In late May, we had a chance to speak with Ani Vartanian, the Managing Partner of Rubicon Point Partners. Formed in 2010, Rubicon Point Partners (Rubicon) is a private real estate equity firm headquartered in San Francisco. To date, the firm invests primarily in office buildings, although it has also invested in other property types including industrial, residential and some mixed use retail.

Where do you see the biggest value opportunities today?

There are always opportunities, but they change over time. To find our niche or opportunities, we focus on demographics and company formations. We see residential demand forecasting office demand. We have tended to find opportunities in the urban or sub-urban markets. However, now with the “Gen-Y” and millennials beginning family formations, they have a need for more space, and maybe more access to affordable education for their children. They are looking to the suburbs. This trend has caused us to now look at deals in the suburbs. There can be some opportunities in the suburban markets. For example, there is a bit of a value disconnect between an office building in downtown San Mateo versus an office building in “suburban” San Mateo. There seems to be a disproportionately unwarranted discount to the suburban San Mateo building and there can be opportunities in those types of markets.

Rubicon is primarily an investor in the office market. Are there any concerns today about Bay Area office rents? Is there another tech meltdown coming like we saw in the late 1990s?

We have been concerned about office rents since 2015. Rents seem to be running in parallel to the NASDAQ. When we underwrite an office building today, we focus on a possible downside scenario. What would happen to the target project if rents dropped by 10-20%? Would we still buy the project? We don’t underwrite a project today with strong rent growth assumptions.

We don’t see an overbuilding situation in San Francisco, but we are cautious about continual rent increases like we have seen the last 3 years or so. I don’t see a tech meltdown like we had in the late 1990s. These tech companies are so much larger today, and financially capable, than they were almost 20 years ago now.

Can you speak to the trend we have been seeing for the last several years of employees working from home? Is that trend continuing?

There has been some pull back here. We believe there is more value to a team working physically together than the benefit(s) that may be gained by having employees work from home. We believe this pull back will continue at some level. There is, of course, a correlation on the type of tenant improvements that companies are requiring today. There continues to be a request for more open space (collaboration areas) with some private meeting room space. There is a desire to keep the window line open with any offices then on the interior of the floor. One might think that with less private offices the tenant improvement cost would go down. However, just the opposite is true. The cost of these open space buildouts has actually increased the cost of tenant improvements. And, in general, the cost of the tenant build out has probably doubled in the last 3 years. Adding to that is the increased cost due to the Title 24 requirements.

What concerns do you have for real estate in the Bay Area over the next 12-18 months?

While it is true interest rates have been rising, and spreads have narrowed, we do not see a significant impact on the real estate industry in the short-term. In fact, the lending market has strengthened.

One area of real concern in the Bay Area is the affordability factor, both in construction pricing as well as in purchasing. This applies to all asset types. You just can’t build 100% affordable housing. The project doesn’t pencil from an owner’s standpoint. This is a real community issue.

Do you have any other observations today about where we are headed?

First, there is a lot of liquidity out there both on the debt and equity sides waiting for a hiccup in the real estate market. If the hiccup happens, we will see 20 different firms lining up to take advantage of the opportunity.

Second, we are also seeing real estate companies in a rush to get bigger… to scale-up. There will be advantages to those companies who can scale-up in a controlled fashion to enable them to compete on a broader basis.

Overall, we are opportunistically optimistic on the future of Bay Area real estate. 

Greg Dresdow is a real estate tax advisor at BPM. Contact Greg at [email protected] or call 925-296-1088.