Published in Silicone Valley Business Journal
If you ask Tony Kaufmann, a $97 million financing package he just put together highlights the strengths of Silicon Valley's commercial real estate market.
Kaufmann, a director in the San Francisco office of mortgage banking company Gantry, helped put together the financing for Dollinger Properities in a deal announced Monday. Dollinger plans to use the funds to retire its construction debt on a new building in Sunnyvale's Peery Park district. Despite rising interest rates and growing concerns about the health of the office market with the growing embrace by companies of hybrid and remote work, Kaufmann was able to put together an interest-only deal from an unnamed lender with a sub-4.4% rate for Dollinger that the developer has the option to extend.
It helped that Synopsys Inc. has already fully leased the 152,000-square-foot, four-story structure, Kaufmann told the Business Journal. It also helped that the building, located at 675 Almanor Ave., is in a bustling and desirable area; it neighbors both Pathline Park and an Abbott Laboratories building.
But the key was that the structure is in Silicon Valley; lenders are still bullish on the area, he said.
In an email interview following Gantry's announcement of the financing deal, Kaufmann favorably compared the Silicon Valley market with that of San Francisco and Oakland. But he declined to make any predictions about what's to come.
Was this a difficult financing plan to pull together? And does that speak to the ease or difficulty in financing across Silicon Valley?
This was a challenging financing opportunity due to the mixed perspective amongst various lenders regarding the ongoing utilization of office space. Although the tenancy here was very strong, lenders are being very cautious on single-tenant office buildings.
To obtain competitive terms on a single-tenant office building, a deal needs to have a long-term lease to a tenant with solid financials, a strong borrower, and a market-fundamentals story that makes sense. The quality of the real estate also plays a big factor. This deal met those requirements and more.
Overall, lender appetite for assets in Silicon Valley is robust.
How are financing arrangements being affected by the Federal Reserve's interest rate hikes?
The Fed's actions have caused widespread volatility in both debt and equity markets.
We are facing a somewhat unprecedented event, where both indexes, such as the 10-year UST (U.S. Treasury) or 1-month SOFR (secured overnight financing rate), and credit spreads have increased dramatically in a short period of time. It’s a one-two punch.
There are various factors impacting the widening of spreads, but the end result has been a sharp increase in the cost of borrowing across the broader economy. This upward rate pressure is constraining leverage for investors and developers who are facing lagging price adjustments for purchase opportunities and building costs that remain high.
You seem bullish about the overall strength of Silicon Valley's office market. Given the vacancy rates and low occupancy levels, that seems a little questionable. What is it about the leasing numbers that makes you so positive?
I agree that "success" is a relative term. Silicon Valley's office market is still facing its share of post-Covid issues.
However, in contrast to downtown San Francisco and downtown Oakland's office markets, we have seen numerous large Silicon Valley office leases get inked over the past two years. In the face of a reported tech-company exodus, the Valley's heavyweight tenants, including — but not limited — to Google, Apple, Amazon, and Meta have all planted their flag and expanded their office and R&D footprints.
We have not witnessed the same leasing momentum in San Francisco and Oakland for multiple reasons, including that these (urban) office markets are heavily transit-dependent.
Overall, how do you see the health of the commercial real estate market (CRE) in Silicon Valley?
Silicon Valley’s CRE market fundamentals remain strong.
You have a skilled and educated workforce and a robust, diverse economy comprised of companies that cluster here to tap into the labor force. Silicon Valley remains a very desirable place to live and work.
With limited availability of space and prohibitive barriers to new development, the region faces supply-side constraints that can't meet demand. We have thus seen upward pressure on rents, which in turn supports strong value.
Any predictions to make on what the financing picture is going to look like a year from now?
No predictions, given the market volatility. The Fed's pace of future rate hikes remains very uncertain.
In a few weeks, our team will be meeting with over 100 capital sources, including life insurance companies, banks, credit unions, (commercial mortgage-backed securities) lenders, and debt funds at the California Mortgage Bankers Association Conference. There, we expect to gain more insights about lenders' plans for 2023 as they begin to prepare their allocation targets for the new year.