Industries: Real Estate

eric taoRecently, we had the pleasure of talking to Eric Tao, Managing Executive Principal, Avant Group, Inc. The real estate development company based in San Francisco is one of BPM’s real estate clients. The AGI team has developed more than 1,000 new transit oriented urban infill multifamily units in the SF Bay Area. Eric shared his company’s mission and his view on Bay Area housing.

Please Describe Your Business and Where You See It Heading in the Next 3-5 Years.  
We are a boutique real estate development firm that specializes in high-density urban infill housing. We are building urban smart housing projects that are near transit, services and workplace. We face challenges involving high construction costs and dealing with city governments with multi-faceted agendas and politics that may complicate the process. We are mindful of existing neighborhoods and communities who resist development and sensitive to the fact that CEQA (California Environmental Quality Act) is a powerful tool to stop you from developing high-density housing.

We plan to continue to focus in the Bay Area due to our expertise in understanding the goals of our communities and government policies in San Francisco, San Jose and Oakland, which are not translatable to other geographical areas. We have access to deals and have an understanding of competitive advantages, so it does not make sense to expand out of this area at this time. Ultimately, unlike other industries, real estate is still intensely local.

However, we do have plans to expand product type into industrial properties that cover the “last mile” to serve the local distribution logistic needs that online businesses have in order to deliver more on-line goods and services to your door.

How Do You See Multi-Family Rents in the Bay Area in the Next 2-3 Years? What Is Happening with Development Costs? Will This Trend Continue? Impact on Rents?
Rents have stopped going up due to sudden supply of housing which mitigated the demand. However, rents will probably go up again because construction costs are rising and, as a result, projects are halting. Construction activity stopped for about 4 to 5 years during the recession that started in 2008. A lot of construction companies went out of business or the owners decided to trim their workforce, and as a result, there was a reduction in firms with sufficient numbers of skilled labor to respond to the sudden demand. Since then, the Bay Area has experienced an unprecedented demand for experienced contractors, but because you cannot suddenly form a company with a specialized labor force, development costs have gone up. We have seen rents stop rising currently as the inventory of new units are filled; however, given that the pace of production is slowing due to high costs, it is a little hard to predict what will happen in a few years.

How Does SF (And the Bay Area) Tackle the Affordable Housing Issue?
I think two things would help the affordable housing issue:

  1. Offer incentives similar to New York City. NYC permits abatement of property taxes if a certain number of developed units are affordable. Since half of our operating costs are property taxes, it would be feasible to build more affordable housing if an incentive like that is offered here. Further, because the tax abatement would only be for the incremental value of the new projects developed, which may not otherwise have been developed but for this abatement, there is no erosion of the existing tax revenue funding other critical civil services.
  2. Changing mindsets that middle-income housing is one type of infrastructure. If we build more housing for middle-income residents such as teachers, firefighters, and others who service a city and keep the rents at 20 percent below market, then, you would never have vacancies. Your return on investment would be comparable to treasury bills and your investment would also have a comparable low risk profile. We need to rethink how we invest and have a lower expectation on return on investment from real estate rather than saying real estate has higher returns because it is volatile. We can use the same low cost capital invested in government bonds for infrastructure projects such as roads, bridges, and also invest in human infrastructure necessary for our society to function, which is middle income and workforce housing. This allows for a market return (not a subsidy) for the same capital on a risk-adjusted basis.

Jackie Matsumura is a partner and the real estate industry group co-leader at BPM. Jackie has represented AGI for approximately 5 years. Contact Jackie at [email protected] or 925-296-1035.

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