Deidre Woollard: The ascendance of San Jose is fascinating to watch. It's topped the list of most expensive cities, most desirable real estate, and it's really been an interesting evolution. I previously interviewed Erik Hayden, who's the founder of Urban Catalyst which is an opportunity zone fund based exclusively in downtown San Jose. I was impressed not just by his experience, but also his love of the city. I wanted to circle back to see how the city is emerging from the pandemic and what's next. A little bit about Erik, he's responsible for developing more 3.5 billion in real estate projects, including over 2,300 residential units in the California Bay Area. Welcome.
Erik Hayden: Thank you for having me.
Deidre Woollard: Let's talk about something that's happening in California right now that I find fascinating which is Governor Newsom signed a couple of new bills that impacts statewide zone and we talked about it on the Millionacres website. Can you explain what the bills are and what they may mean for California?
Erik Hayden: Sure. These two bills are added to a long list of bills that are meant to address our housing crisis here in California. Overall, maybe 10 or 15 bills that made it through that have actually had an impact. These two most recent ones, SB 9 and SB 10, Governor Newsom signed into law. One allows for up to four units on a single-family lot. Its really changing the single-family designation, which is really prevalent throughout California to allow for a higher density development type. SB 10 allowed to do 10 units per lot near a major transit station. I really don't anticipate that either of these bills is going to have a major impact on solving our housing crisis. It's really just chipping away at it and taking away control from local land-use authority which people have a lot of opinions on whether that's a good thing or a bad thing.
Deidre Woollard: Interesting. So this actually might not do some of the things that people hope it will do?
Erik Hayden: I can tell you here in Silicon Valley, our housing crisis is really acute. We have to build something like 150,000 housing units here in Silicon Valley if we wanted to have supply equal demand, and we've never built more than 5,000 housing units in a single year. It's almost like we're never going to get there and just changing a single-family designation to allow you to put a couple of additional lots on it, it's not going to make a major impact.
Deidre Woollard: Interesting. I know there's also a fund involved to of I believe it's a $1.75 billion housing affordability fund. Do you think that will make a difference?
Erik Hayden: There's a lot of housing affordability funds out there. A couple of notable ones has been Google's pledge of a billion-dollars, Facebook pledged a billion, Apple pledged two billion, really just drops in the bucket. We need a comprehensive way to fund below-market rate housing if that's the way that we choose to solve this housing crisis. People tend to focus a lot on below-market rate housing as the solution, but it really is just a housing issue overall. We need houses of all different types, not just below market rate. Sometimes when we talk about below-market rate housing and what we're doing right now is just we're putting a band-aid on a bullet wound.
Deidre Woollard: [laughs] That is accurate but painful, and certainly I think, I've always thought that California is often, as California goes, so goes the country. It's been interesting to watch this state try to wrestle with some of these major issues, and it doesn't seem like developers in general are really reacting to it too much yet. Time will tell.
Erik Hayden: Developers do what they think they can do to be successful and the state and the local jurisdictions, they try to setup ways in which they want cities to grow. Developers will fill in where it makes sense for them. It's really up to the local governments to change the rules in a way that creates a significant amount of new housing at all levels.
Deidre Woollard: But I think the impact of the local government is, you're absolutely right, is very important. Let's talk a little bit about that when it comes to San Jose because the city is coming out of the pandemic, we're all coming out of the pandemic. The city launched vaccine requirements at large events, hopefully that will make people feel safe to go. But how do you feel the city has responded overall, and are you seeing people actually be interested in going back to the new normal?
Erik Hayden: It's interesting here in Santa Clara County. We have one of the highest vaccination rates in the country, and we have one of the lowest COVID rates in the country. It's interesting or maybe not surprising that those two things coincide. The government has taken steps to make people safe. Our steps are a little bit more stringent than most other places in the country. But what we can see is that what we're doing is working and people going back out to events? Yeah, we're seeing lots of people out at events. Whether it's my children going to soccer games, or your children's musical theater, or going to a 49er's football game. People are out about.
Deidre Woollard: What about office work? You're back in the office. Are you seeing that across San Jose and Silicon Valley in general that people are slowly returning back to the office?
Erik Hayden: Right now, I just read the statistics. About 30% of people are back in the office with most of the major companies delaying their reopening into next year. They were unsure of what was going to happen with the Delta variant and they're just keeping it safe. I applaud them for their thoughts. When they're ready to come back into the office, it's going to be a return to the office that's somewhat unprecedented mainly because Silicon Valley companies have done fantastic during the pandemic, and they've been on a hiring spree, and they're at the point now where they've hired so many people, and in a lot of cases, they don't even have enough office space to have people come back, whether or not it's in a hybrid work format or not.
Deidre Woollard: That's really fascinating, especially considering things like I know Google just did a big deal in New York City. You see a lot of these tech companies that they're offering that freedom, but they're also still investing in a lot of space all around the country.
