 15 Urban Land
Institute Chapter 2 - Real Estate Trends and Outlook
Uncertainties Since the Pandemic
• Hybrid work allows out-migration from the Bay Area
• Office plus some retail and hospitality have not yet recovered (low rents/occupancy) • Bay Area construction costs increased at 5-15% per year from 2021 to 2024 • While recently stabilizing, uncertainty around tariffs on building materials • Interest rates rose steeply in 2022 and stayed high through 2024. • The future is even more uncertain.
16 8
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1 Urban Land Chapter 2 - Real Estate Trends and Outlook institute
Value Trends Since the Pandemic
• If you have a well-operated apartment building, values are down 15% - 30%. • If you have an office building, its values are down 35 - 70%. 17 Urban Land Chapter 2 - Real Estate Trends and Outlook institute
Investors Consider Select Gateways and Sun Belt Cities as Most Attractive Most Attractive
Top 10 Most Attractive Markets
Seattle
Dallas / Ft. Worth
2 Boston
Baston O
3 Miami / South Florida
Greater NYC and Northern Nu. C
Raleigh - Durham
San Francisco Greater Washington, D.C.
Allanta Bay Area
(Including
Austin Oakland and San Raleigh-Durham
Jose)
San Froncisco Bay Area Atlanta C
Greater Washington, D.C. Dallas/Ft. Worth
9 Greater New York City
Austin
10 Seattle
Miami/South Florida
Source: US. Investor Intentions Survey CBRE Research, December 2024 18 9
2/19/2025
Urban Land
Chapter 2 - Real Estate Trends and Outlook
Institule
How real estate products (food groups) typically line up Land Speculation/Entitlement*
Hospitality
Office
Return Retail
Apartments
Industrial
Risk
*For Sale Housing is built on land that has to be bought, entitled, subdivided, and "built on spec." 19 Urban Land
Chapter 2 - Real Estate Trends and Outlook
Institute
U.S. Cap Rates (%) by Sector with Forecast
The drivers of cap rates
(e.g., GDP, inflation,
interest rates,
fundamentals, risk
spreads, investment
activity, etc.) 6
are all expected to put
modest downward
pressure on cap rates
for several years.
- Apartment - Industnal — Cifice Rela
Source CBRE Research CBRE Econometric Advisors, O3 2024 20 10
2/19/2025
Urban Land Chapter 2 - Real Estate Trends and Outlook
Institute
The 10-Year Treasury and Multifamily Cap Rates (%)
US Treasury rates
have increased since
2020, although 7
stabilized at the end
of 2024.
Average US cap rates "~
for multifamily have
3 increased overall
since 2020, which
depresses values for
multifamily housing.
— 10yr Treasury — RCA Multifamily Cap Rate
Source: CBRE Research. MSC. Real Assets. Federal Reserve Bank of St Laus O4 2024 21 Urban Land Chapter 2 - Real Estate Trends and Outlook Institute
Prospective Allocations
Trend Toward Modern Sectors
Expected change in allocations to REIT sectors: 2024 to 2027 Deda Centers # 21%
Totecommuricatons # 15%
Manufactured Housing 12%
Haaith Care
Triple Net Lease 27%
Timber
Diversifed - 2%
Student Housing • 1%
Other 10%
Self Storage 10%
Singla Fandy Residentian! 0% |
Industrial 0% 1
Gaming -1% •
Apartments
Lodging Resorts -7%
Malls -14%
Shopping Corters -18% m
Office -25%
Narelt.
