Urban Catalyst Eyes Debt Market Rebound at San Jose Project

Six to nine months from now, Urban Catalyst plans to start looking for financing for the construction of more than half a million square feet of office space in downtown San Jose, where one in five offices stood vacant at the end of last quarter.

However, unlike now, it expects the capital markets “will be there for us,” Urban Catalyst co-founder Joshua Burroughs said in an interview. Burroughs told the San Jose City Council shortly before it unanimously approved the developer’s 1.4-million-square-foot Icon-Echo development at its Nov. 29 meeting that Urban Catalyst doesn’t see any problem with the financing for the project’s 525,000-square-foot office component over the next 12 months.

“A lot of folks in our community are wondering about office in general,” Burroughs told the City Council at the meeting. “There are blips in the valley, but we’ve gotten through all of those.”

Whether Silicon Valley’s office market is experiencing more than a blip figures crucially in the financing outlook. The enduring adoption of remote or hybrid work arrangements, combined with thousands of job cuts in the Bay Area’s tech sector since September, have made forecasting near-term office demand seem like a fool’s errand. The Federal Reserve Bank has raised interest rates by three-quarters of a point on four occasions this year, driving the benchmark interest rate up to a target range of 3.75 to 4 percent, the highest since 2008.

For San Jose-based Urban Catalyst, its confidence in the firm’s $600 million Icon-Echo project coming together lies in the timeline. As conventional wisdom states, timing is everything in real estate.

“We break ground on the Echo project next summer, and then, as we finish the fundraise and get the building permit for the office project, it kind of just dovetails right into that,” said Burroughs, adding that Urban Catalyst hopes to obtain that permit in December 2023.

The fundraising effort Burroughs referenced is Urban Catalyst’s second Qualified Opportunity Zone fund, an investment vehicle specifically created to invest in a project or business within designated low-income Census tracts. The fund has raised $119 million to date, 60 percent of its goal, said Erik Hayden, Urban Catalyst’s founder, in an interview. His firm expects to reach the $200 million fundraising goal in December 2023, Hayden said.

For Echo, the 389-unit, market-rate apartment portion of Icon-Echo, Urban Catalyst isn’t seeking construction financing yet, although it was garnering unsolicited interest from several equity partners before receiving planning approval this week, Hayden said.

For Urban Catalyst to start getting unsolicited interest from lenders on Icon, two things will likely need to happen: more employees working in physical offices in the region, and the Fed lowering interest rates.

Bank of America and others predict that the latter will happen at the end of next year if the U.S. enters into a recession in mid-2023. The Fed, meantime, doesn’t forecast cutting interest rates until 2024 at the earliest, according to a September New York Times report. As for employees returning to physical offices, Hayden said that has picked up in the region in recent months.

The caveat is there’s likely a long way to go before office occupancy levels in the San Jose metro area, the site of all seven of Urban Catalyst’s projects, return to something resembling normal. Occupancy was 29 percent last week, the lowest out of 10 major U.S. metro areas, according to the latest Kastle Systems data.