Erik Hayden: Absolutely. It's interesting here at Urban Catalyst as an Opportunities Zone Fund, we talk to a lot of direct investors and a lot of our investors work at these major companies. We had the most fascinating conversation with someone from Netflix recently. In our fund, we have a large office building we're building and he said, ''I'm concerned about office. Netflix just told me that I am going to be working from home for the near future, and they sent me a box with all of my stuff in it from my desk. I'm worried that maybe they're subleasing space, I don't know what's going on.'' I called one of my friends who is in HR in Netflix and he said, "Yeah, we are forcing people to work from home, but we're not subleasing space. Our issue is we've hired so many people that we can't bring everyone back when we plan to return. We've identified folks that we think can successfully work from home and we're going to force them to work from home until we can figure out this office space issue." That's been pretty common with a lot of the investors we've talked to.
Deidre Woollard: Interesting because I know the CEO of Netflix has been very outspoken about not wanting people to work from home, and that the offices has values that can't be replaced. That's an interesting one. What advantages do you think San Jose has because it's so important to tech companies?
Erik Hayden: San Jose really has two major advantages for tech companies. Maybe three. The first is, San Jose traditionally has been a bedroom community. We're the tenth largest city in America, but 90% of our city is single-family homes. If Palo Alto and Mountain view are the center of the silicon valley universe, they're 15 miles away from downtown San Jose, but in traffic that can take an hour to hour and a half. Having office space located closer to where their employees actually live, because it's more affordable here San Jose. It's funny to say that because our median home price is 1.3 million, but in Palo Alto, its 2.5 million, since closer where people live. The next is, it's hard to get large chunks of space throughout Silicon Valley. We don't have a very high vacancy rate. Downtown San Jose, with the ability to build new office buildings, we have the ability to create more spaces as companies continue to expand. Then the final reason really is a price-point thing. If triple-net on a price per square foot per month in Palo Alto, you're looking at like $10. Here in San Jose, it's 550, it's almost half of what Palo Alto is. You can get less expensive office space, you can get it closer to your employees, and you can get the amount of space that you need.
Deidre Woollard: What other industries are driving growth in San Jose, and are they fighting with these monster tech companies to get space?
Erik Hayden: Everyone is fighting with the monster tech companies to get space, but I'm going to lean in and say, the tech industry is the industry here in Silicon Valley. Most of the other industries have left. We don't have significant manufacturing industry anymore. The second largest industry is really local government, people that work in the county, work in the cities. It's all tech all day long. One thing to remember about the tech industry, it's a lot different than it was during the dotcom crash where you had pets.com. It's Silicon Valley is now home to three of the five largest companies in the country, with Facebook, Apple, and Google, and the other two, Microsoft and Amazon have a big office presence here. They have a significant amount of office space. But we also have just as many startups, if not more than we've ever had before. We had more companies go public this year than we've had in any year going all the way back to the dotcom. We created something like 59 new unicorns in Silicon Valley this year. While we now have this establishment of these giant tech companies, we also still have that small startup mentality where venture funding is pouring into the area and the universities are cranking out engineers. That's the life of Silicon Valley.
Deidre Woollard: SPAC fever has certainly accelerated that as well, given everybody a new path to go public faster.
Erik Hayden: Absolutely.
Deidre Woollard: You operate in downtown San Jose, but are there neighborhoods within that? Are there sections of it, and what is the surrounding area look like in terms of investing?
Erik Hayden: Sure. Downtown San Jose geographically is really giant, it's like the City of Phoenix. It's very spread out, so there's a bunch of different neighborhoods. We're focused in the downtown core, because downtown San Jose really is the only true urban environment in Silicon Valley. We have the Diridon train station, which is slated to be the largest train station on the west coast, and BART, which is the largest mass transportation system here in the Bay Area. It's now funded to come through downtown San Jose and connect into Diridon Station. We say about time has been only 62 years, before [laughs] San Francisco connects San Jose with BART. But the surrounding neighborhoods around downtown are primarily single-family neighborhoods. Almost most of San Jose is single-family neighborhoods. Some notable ones are the Rose Garden, Willow Glen, Neglee Park, the Delmas neighborhood. These are just fantastic neighborhoods. They primarily were formed when Silicon Valley was called the Valley of Heart's Delight, because we had so many orchards that in the spring all the orchards would flower, and it was just so beautiful that that's how it got its name. But the major industry at the turn of the century was the canning industry, and so all of these neighborhoods around downtown San Jose grew up for housing for workers to support the canning industry.
Deidre Woollard: Interesting. I wanted to talk a bit because when I was researching San Jose, I saw that the city has this general plan that was adopted in 2011. It looks like it's a guiding force for the city, but a lot has changed in 10 years. How is that plan adapting and how are you thinking about that plan as the guiding force for your investment?