https://www.reit.com/news/blog/market-commentary/outlook-institutional-investors-portfolio-completion 22 22 11
2/19/2025
Urban Land Chapter 2 - Real Estate Trends and Outlook
Instiute
INDUSTRIAL: Strong Silicon Valley market although significant subleasing occurringin 2024 Figure 5: Net Absorption & Vacancy
- Net Absorption (MSF) • Vacancy
4.5%
3.0 25 4.0%
Millions 3.3%
20 3.5%
15 3.0%
NI 2.5%
1,0
2.0%
0.5 0.0 - 1.5%
(0.5) 1.0%
(1.0) (974K) 0.5%
(1.5) 0.0%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: CBRE Research
23 Urban Lana Chapter 2 - Real Estate Trends and Outlook Institue
OFFICE: Bay Area Return-to-office improving but still lower than national average Bay Area metros
00%
lag major metros 90%
Kastle Office Occupancy by Bay Area Submarket
METRO AREA 80%
(%of March 4, 2020 baseline)
Decerter 25,2024 10%
Houston 37.9%
60%
Dallas 37.1%
50%
Austin 324%
Chicago 40%
30.2%
30.0% 30%
10-MetroArea Average
Philadelphia 29.0% 20%
Los Angeles 28.7% 10%
San Jose 28.4%
New York 28.0% "........
Washington, D.C. 27.2% - San Fratasco → -Metro Area Average San Francisco 21.4% Sans 8E Rear Maste mis 04 2020 Source: CBRE Research 24 12
2/19/2025
Urban Land Chapter 2 - Real Estate Trends and Outlook
Institute
RETAIL: City's major South Santa Clara retail market showing higher vacancies for Strip Centers
VACANCY RATE
10%
; Forecast
8%
6%
4%
2%
04-14 2022 2025 2026 2027
2019 2020 2021 2023 2024 2028
Mall • Nor; -sorose Certer Ceneral Retad • Scuth Santa Clera 1591 Jose • PeReI Cere Sonp Center 5 Char Rotal
Source: CoStar
25 Urban Land Chapter 2 - Real Estate Trends and Outlook Institute
HOUSING: Growth in Bay Area net migration and population intensifying demand Sixth straight
680 M
20 quarter of positive
10 675M
net migration
6.70M
• Bay Area seeing net growth
after births and deaths -10 - 665 M
since 2023.
-20 660 м
• Combined population of 30- 655 M
San Francisco + San Jose MSAs
reached 6.6 million in Q4 2024. 40- 650 M
645M
Net Migistion(Lett) - Poputation (Right)
Sara CaRE React Oded Erenes, 04 2024 Source: CBRE Research 26 13
2/19/2025
Urban Land Chapter 2 - Real Estate Trends and Outlook
institute
HOUSING: Dramatic Drop in Annual New Multifamily Housing Development in Bay Area 25,000
20,000
5723
5,000
7012
11,453 11254
10917
8,616
4.773
351
20 3 2014 2015 2016 20 17 208 209 2020 2021 2022 2023 2024 2025 2026 2027 • Leasing = Stabilized • U/C
Source: CBRE Research
27 Urban Land Chapter 2 - Real Estate Trends and Outlook Institute
Santa Clara Key Takeaways
Bay Area home sales and new listings Zillow
Typical Home Values: $1,704,442
For January to November of each year
1-year Value Change: +11.7%
90K
BOK
Listings
70K
6OK
5OK
40K sales
30K
20K
10K
2019 2020 2021 2022 2023 2024
Data includes single-family homes, condominiums and small apartment buildings Charentendanade choose source applia
78 28
14 2/19/2025
Urban Land
Chapter 2 - Real Estate Trends and Outlook
institute
US Home Sales
•Nationally, the number of homes sold per year is down to a 30-year low •More than 62% of homeowners with a mortgage are locked in lower than 5% •New mortgages are pricing in the 7% range
•The result is nobody who has owned a home for a while wants to sell •Creates opportunity for homebuilding even though rates are high 29 Urban Land
Institule
ULI San Francisco
Chapter 3
When does a deal "pencil"?
urban Land
Institute
30 15
2/19/2025
O Urban Land Chapter 3 - When does a deal "pencil"?
