Foreign Investment Rising for Net Lease Assets

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

San Jose and Oakland challenge SF in private equity real estate market

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

 

How to take advantage of “Opportunity Zones”

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.

Sources: BizJournals.com, Tax Policy Center

Read our June 25, 2019 newsletter

What Google’s San Jose project means for downtown

For years, much of the area around Diridon Station has been a neglected jumble of grimy auto body shops, vacant lots overgrown with weeds and shabby warehouses.

Google — whose plans face a critical City Council vote Tuesday — is expected to transform some 50 acres into a mix of offices, shops and restaurants connected by pathways that wind through parks and plazas filled with public art. Steps away, Diridon is set to undergo its own renovation and become the only place in the Bay Area where BART, Caltrain, Amtrak and high-speed rail converge.

It’s a tall order. But if the tech giant succeeds, the project could transform a downtown that has struggled to rebound from sprawling development in the 1950s and 1960s, when city manager Dutch Hamann rapidly annexed land at the city’s fringes while neglecting its urban core. When it’s complete, the area could support more than 25,000 workers, a 65 percent increase in the number employed in the core of the city today.

For longtime restaurateur and downtown business owner Steve Borkenhagen, Google’s foray into San Jose might finally spark the kind of urban rejuvenation he’s dreamed of for decades. For Kathy Sutherland, a nearly 40-year resident of the Delmas Park neighborhood in the shadow of the proposed development, the project brings both the long-sought possibility of a vibrant neighborhood and the fear of displacement. And for the urban studies theorist Richard Florida, the project is less personal but no less important — a chance for a major American city to finally get redevelopment right, to provide an antidote to the debacle of the Amazon HQ2 rollout.

It will be years before any such dreams or fears are fully realized, but the sale of more than $100 million dollars of city land — expected to be finalized at the Tuesday council meeting — sets the stage for planning and development to begin in earnest after months of closed-door talks and speculation about the biggest thing to happen in San Jose in generations.

 

 

Read more on the East Bay Times

 

 

Milpitas’ Great Mall unveils major revamp as Silicon Valley shopping centers up the ante

As retail sputters in some places around the country, Silicon Valley retailers and property owners are facing a different challenge: How to compete in a market where investment is still hot in the retail sector.

The Great Mall in Milpitas is one of those looking for a competitive edge in a region where the traditional malls are either going by the wayside or upping the ante to create a space that offers not just shops, but experiences.

Indianapolis-based Simon, an international shopping center and mixed-use property owner, last month wrapped up an extensive, two-year renovation project for the massive shopping center, which has more than 200 stores. (For fun facts about the revamp, click through the slideshow above.)

The revamp added or expanded some of its stores, but also redesigned what it is calling a “dining pavilion” that has 10 restaurants.

“Our goal is to provide the best shopping and entertainment experience for our guests and this transformative renovation makes that possible,” Angela Pyszczynski, general manager at the Great Mall, said in a statement.

Read more on Silicon Valley Business Journal

 

 

 

Seeing Pros and Cons in “Digitization” of Real Estate

A future-focused Urban Leaders Summit discussion in Frankfurt in May on embracing new technology raised just as many questions as it answered.

Many German business leaders have been fretting about what they call Industry 4.0—the sweeping changes created by machine learning, automation, the “internet of things,” and big data—innovations they categorize under the umbrella of “digitization.” The waves of change triggered by this digital shift are going to be felt for generations to come, as more and more jobs are capable of being done by machines. Will we need humans at all? Will we create a superintelligence that finds us an unnecessary burden?

But going back to the present, Sascha Friesike, professor of digital innovation at VU Universität Amsterdam, wondered why urbanization continues to grow even as we increasingly decentralize work. If jobs can be done from anywhere, why do we still largely choose to move to cities?

Klaus Dederichs of Drees & Sommer was wary about the rush to incorporate the internet of things into properties. Tests have shown that the current generation of smart devices, which usually operate over wi-fi, is easy to hack. “They are compromising buildings’ cybersecurity,” he said. “What if terrorists attack smart buildings rather than drive into crowds?”

But Dederichs did also note some potential for buildings to get smarter, optimizing energy use being one of them. Building information modeling (BIM) is another promising field in the world of smart buildings. This digitizing of the planning, construction, and maintenance of buildings increases efficiency and extends the life of a project. Thus far, BIM has not seen huge adoption rates in Germany; the industry is hesitant largely because of the financial investments and the additional training needed for workers.

Blockchain came up in practically every discussion, as did artificial intelligence. It is difficult to find the middle ground between viral anxiety and tech evangelism, said Thomas Metzinger of the Johannes Gutenberg-Universität Mainz. “What do we do when a smart city crashes? And it will crash. We need graceful degradation,” referring a web design term that refers to designing a project to continue to function even if some features fail.

