With nine buildings in Jackson Square, Brick and Timber Collective is “arguably the predominant real estate investor” in the San Francisco north waterfront neighborhood, according to partner Jesse Feldman.
The Jackson Square-based firm put a pause on its purchases during the pandemic and sold one of its buildings for the first time since forming in 2013, Feldman said. An LLC connected to former Apple chief design officer Jony Ive bought Brick & Timber’s 831 Montgomery for $10 million in 2021, according to public records.
With downtown conditions dire amid the shutdown, Feldman said he and founder Glenn Gilmore decided to shift the firm’s focus across the country to the Miami neighborhood of Wynwood, buying three buildings and a parking lot there over the last five years. But they never gave up on San Francisco’s Jackson Square, he said, keeping tabs on possible properties in the neighborhood over the years.
“We got calls from brokers about buildings coming to market, and people would say, ‘It’s $500 a foot. Now it’s $450 a foot. Okay, $400 a foot.’ The number kept dropping but it still didn’t feel like it made sense,” he said.
Now Brick & Timber is back and bullish, with a $500 million fund for San Francisco office buys the firm would like to deploy sooner rather than later, Feldman said.
In an interview with The Real Deal, Feldman explained why Brick & Timber chose to return to the market with its $33 million buy of 500 Washington in December, the reasons former competitors are joining up to invest in San Francisco office, and how “collusion and theft” is keeping construction costs sky high in the city.
The interview has been condensed and edited for space and clarity.
What made Brick & Timber want to buy 500 Washington?
We felt from the very beginning, this is our building. I think the market felt the same way, too, though we did have competition.
It’s one of the three largest buildings in Jackson Square, which doesn’t have a lot of large buildings. Many of our Jackson Square properties have the benefit of charm and character, which makes them very leaseable, but they don’t have views. So to us it felt like a no-brainer to jump in, especially given the scale of the development with both Michael Shvo and Related [in separate developments] at that intersection of Washington and Sansome. I haven’t run the math on it, but I think it has more development dollars being poured into it than any other intersection in the city.
Who is interested in investing in the San Francisco office market today and what are some tactics to buy buildings given the lack of availability for debt and equity?
We’ve had more collaborative conversations with our counterparts than I ever remember before. The nature of these transactions has become much more complicated, so we’ve engaged with people that we’ve competed on deals with for a while and looked at different opportunities together that we might not have done before.
When it comes to debt and equity, you really have to put them into different tranches because while they’re both part of the capital stack for these investments they operate in fundamentally different ways. The debt is concerned with risk, and equity is concerned with upside and outcomes.
There’s a lot of family offices and small private equity shops without a lot of real estate experience that are poking around, but institutionally speaking, there’s a very limited number participating. The groups that have a West Coast presence are much more likely to invest, but the field is flattened to a pretty significant degree, and there aren’t many groups that have capital to go and purchase these assets.
You really need to have that understanding block by block of how much the city changes to have the confidence to place capital here.
But tech is to San Francisco as finance is to New York, except now tech is every business. You can’t start a new business in the United States without it being a technology-enabled company and that machine exists in a very special capacity here. The wheels have been started back in motion under the auspices of artificial intelligence in a very major way in San Francisco. Once those start going, the populace comes back, and the growth and the healing happens. So we’re very, very bullish on the next 10 years in San Francisco. We took our lumps. We’re coming back.
Jackson Square has been the darling of the office market in San Francisco. Are you starting to see more competition for investment in the neighborhood in particular or is it still a wide-open field?
We’re seeing limited competition, but it’s growing. One group that has dropped out completely is owner users. Pre-Covid, we had a lot of users we were competing against, and it’s very difficult to compete against the user because they don’t need to make money on the asset. If you see a piece of really badly priced real estate, you’ll usually see underneath it, “Great for an owner user.” With that part of the market being cleared out, now it’s just investors and the investors are all doing pretty similar things when they’re looking at their underwriting and their spreadsheets and making a decision.
Are you looking to invest outside of Jackson Square?
We look broadly at the Bay Area, we look at California, and we look beyond as well. That’s evidenced by the fact that we’ve made investments as far away as Miami.
We maintain a presence in both markets and I think they’re the two coolest cities in the country — and I’m from Los Angeles.
