[BTinSF]

Friday, December 5, 2008
Forest City set to start Presidio rental project
San Francisco Business Times - by J.K. Dineen

Forest City starts construction this week on a $71 million residential redevelopment of the former Public Health Service Hospital in the Presidio, despite the crippled credit market that has stalled new housing developments across the Bay Area.

Susan Smartt, senior vice president of Forest City Residential West, said her firm was able to obtain construction financing for the 154-apartment complex because of the site’s unusual bucolic-yet-urban Presidio setting and the relative resilience of San Francisco’s apartment segment. Forest City’s strong experience as a national urban developer was also a factor, she said.

“It’s a testament to Forest City’s track record that this loan got done in the heat of the financial crisis,” said Smartt. “It got done based on relationships and the strength of the location.”

Wachovia is the lead lender for the loan, which closed the last day of October — a wicked month on Wall Street during which the Dow Jones lost 14 percent of its value. Wells Fargo will end up with the loan through its takeover of Wachovia.

“We have a long-term investment horizon, and while things are pretty down right now, you really should be building when the market is down so you bring product online when the market is up,” said Smartt.

Five-year journey

The start of construction comes five years after the Presidio Trust picked Forest City to redevelop the 1932 hospital at Lake Street and 15th Avenue, a structure that has been empty for 20 years. Forest City underwent a four-year community process during which residents in the abutting inner Richmond neighborhood convinced the developer to pare back the project from 350 to 154 units. The developer also agreed to knock down the non-historic wings of the hospital.

The Presidio Trust is investing another $20 million in the district around the former hospital. About $7.8 million of this will go to renovating the 70,000-square-foot former nurses dormitory into office space. Another $11 million will go toward revamping 13 historic homes along Wyman Terrace, set to start construction in March. The rest of the money will be invested in landscaping and trails.

The 1,500-acre Presidio has seen a flood of investment in the five years between the time Forest City started working on its plan and the start of construction. In 2005, the 860,000-square-foot Letterman Digital Arts Center opened for business. In 2007, a roster of other new tenants inked leases there, including Babcock & Brown, Francisco Partners and Clarium Partners. New restaurants have popped up, including La Terrasse, Pres A Vi and the Presidio Social Club, and a new Walt Disney Family Museum is under construction and set for completion in August 2009.

Office leases feed housing

The burst of activity has only improved the prospects for a residential project in the Presidio, especially in a region where eco-conscious workers want to walk or bike to work, Smartt said.

“The Presidio as a location for companies has become more established, and we certainly will be doing a lot of marketing to existing employees,” said Smartt.

The Presidio has a 2 percent vacancy rate for its 1,089 apartments, and just 5 percent of the 3.5 million square feet of office and warehouse space within the park is vacant. Most of the office leasing deals were completed in 2006 and during the first half of 2007 — just before the economy slowed.

Presidio Trust Executive Director Craig Middleton said the park has been insulated from the recession by “what we call Presidio magic.” Still, he said he was worried that Forest City might have trouble financing its project.

“I would have to be deaf, dumb and blind not to be concerned about what is happening in the overall economy and what it might to do the Presidio,” Middleton said.

Strong rental market

San Francisco’s apartment market continues to be among the strongest in the United States. Asking rents in San Francisco have shot up 6.3 percent since the third quarter of 2007 to an average of $1,827 a month — second only to New York, according to a market report from Reis Inc., a New York-based research firm. In addition to Forest City’s Presidio development, three major apartment projects are under construction in the city: Trinity Properties’ 1,900-unit development at 1169 Market St.; Avalon Bay’s 260-unit project at 355 King St.; and Urban Housing Group’s 192-unit project at 555 Mission Rock Blvd.

Smartt said if the project were set to be condominiums, rather than apartments, “we surely would not be doing it.”

The units will be junior one bedrooms, one bedrooms and two bedrooms, and range between 400 square feet and 1,500 square feet.

Congress established the Presidio Trust in 1994 to manage the Presidio, a former army base with nearly 6 million square feet of buildings, including 469 historic structures that contribute to its status as a National Historic Landmark District. In establishing the Trust, Congress mandated that it make the park financially self-sufficient by 2013.

“The trust has done a good job of trying to balance out some economic activity to support broader goals on open space and trails and preserving historic resources,” said Smartt. “It has become a place where there are people everywhere doing different things.”

The contractor on the project is Plant Construction, and SMWM, which recently merged with Perkins + Will, is the architect.

Source: http://sanfrancisco.bizjournals.com/...ml?t=printable