Erik Hayden: The general plan is everything in California. Every city about 30 years ago was required to adopt one or they stopped getting state funding for transportation. Zoning laws are antiquated from the '40s and '50s, and so in general plan is that guiding document. San Jose started to redo their general plan around 2005. I remember, because I went to a lot of the early planning meetings. The problem with San Jose's general plan is that it was adopted in 2011, but they said we have 52 areas that we want to support high-density development, and each of those areas is going to require its own plan and they're going to come out in three horizons. So far in the last 10 years, they finalized 13 of the 52 horizons. Big article in the Mercury News a couple of weeks ago, what a failure the San Jose general plan has been as in it has not spurred any additional housing development, if it was there or if it wasn't there. I tend to agree. The only thing that it really did that was fantastic was it designated downtown San Jose as every property in downtown was general plan "downtown", which allowed for anything, because they want to see high-density development. They don't want to make it a challenge to get your projects approved here, they want to streamline that process. California is notorious for having a really challenging environment for the preconstruction process. But in downtown San Jose, it's really the easiest of any city that I've seen in Northern California, which still means it's very challenging, it's just not impossible.
Deidre Woollard: If housing affordability is a challenge, what other challenges do you feel like the city is facing, given that it's expanding so rapidly and the population's growing?
Erik Hayden: The population only grows as fast as we build new housing, so it hasn't grown that quickly. In fact, Austin, Texas is going to take us over as the 10th largest city next year, which is sad. I like being in the top 10. As far as challenges COVID, everybody's facing that challenge, and San Jose is no different. We also because of our housing prices, we've seen an increase in homelessness. Not to the extent that you see like in San Francisco, but it's still happening here. Our cities is recently as of today, the state government and the local governments are combining for a big plan to build a significant number of new homeless housing units, converting older hotels, and then building smaller individual units. We have that issue. The local governments are working to respond to that issue. The housing crisis, as far as yes, it's expensive to live here, and yes, people deserve to be able to afford to live here. One of the side effects of that is that we create six jobs for every housing unit that we've built in Silicon Valley for the last 30 years, and our companies here can't grow faster enough. They can't get enough employees to actually live here to fill all those applications, because it isn't that they can't afford to live here, it's just there aren't any houses. A little bit of a side effect and a problem that San Jose has is we need more housing in 100 different ways. It's the only thing that really could put a damper on Silicon Valley's economy, the lack of employees.
Deidre Woollard: Well, I heard that the city is also considering changing the parking requirements per building. What do you think of that and how are you thinking about parking? Obviously, you've got tech there. If there's going to be autonomous cars, they're probably going to happen there before other places. What are you seeing right now?
Erik Hayden: I love this question because this is something the city should have tackled 15, 20 years ago. Here in the Valley, most cities they're suburban cities, they're suburban parking requirements where it's like, every housing unit needs two spaces. When you build high-density development near transit, you don't need that much. How much do you need? A lot of studies out there showing that in urban environments you should have around 0.9 spaces per unit. The city of San Jose in downtown wants to eliminate parking requirements altogether and just say it's at the discretion of the planning department. I'm totally fine with that. What I want to do when I build my projects is I want to build enough parking to meet what the demand is for my future tenants, and then that's it. So if they let me build one space per unit, I'm totally happy with that. As far as how we build our parking structures, we thought about these autonomous cars in the future, and I'm not sure how many years out that is. But in some cases, we do design our parking garage, especially here in San Jose. We build above-ground parking that eventually you convert those parking areas into other uses in the future if parking becomes obsolete.
Deidre Woollard: Well, I think that's one of the things that's exciting, is the idea of parking, maybe not becoming obsolete right away, but needing less parking, but because it opens up so much infill opportunity, is that something that you're hoping happens overtime?
Erik Hayden: I don't know if I hope for it. Building parking spots in my buildings makes it very expensive to build buildings. A typical above-ground parking space, not including the cost of land is $45,000 per space. So if I'm building 400 units and I need 400 parking spaces, that's a big chunk of change towards the development costs in my building. So reducing development costs obviously spurs developments, so we like that. We like the synergy and the revitalization that's happening here downtown. Will it unlock urban development? Urban development will be unlocked based on a variety of factors. Construction costs, market costs, city fees, the abilities, and once some cities deal the process projects in a timely manner. There's a lot that goes into it. Parking is one of those issues, but probably not one of the bigger ones.
Deidre Woollard: What do you think as far as supply chain issues? Is that impacting you at all?
