Timing for Massive India Basin Development Pushed Back, AgainJune 27, 2018
Having quietly changed from “Q4 2017” to “Q1 2018/Q2 2018” in the fourth quarter of last year, Build Inc’s expected timeline to secure the necessary entitlements to move forward with their massive India Basin project, a proposed development which could yield over 1,200 units of housing, 1,800 parking spaces and 275,000 square feet of commercial space (or half as many units of housing and a million square feet of office, retail and R&D), has just been pushed back to “Q4 2018.”
As we noted when the Draft Environmental Impact Report for the project was published last fall: “Originally expected to published this past spring, the delay will likely push back any ground breaking to the second quarter of 2018, at the earliest. And that’s assuming the impact report is certified, the project is approved, and there are no other significant delays or challenges.”
And once again, in terms of the projected timing once the entitlements are secured and the ground is actually broken, the development of India Basin is expected to be conducted in multiple phases, “over a period of 5–15 years based on market demand and financing.”
Comments from Plugged-In Readers
“over a period of 5–15 years based on market demand and financing.”
Pretty sure market demand isn’t the issue.
Demand is a function of pricing. And when developers, or their lenders, project a project won’t be able to command enough demand at the pricing necessary to build at a profit, they don’t break ground.
It’s clearly the costs of labor, permitting and construction that make developers push back construction plans. The same is happening to Schlage Lock in Visitacion Valley, to the two big projects in Executive Park and at some extend to the Candlestick development. All these projects are constantly 2 year away from being 2 years away.
If it’s simply “the costs of labor, permitting and construction,” wouldn’t developers just raise their prices, as we’re told happens when affordable housing requirements are raised, in order for the projects to pencil?
And if it’s simply “the costs of labor, permitting and construction,” how are affordable housing developers continuing to break ground? (Big hint: don’t ignore the basis of the land)
The cost of land is sunk cost – you are not going to make a return on your investment by postponing development or be able to pay finance cost on your land investment… that is if you actually purchased the land.
Affordable housing developments are usually looking at a different set of issues, involving available grants and subsidies.
Demand is a function of pricing or pricing is a function of demand – what came first, the chicken or the egg? When incomes go up in an area it usually creates a desire to locate there which pushes the demand for housing which increases price, especially if there is little room for new construction.
“you are not going to make a return on your investment by postponing development”
Ever heard of land banking? Which, of course, is premised on appreciation (and enabled by Prop 13). And while the cost of land for a project might be sunk, said cost, which has been driven up by those bidding over the past few years, would have been based on proforma expectations for future rents/pricing.
But again, if there’s demand, why don’t developers “just raise their prices” to make their projects pencil?
I am very familiar with “land banking” – if you have a bunch of cash and don’t know what to do with it, a land purchase is a pretty safe investment – just pay your property taxes and other minor cost. If you borrow money to buy the land it is often a fail and somebody else will swoop in and buy the land out of BK during a recession.
” When incomes go up in an area…”
Have incomes gone up that much? There is an ever widening gap between salaries and housing cost. Part of this is due to the tech industry tapping into an inexHuaust1ble supply of cheap laBor that has flattened out the salary growth curve.
Yes, housing costs have increased faster than wages but still stayed way ahead of Sacramento, the Central Valley, most of Southern Cal, and the locations from where the H1B originates. Thus the Bay Area keeps drawing in young talent (and the companies dependent on that talent) despite the crazy cost of housing and office space.
There may be a last straw that will break the camels back where the population of SF and SV will stop growing, but I haven’t seen it yet.
Incomes are higher here, but so are prices. Best to look at the price/income ratio to compare valuations of markets with different income characteristics. And you’ll see that many markets, both in the 2007 cycle and the current one, had bumps up and down in the price/income ratio.
There some story to the stagnant income side, but stagnant incomes alone don’t cause a rise in prices. The key is that people can punch above their weight class as long as prices are on the rise. Use leverage to stretch to the max to get into the market, if prices keep rising then capital appreciation will bail you out. The same dynamic applies to a 50k worker stretching to get into a 500k home as it does to a 150k SV engineer stretching to get into a 1.5M condo.
And on the income side, while it might sound great to have constant double digit income growth, that income is also a cost to the employer. So without corresponding double digit productivity growth, you couldn’t support that without eating into profits. And given that many tech companies are unusually unprofitable these days, you could make an argument that in aggregate tech incomes are too high, not too low.
anon2 – is that a reply to something I said or just your reasoning regarding pricing being function of demand or visa versa?
I was affirming what MoD pointed out about prices having rising in excess of incomes, but also pointing out that you can look at why prices did rise over incomes, not just why incomes didn’t rise as much. And throwing in an aside about how rising incomes aren’t a free lunch either, at least absent productivity growth.
And also, that demand is not just a function of current “spot” pricing, but of price trends or at least people’s expectations of those trends. Buying (and thus also for the builder, building) a $1M condo in a market rising at a double digit rate is very different from buying a $1M condo in a flat market, and different still from buying a $1M condo during a market decline.
“The cost of land is sunk cost – you are not going to make a return on your investment by postponing development or be able to pay finance cost on your land investment… that is if you actually purchased the land.”
And in broad strokes I agree with this as well. Nobody makes money by not building. And whenever there is a change in the market, it shakes up the “supply chain” and prices need to re-adjust. But obviously everyone wants the other guy to take the hit, so there is always a game of chicken. Often, people who own land have deep pockets and low ongoing expenses, so they are in the best negotiation position to wait things out or hold the line on price. But as you point out, some may have levered heavily to acquire the land so they may be on much thinner ice.
Absent the fear and chaos in the financial system in the aftermath of the 2007 cycle, I think we might see more robust supply growth at the bottom of this cycle.
Also One Oak, 1270 Mission and 524 Howard are not going forward. That is almost 1000 units in shorter term projects which would have not been built out over 10 plus years but in the next few years. Don’t forget the large 7th. Ave project (450 or so units) that was put on the market a while ago. Not sure on it’s status as to has a buyer for the entitlement been found. This will begin to diminish yearly SF housing production which just recently topped 4K units in a year and is set to see 3300K/units or so over each of the next two years. As to the constant pushbacks, 524 Howard had a large sign at it’s site 5 or so years ago that said coming soon.
Is that a golf course in the rendering? I’ve seen the image before but always wonder what’s going on in the fields by the bay.
No, it’s a park.
Part of the issue is that Build Inc. keeps trying to push the affordable housing component off-site. They tried to strong-arm the community into putting all of their affordable housing at a site slated for a community center, but got handily shut down. So this is much more about financing and cash flow than it is about permits.
UPDATE: New Timing and Affordability for Massive India Basin Development
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