February 22, 2007
The Californian On Rincon Hill Construction/Sales Pushed Back
An eagle-eyed tipster notices that Fifield's website for The Californian on Rincon Hill was just changed to reflect a “Sales Start” of Early 2008 (was February 2007) and a “Construction Start” of November 2007 (was March 2007). It's also worth noting that the average unit size has increased (from 988 square feet to 1,048 square feet) as the number of planned condos has decreased (from 420 to 393).
Our Complete Inventory Index (Cii) has been updated to reflect all three changes (we were forecasting 420 units hitting the market in the second half of 2007). And we have a feeling this news explains that “Rincon Hill” rumor.
∙ The Californian on Rincon Hill [fifieldco.com]
∙ The Californian on Rincon Hill: 375 Fremont St [SocketSite]
∙ SocketSite’s Complete Inventory Index (CII): Q1 2007 [SocketSite]
∙ The SocketSite Scoop On Two Very Big (Unconfirmed) Rumors [SocketSite]
First Published: February 22, 2007 3:12 PM
Comments from "Plugged In" Readers
Question(s) for the developers out there:
So I'm naive on this topic, but if a developer has already purchased land and invested considerable time and resources getting ready to build (i.e. architects, zoning, ground prep, etc.), wouldn't they be better off completing a project rather than scrapping or delaying it?
What do margins look like in highrise development? If a market cools and prices fall, what litmus test/hurdle makes developers decide to postpone or cancel projects? I would wager developers prepare for volatility when they bid on projects, no?
I think it'd be a great shame for the city and SOMA if some of the phenomenal projects we've read about here on SocketSite end up getting cancelled. So my stupid question is, why can't they just build something less luxurious and just lower prices on the units to move them? You would think that subcontractors/developers would be willing to accept less and keep working rather than having a project scrapped altogether....
Posted by: Dude at February 22, 2007 4:40 PM
Building and selling less units at a larger size seems telling on where this developer thinks the market is going. They beleive that the low-end studio and 1-bedroom buyers are going to be harder to find and sell to, than the high-end 2+ bedroom buyers. More catering to the "Cash is KING" crowd.
Posted by: Anonymous at February 22, 2007 5:37 PM
I think this just confirms my much earlier anticipation that the condo (real estate) market is headed south ... a lot faster than even the developers forecasted (if they did so at all). The future looks certainly bleak for these beautiful projects.
I'm willing to bet that The Californian will set off a domino effect on the future of The Infinity and One Rincon, and if the rumors are true about them going into rentals, I'm sure people who have already plopped down a deposit on these projects are going to get some serious cold feet ... I know I would. I suspect there will be quite a few contracts yet to fall out by project completion or contract closing.
The time from now until the end of this year will be incredibly interesting for all the projects already in progress.
Posted by: Sexy & Sassy in SF at February 22, 2007 6:14 PM
The future looks certainly bleak for these beautiful projects.
Not necessarily true. The price of land will drop and the projects will get built again. If the land prices dropped at Mission Street to where upper floors could be sold for $600 psf, there'd be plenty of demand. So somewhere between the price now and a price in the future, the projects will get built, it's just that the land owners who want to sell will have to take a bath or find someone who wants the land for a use that can support a higher price.
Posted by: tipster at February 22, 2007 7:05 PM
I am now more convinced than ever to invest only in more established neighborhoods. With the flood of inventory in SOMA, how can one hope to possibly sell (if they had to) with new units left unsold and others going for less than half ownership costs as rentals. This is not to bash SOMA, but rather to point out what seems everyday to be the new reality down there. I feel sorry for One Rincon as this news means that that tower's location will be isolated for a long time.
Posted by: Anonymous at February 22, 2007 7:12 PM
The point of no return on a condo development is the construction of the building, not the purchase of the land. The cost of the land and plans are miniscule compared to the cost of the building. Additionally, generally once a project has been approved, it is much easier to retain those approvals or modify them rather than to start over, even if quite a while passes in the interim. Furthermore, you can then sell the entitled land to someone else so it's a marketable commodity. However, once you start building the building, you have to take out construction loans and you can't stop until that building is done as a half built building is pretty useless to most buyers. So once the foundation is poured and they start framing the building, they are in until the building is completed and can be sold or rented.
As for margins, there are a lot of components to the overall cost that is pretty closely guarded information by most developers. You've got the land cost, the hard costs (bricks and sticks), the soft costs (financing, insurance, permits, architects, etc.), and your holding and selling costs (paying the construction loans while the building is selling and paying the brokerage costs). Just the hard costs alone have jumped up so much in the past 5 years and so few of these massive projects have been built in the immediate area that few people have a real handle on what just the hard costs are. And whenever you hear a news source quote construction costs, you can't really be sure what they are talking about - hard costs alone? hard and soft costs? hard and soft costs and land costs? or hard and soft costs, land costs, and holding/selling costs. The numbers for every project are pretty unique, so you'll be lucky to get even a rough answer to this question. But now back to margins - generally they are pretty large and are in excess of 20% to 30% on most initial estimates to account for the large amount of risk in a multi-year timeframe where millions of dollars are riding on the line with a variable outcome.