Values in Miami are still very high, but we don’t see the same sort of leasing momentum that we see in San Francisco relative to the purchase price. So fundamentally, we’ll keep investing in Miami for the long term. We think it’s a great city but we’re not seeing the same drastic cuts in purchase price that we are in San Francisco that really create the value at this point, though.
In San Francisco, views are often the biggest selling point. Since most of your buildings don’t have views, how do you market your properties to companies?
Successful companies that can afford great space just want something that’s cool and differentiated and what that is can vary building by building. People in the market always say you need to have a gym and a conference room. But maybe your office should have a speakeasy bar. Is it a risk to build that spec? It certainly is. But I guarantee you, when you tour it, nine out of 10 people are going to go, “We should move into the place that has the speakeasy bar that’s really cool.”
We also plan to curate our retail. I love dealing with white-glove firms who are doing really interesting things from an investment perspective, but I really like meeting with the guy that has a taco truck, and seeing if we can help him grow his business too.
We’re looking at the other cities we’ve invested in, and what we’ve done with the buildings there, and how we can replicate that in San Francisco. We have, historically, had one of the most challenging and Byzantine planning and land-use frameworks in the world and while it’s protected a lot of buildings, it’s also prevented them from improving.
Within that framework we’re working on making changes to bring some of that intrigue to them that otherwise we wouldn’t be able to, because the buildings can be so shrink-wrapped.
Our unique offerings are really what kept our portfolio leased throughout the pandemic, and then moving forward allowed us to continue making investments during what has been, honestly, a calamity.
How do you gauge Mayor Daniel Lurie’s performance on remedying that calamity, especially downtown, or is it too early to say?
He has his work cut out for him. The mayor of San Francisco has legislative powers, but it’s also very much a bully pulpit. The underlying bureaucracy of San Francisco is extremely challenging to untangle and I think that it’s one thing to say into a mic stand what you’re going to do and another to actually have to get into weeds and make those changes.
One thing we’ve seen that’s unique to this period in time is the technology community getting active politically in a way that they absolutely never were before. I find that fundamentally meaningful and interesting. San Francisco fails sometimes by letting dogma lead. Having new people enter the arena allows for decision making in the city that represents a more broad group of individuals.
If you had Lurie and the Board of Supervisor’s ears, what would you tell them needs to happen in order to make change come more quickly?
We need to rewrite the city charter and the planning code. You should not have to be venture-backed or independently wealthy to open a bar in San Francisco. San Francisco has limited the capabilities of small business owners through layers of regulation over the course of decades. That has been nothing short of disastrous.
Working in Miami versus San Francisco is night and day because Miami doesn’t demonize building housing, which allows for a lot more people to be housed affordably. Miami does not have a homelessness problem. Miami does not have a fentanyl problem, and the streets of Miami are clean and safe to walk on.
Miami does not have the budget of San Francisco. It doesn’t have the enterprise of San Francisco. So why is that happening here? These are questions that are directly linked to policy failures.
There also has to be a reckoning on the cost of construction in San Francisco. It’s one of the most expensive places to build in the world and that’s not because we’re offering great union benefits to blue-collar workers. That’s due to collusion and theft. It’s completely unfettered in this city and has been for years. It’s pretty easy for any of us that build buildings to go into the line items and see where that’s taking place.
The city needs to take a larger look into why it is that they’re paying so much to build and get outside groups to come and help prevent that from happening.
At what point in the process is the theft happening?
At multiple points. It’s on the markup on goods, which goes through several layers. I was just in China to meet with lighting manufacturers. I can buy lights directly from them for $20. These same lights I would buy in the United States for $400. There’s not $400 of blue-collar American labor going into those lights. Why are we paying so much?
There’s a lot of costs that have been buried here, and that’s because when the tide is high, there’s been the ability to pilfer and to build so much into the cost of construction budgets. Now that the tide is receding, we need to see those costs come down. Otherwise we’re going to see even more tertiary labor lose their jobs. It’s important to us and people like us to keep those folks employed.
That’s really meaningful for us to be thinking about as San Franciscans, because the cost of construction creates real constraints on what we can actually build in our city. Every company should make money, and the guys turning the wrench should definitely make their money, but it needs to be reasonable, and it can’t prevent the growth of San Francisco.
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