Institute
The capital "stack" represents all the money it takes to build a building Developer Equity
Total Investor Equity
Project Total Project
Costs Value
Debt
31 ULT Oroan Land Chapter 3 - When does a deal "pencil"? institute
When things go well...value is much greater than the cost Dev Equity
Dev Equity 2050,00
Investor
Investor Equity
Equity Total Project
Total Value
Project
Costs
Debt Debt
Image design credit: Freepik
32 16
2/19/2025
Urban Land Chapter 3 - When does a deal "pencil"?
Insiitule
When they don't...cost is much less than value
Dev Equity
Investor Dev Equity
Equity Investor
Total Equity.
Project Total Project
Costs
Value
Debt Debt
33 Chapter 3 - When does a deal "pencil"?
When we see a financial crisis or instability like now... (Dev Equity
Investor
Equity
Total
Project
Costs Total Project
Debt Value
34 17
2/19/2025
Urban Land Chapter 3 - When does a deal "pencil"?
insmite
What is the multifamily housing challenge now?
Bay Area average apartment development cost = $650,000/unit While average apartment value = $510,000/unit
[Dev Equity
Investor Dev Equity
Equity Investor
Total
Project Total Project
Costs Value
Debt Debt
35 Urban Land
Institule
ULI San Francisco
Chapter 4
Land Residual Value
uhan Land
stitute
36 18
2/19/2025
ULI Urban Land
Chapter 4 - Land Residual Value
Inshitule
The Land Market
• We cannot discuss real estate without talking about land value • Real estate developers buy land based on a "Land Residual Analysis" • Project future value once project is developed
• Less: all known project costs
• Less: Risk Adjusted Return (taking into account when project may occur) = Land Residual Value
37 C26I
LS27
Urhan Land
Chapter 4 - Land Residual Value
InSilute
What makes up development costs?
Return
Construction Financing
Fees & Exactions
Pretty much
Other Soft Costs
Project costs Fixed costs
Hard Construction Costs
Land or Land Residual Value Variable
38 19
Slide 38
LS26 Changed this from hard costs
L Seifel, 10/14/2022
LS27 Think we should emphasize parking here
L Seifel, 10/14/2022
2/19/2025
Urban Land Chapter 4 - Land Residual Value
Institute
Sample Land Residual Value Calculation
Sample Project (200 Apartments) Total Project Per Unit
Projected Value $130 million $650,000
Less: Project Costs $100 million $500,000
(without land cost)
Less: Return (Risk Adjusted) $20 million $100,000
Land Residual Value $10 million $50,000
39 Urban Land
Insfitute
ULI San Francisco
Chapter 5
What Policy Makers Can Do
mubait Land
40 20
2/19/2025
Urban Land
institute Chapter 5 - What Policy Makers Can Do
A. Lower Costs
B. Increase Revenue
C. Increase Certainty
41 Urban Land
nstitute Chapter 5 - What Policy Makers Can Do
Lower Costs
• Lower parking requirements Cost
• Eliminate retail in the wrong place
• Lower fees of any and all sorts
• Lower processing fees
• Lower utility connection fees
• Lower percentage of on-site affordability
• Real estate tax reduction
• Help lower construction and public infrastructure costs • Consider costs of sustainability reach goals
42 21
2/19/2025
Urban land
institute Chapter 5 - What Policy Makers Can Do
Increase Revenues
• Enhance regional and local economy
• Allow higher income targets for affordable housing
• Reduce transfer taxes
• Limit effect of rent control on new development
REVENUE S
43 Urban Land
institute Chapter 5 - What Policy Makers Can Do
Increase Certainty
Time kills deals due to increased risk and cost
• Clarify the steps and required submittals for approval • Clarify the objective standards being used
• Streamline development approval and processing time
• Shorten number of review cycles and review time
• Provide clear guidance on changes needed
• Limit changes to the project after design is approved • Help developer seek approvals from other organizations, like PG&E, utility districts, Caltrans
44 22
2/19/2025
ULI Urban Land
institale
Break
45 Urban Land
MISTUTE
ULI San Francisco
Questions
# Uman Land
46 23