Posted: Oct 29, 2006, 6:16 AM
Join Date: Jun 2006
Location: San Francisco & Tucson
Developer drops plans for condo tower
SoMa site's new owner says it wants to build offices there
San Francisco Business Times - April 21, 2006
by J.K. Dineen
Charlie Kuffner: "Stars are starting to align."
Citing an "overheated" residential construction environment, developer Monahan Pacific has scrapped plans to build a condominium tower at 535 Mission St. and has unloaded the prime south financial district land to Beacon Capital Partners for $30 million.
While the property is approved for a residential complex, a spokesman for Beacon Capital confirmed the company plans to build an office tower on the site, the latest example of what is shaping up to be a revival of new Class A office construction in San Francisco. In addition to the 535 Mission St. site, Tishman Speyer is expected to break ground this year on an office building at 555 Mission St., and Shorenstein Properties is actively seeking tenants for a 350 Bush St. highrise.
Jeff Hutchinson, Monahan Pacific's director of acquisition and finance, said the company had hoped to develop the land as a 34-story housing complex but a "super-heated environment" put construction costs 40 percent above what they were in 2004 when the company finished its 166-unit building at 199 New Montgomery St. Monahan Pacific bought 535 Mission two years ago for $19.2 million.
"It seems like the labor and construction issues were going to get worse before they get better," he said. "The cost environment gave us some pause along the way."
Hutchinson said the project would have been competing for labor and materials with a spate of skyscrapers under construction, including 301 Spear St., One Rincon Hill and Millennium Partners' towers at 301 and 333 Mission St.
"With all the residential that is being built, it's tough to get a crew," said Hutchinson. "We would have been fighting for a tower crane reservation. There is a waiting list for man lifts. Given that type of environment and given that it was going to get worse before it would get better, it was not readily apparent that the costs would settle."
In a sense, the 535 Mission property has come full circle. During the economic downturn, the Hines real estate investment trust abandoned plans to develop an office tower on the site, clearing the way for Monahan to snap it up in 2003 to take advantage of the explosion of demand for high-end condo towers in downtown neighborhoods.
Charlie Kuffner, president of Swinerton Builders, said he now sees residential highrise softening slightly and that "the stars are starting to align so that office makes more sense." That the 535 Mission site has been pulled by market forces from office to condo and back again, makes it a telling microcosm of the overall trends, Kuffner said.
"That site has an interesting tale to tell," said Kuffner.
Hutchinson said his company could have sat on the property until construction costs went down, but that is not the way Monahan Pacific operates.
"We are a development firm -- we were either going to build or move on and do something else with the capital," he said.
The rise in construction costs over the past few years has been staggering. A study by Webcor showed the price of roofing, glass, aluminum, drywall and metal stud jumped by more than 25 percent in 2005. Glenn Gabel, senior vice president of Webcor, said crane towers are "at a premium right now in the Bay Area and continue to get more expensive, but they are available."
"Is the market overheated in construction? I don't know that I'd use that term. But most contractors are pretty well stretched. There are selected trades where it's difficult to get participation," he said.
Over the past year, Beacon has become a major player in the downtown office market, snapping up 50 Beale St., 100 California St., and 1 Sansome St., as well as two other buildings. Beacon Capital Partners Chairman Alan Leventhal did not return a call seeking comment, but last year he told the Business Times that "San Francisco has the type of long-term fundamentals we like, with the highly educated workforce, great financial centers, teaching facilities and research."
Tim Maas and Tony Crossley of Colliers represented Monahan Pacific and John Cecconi represented Beacon in the transaction.
Beacon has been on a buying spree lately and appears to be serious about becoming a major player in SF real estate:
That suggests they didn't buy the 535 site to fool around and we can hope construction could get underway as soon as the cumbersome SF planning process allows.