Foreign investment in commercial real estate is on the rise due to the search for yield and portfolio diversification, according to the World Property Journal. Globally, investment in net lease properties (office, retail, and industrial) averaged $3 billion per year from 2011 to 2014 and is up to more than $8 billion per year from 2015 to 2019. In the United States, foreign investments for Q1 2019 represented 15.1% of net lease transactions, totaling $1.9 billion, up 6.6% compared to Q1 last year when they only represented 12.9% of the market. In 2018, foreign investors held 30.1% more net lease properties than in 2017, an $8.8 billion increase.
Most of these investors are from Canada, South Korea, and China. Canadians invested $5.55 billion, with a focus on industrial properties; South Koreans invested $3.28 billion, overwhelmingly preferring office space; and Chinese investments of $3.22 billion also focused on industrial assets.
So far this year, New York City, San Francisco, Boston, Dallas, Columbus, and Los Angeles have received the most foreign capital, but commercial real estate investments in high-growth secondary and tertiary markets like Phoenix, Seattle, Baltimore, and Atlanta are also becoming popular.
Source: World Property Journal
California’s largest cities for real estate investment, San Francisco and Los Angeles, are now being challenged by San Jose and Oakland. California holds almost 20% of the private equity real estate (PERE) in the country and 12% of global PERE assets under management, according to a study by accounting and advisory firm EisnerAmper and Preqin. PERE properties include office buildings (high-rise, urban, suburban and garden offices); industrial properties (warehouse, research and development, flexible office/industrial space); retail properties, shopping centers (neighborhood, community, and power centers); and multifamily apartments (garden and high-rise). Less common but still an option are senior or student housing, hotels, self-storage, medical offices, single-family housing to own or rent, undeveloped land, and manufacturing space (via Investopedia).
So how do the Bay Area cities compare?
San Francisco’s strength is in its office market, with $3.2 billion PERE deals in 2018 (a $1 billion increase over 2017) and another $1 billion already invested this year as the Bay Area’s largest tech companies continue to expand. The overall PERE total for last year was $4 billion,down from $4.8 billion in 2017; according to an article in the San Francisco Business times, “the drop-off in the quantity of large mixed-use transactions compared with recent years is at the heart of the decrease.” San Francisco is also running out of space, which limits growth.
While San Francisco is still the largest market for office transactions in the Bay Area, San Jose is leading in growth. Their office transactions in 2017 and 2018 both reached $1 billion, with a record in 2018 at $1.2 billion. In Q1 of 2019 alone, these transactions reached $500 million, putting San Jose on track to quadruple its PERE deals this year. The overall PERE total for 2018 was another record of $2.7 billion, almost 60% more than 2017 and a sharp contrast to San Francisco.
Oakland may be emerging as a competitor, with more reasonable housing options for tenants; the tech company Square announced at the end of last year their intent to move 2,000 employees into an Oakland office. Even as a smaller city, it is on track to reach a total of $1 billion in PERE deals this year, with $560 million in Q1 2019 already; $493 million of that was just two office space deals by Starwood Capital Group. The city also has more Opportunity Zones than either of the other two cities.
With San Francisco as the “benchmark,” San Jose as the “growth leader,” and Oakland as the “up and comer” (according to the SF Business Times), all three cities are going strong.
Source: SF Business Times
The Tax Cuts and Jobs Act of 2017 created new rules for “opportunity zones,” underdeveloped neighborhoods, sheltering your investments from federal taxes with minimal limits and employment requirements. You only have a few more months to maximize the benefits of this program: so how does it work?
When you sell a property, you can immediately reinvest that gain, tax-deferred, into an Opportunity Zone by depositing it into a qualified Opportunity Zone fund (either one you create or a traditional one). Then you have two choices; buy a property in one of the zones, or invest in a business in the zone. We’ll focus on the property option.
You have 31 months to purchase your new property, whether it’s multifamily, retail, industrial, or office space. Eventually, you need to invest the same amount of money as the property’s structures (not land!) currently are worth; if the current building is worth $100,000, you need to spend $100,000 remodeling, rebuilding, or otherwise upgrading the building. This means if you buy a property with a structure worth very little, you don’t have to do much to get the tax benefits.
Speaking of benefits, not only is the tax on your original gains deferred until 2026, but if you hold it for seven years, 15 percent of that gain will completely avoid federal capital gains taxes. (You only get 10 percent if you hold it for five years.) And if you hold it for ten years and your new investment appreciates? None of that appreciation is taxable under federal capital gains taxes. This is an opportunity indeed!
There are 102 opportunity zones designated around the Bay Area, including in Oakland, Concord, San Rafael, Santa Rosa, and even San Francisco; visit the SF Business Times’ site for maps and stats about the zones, or contact one of our advisors to find a property that matches your investment goals.
Mid-Market’s vacancies, stalled developments trigger plants to activate dormant sites.
Stalled developments have meant boarded-up walls, vandalism and empty storefronts have become all too common along the upper stretch of Market Street. The city is hoping a new type of temporary permit will spark change.
Bay Area paradox: We need housing, but we don’t want to build faster.
Chronic lawsuits against new Bay Area housing developments. Loud, angry protests against pro-growth legislators and mayors. If the Bay Area has an all-season contact sport, it’s the recurring NIMBY fights against housing construction. And although almost everyone agrees housing prices are too high, few want to see faster development to tackle the problem, according to a recent Bay Area poll for the Silicon Valley Leadership Group and this news organization.
Earthquake map reveals liquefaction risks in Bay Area neighborhoods.
No place in the Bay Area is safe when it comes to the inevitable, devastating earthquakes that loom on the horizon. But some neighborhoods are better situated than others.
Even cool, Bay Area housing market is still hot.
The San Jose housing market has cooled more than any other in the country — and it’s still the hottest in the nation, according to a recent Zillow survey. The bidding wars and quick cash sales have abated, and home sellers are cutting prices more often and waiting longer to close deals than a year ago. But middle-income families still struggle to afford the median-priced home of $1.2 million in the San Jose metro area. A typical family needs to put about $600,000 down to fit that mortgage comfortably in their budget.
An estimated 100,025 homes are sitting empty in the San Francisco metro area.
Compared to other cities, San Francisco metro area’s vacancy rate is actually low at 5.6 percent. Of the 1.784 million households counted in the census region, roughly 1.684 million are occupied. LendingTree concludes a region like San Francisco – which includes Oakland, Hayward and surrounding areas is what’s considered a sellers’ market, meaning people selling their homes will easily find buyers, while future homeowners will struggle to buy. Anyone who has tried to buy a home in the city in the last decade knows this to be true.
For any real estate investors looking to purchase or refinance an investment, here are the latest interest rates, courtesy of our financing group Piedmont Capital.