Lastly, construction costs are not so flexible that you could lower them significantly to arrive at an affordable new condo. One of the main reasons for higher construction costs around here is that the labor needs to be more qualified for these complex projects and is significantly more expensive around here compared to more distant suburban markets with basic production home building.
[Editor’s Note: We bow down to a fantastic overview. And humbly thank you for “plugging in.”]
Posted by: Anonymous at February 22, 2007 7:47 PM
Interesting points. I've seen subdivisions where they get halfway through and just quit because they can't sell the remainder so the financing company forecloses, and about 10% of the homes are left half finished.
I wonder if that has ever happened on a high rise, where it just gets 80% built and then the builder just walks away, leaving a big scrap project in the sky.
In the meantime, high rises were being built and sold for 600 psf not too long ago, so I don't think there's anything inherent in a 1000 psf price. Construction costs have gone up, but they didn't double in a short time period, and if things slow down, they'll drop down right along side land prices.
Posted by: tipster at February 22, 2007 7:53 PM
I've seen half completed high rises abandoned...in Mexico
Posted by: Anonymous at February 22, 2007 8:09 PM
During the dotcom bust of 2000/2001, Intel left a half complete highrise office building in downtown Austin which is just now being destroyed to make way for a federal courthouse.
Posted by: Anonymous at February 22, 2007 8:15 PM
This is really bad new for 1Rincon. And the only highrise that has a chance to NOT complete is the 1Rincon buildings. The developer couldn't even lock down financing until they presold a large number of units (thus the aggressive marketing campaign).
Infinity will finish for sure given Tishman Speyer is one of the largest developers in the world. They have several other projects in SF, including the massive office tower going up at 555 Mission, and recently invested $5.4 billion on a huge 100+ building development in Manhanttan. Definitely, they have the financial backing and will finish a "small" project like Infinity.
Posted by: Anonymous at February 22, 2007 8:33 PM
I’m sure there are tons of alternative ways for the developers to get out of their holes. How bad could it be? I mean when do we ever hear them going bankrupt, right? For instance, rather than lowering prices, they could simply fire their entire marketing firm (I know for a fact that a conversion project in Emeryville just did that because almost half of their contracts fell out) and then hire another company with much more creative theories to throw at the buyers, such as the “google saving the world” theory. Oh wait...that was a week ago. Right now it’s “new york saving the world”.
Posted by: Anonymous at February 22, 2007 8:51 PM
I would not put so much thought into this. There are hundreds of reasons why a project can be delayed that have nothing to do with what everybody is saying here. If the market was going south why would they delay the sales by only 1 year and the construction only by 7 months? How would that help? If they cancelled it would be another story.
Everybody just can't wait for any reason to bash One Rincon.
Posted by: Anonymous at February 22, 2007 11:03 PM
One Rincon Hill is going to have incredible views with a large portion that will have a high probability of never being blocked. The Infinity is going to be a terrific building in a terrific location.
They both have good points and bad points. At the end of the day I am glad they are both being built as they will add value to this great city.
Posted by: Paul Hwang at February 22, 2007 11:31 PM
I second that!
Posted by: Anonymous at February 22, 2007 11:33 PM
Posted by: Anonymous at February 23, 2007 3:37 AM
Regarding "The Californian", Fifield builds great buildings, especially in Chicago and Los Angeles. this WOULD have been a REAL luxury developement, and although it may not be appropriate in San Francsico, I have visited their building on 10800 Wilshire Blvd. and was happy to experience a building that was worth the money in that the quality of the finishes was excellent. I also think "The Californian" when built, will be a real education for other builders in this city in that if you are going to charge the per square foot costs that many projects are, you better finish the building with materials that are worthy of $1,000 a sq. ft. and up. (e.g. NO press-on bricks!) Please build this building if for no other reason than to "school" other builders and developers in what quality looks like.
Posted by: Anonymous at February 23, 2007 7:25 AM
Anon at 7:47PM: thanks for the insightful overview. I always figured the land would be the most expensive part of any real estate project in this city. Regarding others' comments about half finished buildings, I don't understand how this would make sense? Aren't residential towers modular? In other words, if you can sell for some amount per square foot, and your costs are some other amount, you make the same "spread" regardless of how much you build, right?
But I sincerely hope everything we've heard about gets built. Sure, "established" neighborhoods like the Marina and Pac Heights are great. But there's so much wasted potential in other (i.e. southern) parts of the city, which is frustrating given SF's continued housing shortage.
7x7 magazine recently had a cover showing an artist's rendering of what SOMA and the skyline would look like once all the proposed construction is finished. I sure hope we get there.
Posted by: Dude at February 23, 2007 9:26 AM
Sure, "established" neighborhoods like the Marina and Pac Heights are great.