“We aren’t going to build houses that aren’t future-proof anymore,” said Martin Rodeck of EDGE Technologies, owned by OVG Real Estate. You cannot risk a new building being outdated within five years. And you should not jump on a trend like blockchain or virtual reality just because everyone else is doing it—you need to focus on how to solve the problem at hand.

Read more on Urban Land Institute

 

Exclusive: East Bay shopping center lands new grocery tenant to anchor redevelopment strategy

The new owners of the regional mall have mapped out a multi-phased plan to redevelop the East Bay property into a shopping and entertainment geared toward the region’s strong Asian demographic.

LBG Funds has finalized a 35,000-square-foot lease with Taiwanese grocer 99 Ranch Market to anchor the first of four phases that the Los-Angeles-based investor is planning for the once-struggling Richmond property.

Rebranded as the Shops at Hilltop, the first phase will also include leases for 55,000 square feet of restaurant space; new tenants for a 20,000-square-foot food hall and 12,000-square-foot food court; as well as a variety of incoming shops, entertainment and pop-up uses.

LBG is estimating work on the first retail phase will be completed in mid-2019.

 

 

Read more from San Francisco Business Times

 

 

 

Strong Economic Indicators Present In All Of San Francisco CRE

San Francisco’s commercial real estate market shows many positive signs for growth in 2018.

Multiple CRE products are going up right now, which is relatively uncommon, according to Vanguard Properties Director of Investment Sales Alex Kolovyansky, who spoke during a recent Bisnow event.

Office, industrial residential and hotel are all experiencing up cycles, Kolovyansky said.

“The San Francisco residential market has been growing by leaps and bounds,” he said.

In 2017, 6,500 transactions were completed in the residential market, of which 35% were for homes and 51% were for condos. A very small percentage of the transactions were for investment properties and 2.3% were for apartment buildings. Kolovyansky said 147 old and new apartments traded last year.

Read more from Bisnow

What Do Single-Tenant Net Lease Deals Offer High-Net-Worth Investors?

HNW investors are especially attracted to single-tenant net lease deals in the retail sector.

For more and more high-net-worth (HNW) real estate investors, dollar stores and drugstores make for a winning combination, although these assets can turn into losers if the sole tenant leaves.

Office and hotels still draw a lot of attention—and dollars—from HNW investors. But a rising number of them are betting on single-tenant net lease properties such as dollar stores, drugstores and fast-food restaurants to help round out their portfolios.

By and large, net lease properties are magnets for HNW investors because they’re viewed as safe, recession-proof assets that preserve cash flow and yield.

Read more from National Real Estate Investor

NAI Northern California celebrates continued growth with 21% revenue increase by third quarter of 2017

The tech-forward, collaborative brokerage continues to emerge as an up-and-comer on the Bay Area commercial real estate scene

SAN FRANCISCO, CA – October 17, 2017–  Continuing to evolve as a growing force in the San Francisco Bay Area commercial real estate landscape, NAI Northern California forges into the third quarter of 2017 with revenue already surging past 2016. As of October, the brokerage has increased gross revenue by 21% over last year. Across retail, multifamily, office, industrial, and land, the total square footage of transactions closed by the team more than tripled.

In regards to NAI Northern California’s growth and the current market, President James Kilpatrick points out, “While the Bay Area has been experiencing an extraordinarily long real estate cycle, this seems to be accelerating further as our number of successful transactions is up by 31%.”

Multifamily investment sales are active as investors focus on residents looking beyond San Francisco to the East Bay. Top producing broker Shivu Srinivasan closed the $28.75 million acquisition of an 88 unit apartment complex at 4445 Stevenson Boulevard in Fremont and the $13 million sale of a 70 unit property at 250 West Jackson in Hayward.

In retail, NAI Northern California is carving out a niche by successfully closing over $100 million in triple net shopping centers and single tenant properties this year.Top producer Mary Alam spearheaded the $13.6 million sale of the Newark Shopping Center and several Walgreens properties among others.

Growing market share is directly impacted by the addition of talent. In 2017, experienced industry professionals Tony Alanis, Kevin Flaherty, Fritz Jacobs, Matt Gorman, Gregg Steele, Reggie Regino, Brent Stiggins, and Darija Walker joined the company’s brokerage and financing groups.

James Kilpatrick remarks, “Our growth is truly predicated on our talented team. We are unique in the commercial real estate industry, empowering our professionals to take a collaborative approach supported by a tech-forward platform that helps them be nimble as they get deals done for our clients.”

About NAI Northern California
NAI Northern California is a progressive, full service commercial real estate firm serving the Bay Area. Recognized as one of the Top 25 Commercial Real Estate Firms by the East Bay and San Francisco Business Times, we are committed to delivering best in class services for our clients.

www.nainorcal.com