Most of San Mateo’s large developments on hold by finances

But because of more conservative underwriting and investment approaches as of late, local developers need the city to extend such entitlements so they can continue to secure funding, which has proved particularly challenging over the past year. About nine out of the 15 commercial or multi-unit residential projects in San Mateo have requested extensions, with almost all of them submitting the request beginning last year. 

Some city officials have said this is the highest number of extension requests they’ve seen during their tenure. 

“When I started working here [in 2019], it was something that came up, but I will say that it didn’t seem like it happened a lot, so I don’t think it’s something that, in recent years, we had seen a lot of,” said Assistant City Manager Christina Horrisberger. 

It’s no surprise that, with depressed demand for office space, investment appetite for commercial real estate isn’t strong, but it’s also impacting whether much-needed housing is built. 

Mike Field, principal at Mecah Ventures, said high interest rates and escalating construction costs remain some of the primary culprits of construction hold-ups, but it’s also a consequence of ongoing remote work patterns and therefore, declining or plateaued rents.

“Lenders are looking at deals, seeing that interest rates keep going up, rents are not going up, and they’re saying the deal is going to be underwater when it gets built,” Field said, adding it suppresses developers’ appetite as well. “The demand issue for multi-family [residential] and the lack of rent increases is driven by the back-to-office delay. They’re intrinsically tied together.”

Median monthly rent prices in San Mateo have dropped about $450 since last year, according to Zillow data, with other cities, such as Redwood City and South San Francisco, seeing similar drops. And because multi-unit residential projects are particularly vulnerable to interest rate hikes, compared to commercial real estate, razor-thin margins abound. Even when the Federal Reserve eventually drops rates, the Bay Area’s relatively low percentage of in-office workers compared to other metro areas could remain a thorn in the side of developers, and by extension, cities relying on new housing production. 

With tighter underwriting conditions to take on debt, which has historically comprised roughly 65% of the total project cost, developers are now seeking a higher proportion of equity investors for their projects. The problem, Field said, is that the lower returns they’re seeing are not piquing interest.

“Equity investors are looking at the anemic returns on multi-family development deals, and saying, ‘Why would I go invest at 4.5% or 5%, when I can go buy a 10-year treasury bond at 5.5% and take no risk?”  Field said. 

The issue is not unique to San Mateo, with cities throughout the county and region mirroring similar trends, most of which are facing increased pressure to double or triple the number of housing units as mandated by the state. Many have had to ease zoning and land use policies to allow for more housing, and some of the policies within San Mateo’s state-mandated housing plan — such as whether to increase building height limits or support historic districting in some neighborhoods — have stirred debate over whether they’ve gone far enough to induce substantial production.

Though without more favorable economic conditions, the city’s hands are tied, Interim Community Development Director Zachary Dahl said.

“Obviously, we want to see housing production. We have [Regional Housing Needs Allocation] targets we’re striving to hit, and we know there’s a housing need out there,” Dahl said. “But really, our understanding is that there are much larger economic issues, whether it’s with financing or banks' abilities to lend, that are outside of our control.”

With private market financing in a bind, the lending landscape for affordable housing is even more impacted. A likely $10 billion to $20 billion regional bond measure is underway to address the gap, which purports to close gaping holes in funding for BMR units by effectively creating a public lending institution throughout the nine Bay Area counties. Even if approved by voters in November, however, the county may only receive its anticipated $1 billion to $2 billion allotment after cities have already fallen behind on housing goals, especially for low-income residents. 

But with a slightly stronger trickle of Series B funding, office leasing volume could pick up over the next year, renewing investment interest and changing risk appetite. Overall venture capital funding in the Bay Area was still much lower last quarter than the last few years’ first quarters — around $14 billion compared to $26 billion last year, according to CB Insights data — but it has steadily picked up over the last 12 months, with the majority going toward Series A and B firms. And three of the country’s 10 most lucrative Series B deals last quarter went to companies either based on the Peninsula or have offices in the area, such as Electra and Cellanome. 

“In the Bay Area, when we’re coming out of a slowing market, Series B is what we look for. A Series A company that gets a Series B round is growing at 100% a year, so we know when we see a lot of those rounds, the tech leasing velocity is going to improve in the next 12 to 18 months,” Field said. 

The mid-Peninsula is better equipped to weather the downtrodden commercial real estate storm compared to large cities like San Francisco and San Jose, he added, but when the onslaught of new construction begins is yet to be determined. 

alyse@smdailyjournal.com

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