I agree that the charming streets with stores, restaurants and bars are nice (Chestnut, Union, Fillmore, etc). However, I don't know if most of the housing situations are ideal....if you can afford a house right on Marina Green or a bayview mansion in Pacific Heights, you have it made and are probably a multi-millionaire 10 times over. If not, you are most likely living in a flat that smells like mildew, has poor insulation and sound protection and is pretty much as expensive as a new apartment in SOMA/South Beach.
Sure, these newer developments may not have the traditional San Francisco charm. I personally have lived in other cities in the sunbelt states, so I'm more accustomed to newer apartments/condos. That is primarily what appealed to me about SOMA/South Beach. I figured that if I want to visit the historic neighborhoods, they are a cheap bus ride/cab ride away. While you can argue that SOMA currently doesn't have the neighborhoodly feel of the older areas, once this area is developed with more condos, shops and restaurants, not only will it have the same amenities as in Marina/Pac Heights, but it'll also have nicer places to live....don't forget about the added benefit of more sunshine.
Posted by: Anonymous at February 23, 2007 9:43 AM
To anonymous at 11:03:
There ARE a hundred reasons why a project can be delayed, but when a developer puts off a project for 6 months to a year, what they are ACTUALLY saying is "we're putting this on hold, we'll get back to you with a firm date later when market conditions have improved". Developers with entitled projects do not cancel projects - they just put them in limbo. And no start date is firm until someone starts excavating for the foundation.
Posted by: curmudgeon at February 23, 2007 9:54 AM
I am not so sure. I have heard of many projects being delayed and it was not just "being put on hold." One Rincon for instance got held up at planning so they could evaluate its seismic safety.
Posted by: Anonymous at February 23, 2007 11:02 AM
Tipster - um, actually construction costs have almost doubled in the time period you are talking about. Those $600 per square foot projects were built in the late 1990's and the cost of wood, steel, drywall, the gas to get them all here, and the labor to put them in has all gone up dramatically in that short period. I think high rise costs were around $300 per square foot for hard and soft costs at that time and from what I've heard they are around $500 per square foot now. Add in the land costs, a good chunk of change for the holding and selling costs once its completed and let's not forget a pretty big number for the developer's profit and well, $600 per square foot new high rises are not going to be in the picture anytime soon. And let's not forget that the cost per square foot of a high rise is significantly higher than a smaller four story wood frame development - smaller wood frame buildings are less expensive to build and sell out faster so your holding costs are lower. So the cost per square foot on smaller buildings is significantly less than these high rises.
Posted by: Anon at February 23, 2007 11:33 AM
Rincon Hill cheerleaders will find any reason, no matter how silly, to boost One Rincon Hill.
Rincon Hill detracters will find any reason or rumor, no matter how silly, to bash One Rincon Hill.
I can't help but feel that in the end, when all is said and done, although the actual result may not be exactly what was planned or hoped for or feared, everything will turn out a-ok.
This building won't be built. That building will be rentals. Those buildings are gonna end up shorter than planned. Those other buildings will be taller than planned.
Anyone in the market for the rat's ass that I give?
I admit, it's fun reading this blog and following the debates on such micro-issues. I can't tell you how many times I've seen the roll of the eyes from my friends when I relay the information I've learned here to them. Hey, I get excited, what can I say?
But at other times, man, it gets exhausting. I acknowledge that I'm just an outsider observing the bloodsport, but people, I promise you, everything will turn out juuuuuuust fine.
Minus a major earthquake, of course. =)
Posted by: 49Giants at February 23, 2007 12:07 PM
"This is really bad new for 1Rincon. And the only highrise that has a chance to NOT complete is the 1Rincon buildings. The developer couldn't even lock down financing until they presold a large number of units (thus the aggressive marketing campaign)."
Your statement makes no sense. The first tower is 93% sold and it's still more than a year away from completion so unless that last 7% is the difference between walking away from a half-built building and not walking away, I'd saying the chances of 1Rincon not being completely finished and 100% occupied is about......
Posted by: Anonymous at February 23, 2007 3:26 PM
"I acknowledge that I'm just an outsider observing the bloodsport, but people, I promise you, everything will turn out juuuuuuust fine."
"Fine" is a relatively subjective term, but ultimately, I would agree with 49Giants.
Posted by: Anonymous at February 23, 2007 3:28 PM
"Your statement makes no sense. The first tower is 93% sold and it's still more than a year away from completion so unless that last 7% is the difference between walking away from a half-built building and not walking away, I'd saying the chances of 1Rincon not being completely finished and 100% occupied is about......
I think they were referring to the 2nd building. If it is in fact put on hold, then I'm sure the reason is the developer is afraid they might not sell the % needed to lock down their financing. The reason for the aggressive marketing for the first tower was to sell the mandated % quickly in order for the developer to receive the financing it needs to continue construction. That's what smaller developers must do since they're not large enough to finance their own developments.
Posted by: Anonymous at February 23, 2007 8:34 PM