Erik Hayden: It is impacting us in that we're having to plan now, months, and almost years in advance to get certain items that go into our buildings. We understand what those issues are and so we plan in advance for them. We're lucky that we weren't caught off guard, we heard Urban Catalyst, we just started construction on our first project last month and we plan on starting six additional projects in the next 12 months. We're right at the beginning of that process, which is great for us because we can plan for it. A couple of small examples, I think that everybody is seeing in everyday life, my refrigerator after 20 years finally died. I ordered a new one, and it will be here March 11th. My pool in my backyard is green. It's been green for two weeks. I called the pool companies and said, "Why is my pool green?" They said, "Oh, well, we don't have the chemicals to put into your pool because of supply chain issues from China." You can see it's affecting developers, but it's affecting everybody. How many ships are there now anchored off Long Beach? Seventy-two giants ships. It's stop, start, and stop, and now we have so much coming in that we can't even process. It will untangle itself over time as we return to a more normalized society, but there'll be some interesting times here over the next 12-18 months.
Deidre Woollard: I would agree with that. It definitely seems like we had thought that this was going to resolve itself within a year, and that is so not the case that it's been fascinating to watch. It really does affect every aspect of building. Well, let's talk about a couple of your projects because you're doing an extended stay hotel. Wow, hospitality right now is a concern. I can understand why it makes sense for San Jose because so many business travelers come in. What are you feeling about hospitality?
Erik Hayden: Sure. I always like hospitality. I especially like extended-stay business hotels. During the pandemic, that segment of the hotel market, it did better than most other segments. Others are really strong demand for it here in downtown based upon all of the big companies that are down here. As an example for you, my partner Josh, he built an extended stay business hotel, another Marriott, TownePlace Suites in the city of Campbell, which is about five miles outside of downtown, a few years ago. While it was under construction, Adobe, which has its headquarters in downtown San Jose approached him to lease 100 percent of the rooms a year in advance just for their employees.
Deidre Woollard: [laughs] Wow.
Erik Hayden: I'm not going to say that's what's going to happen with ours, although our project is three blocks away from Adobe's world headquarters. But they're definitely a strong demand, and it really doesn't hurt that it's 500 yards away from Google's future mega campus. They're planning on building out that campus over the next 10 years, and when it's completed it will be their largest campus on earth with over seven million square feet of office.
Deidre Woollard: You talked before about office, and I'm thinking also one of the things I've been tracking is ground-floor retail. Is that a concern in San Jose? It's been a concern in other areas, especially in New York, ground-floor retail has just been terrible. What are you seeing as far as retail?
Erik Hayden: Retail because of the pandemic has just been hit extraordinarily hard. In downtown San Jose we've seen retail close up very similar to other major cities. It seems that the stronger retail survives and whether that's national chains or just really well-run small businesses, they seem to have survived throughout the pandemic. Coming out of the pandemic, we do expect it to rebound. People want to go out to restaurants, they want to go and shop. Downtown San Jose has retail issues for different reasons in the pandemic, which is just we have three malls that were built about a mile outside of downtown in each direction. That really took a lot of our major retailers out of downtown and put them into malls. That happened 34 years ago. But in the downtowns, specifically, we have our first project that I mentioned we got started on. It's the conversion of a 12-screen movie theater into 70,000 square feet of office and 20,000 square feet of ground-floor retail. It's right on the Paseo de San Antonio, which is a major pedestrian thoroughfare. We put our retail out onto the market about four months ago, and we now have the entire retail ground-floor leased out. As far as demand for retail, you can see those stronger groups wanting to expand. We signed some great tenants and really fun. We signed a miniature golf full-service bar and restaurant, we signed one of those ax-throwing places. We're really close to San Jose State, and so we're going to get a lot of those students walking from the campus up the Paseo past Philz Coffee on their way to Plaza de César Chávez. They're going to stop there and maybe have a beer and throw some axes.
Deidre Woollard: It is very trendy, the throwing of axes [laughs] I don't quite get it.
Erik Hayden: We were really close to San Jose state because we have a student housing high-rise project in our first fund. So we talk with our head of facilities a lot. He said, "Erik, please don't put ax throwing two blocks from campus, come on".
Deidre Woollard: Let's talk as we wrap up, where do you see Urban Catalyst in five years and where do you see San Jose, the two together in five years?
Erik Hayden: San Jose is just poised for this massive amount of revitalization. If all the projects that are currently in the planning process are built out, say over the next 10 years, the downtown itself should triple in size. What I expect is right now in downtown, there's seven cranes in the ground. We've never experienced that Seattle moment or the San Francisco moment where you can see 45, 50 cranes in the ground at the same time. I expect to see that in the next five years. Urban Catalyst, we have nine projects in our pipeline. The smallest project is $80 million, the largest projects are $350 million. We expect to have all nine projects either under construction or already completed and stabilized in the downtown. We plan on being a part of this downtown and really a part of this wave of revitalization that's happening.
Deidre Woollard: I love that. Erik, thank you so much for your time today, and listeners, you can learn more at urbancatalyst.com.
Erik Hayden: Thank you.