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Market Pulse: San Francisco, July 2019

Welcome to the first edition of NAI Northern California’s newest feature. We checked the pulse of the San Francisco commercial real estate market to discover the ups and downs of the office, industrial, retail, and multifamily markets.  Each market has four dimensions: current inventory, 12-month net absorption, under construction, and vacancy rate.

Check out our July 2019 San Francisco Market Pulse infographic. If a dimension is on the rise, the pulse goes above the baseline; if it’s on the decline or negative, the pulse will dip below the baseline.

This month the San Francisco office market’s inventory is up to 175 million sq. ft., with 12-month net absorption down at 2 million sq. ft. of office space. Approximately 6.9 million sq. ft. are under construction with an upward trend. The vacancy rate is rising, at 6.3 percent.

For more detailed updates or to find out how San Francisco’s submarkets are doing, contact one of our advisors; whether you’re interested in office, industrial, retail, or multifamily properties, we can help.

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

 

NAI Northern California sale of 888 Vermont Street featured by Multi-Housing News

NAI Northern California’s sale of the Vermont Apartments in Oakland was featured by Multi-Housing News in a recent article, “Oakland Community Trades in All-Cash Sale.” The article covered how the Mitchell Warren Team of Vice President Tim Warren, Senior Vice President Kent Mitchell, Investment Analyst Alex Lin, and Investment Advisor Randell Silva both represented the seller and found a buyer for the 44-unit community in a $14 million all-cash sale.

Located at 888 Vermont Street in Oakland’s Grand Lake neighborhood, the Vermont Apartments features a mix of 2-bedroom, 1-bedroom, and studio units plus two penthouses. The community’s amenities include four laundry rooms, a pool, view balconies, and a 43-space parking garage.

The San Francisco office pipeline is overflowing

The SF office pipeline is overflowing. The city only has enough cap space to approve about 2.1 million square feet of office space, but over 8.1 million square feet are currently proposed. So what happens to the developers who want to add that extra 6 million?

The Planning Commission can only approve 950,000 square feet of office development per year, with any unused approvals rolling over into the next year. When there’s not enough cap space to go around, the commissioners get to develop their own policies to decide which projects will go forward and which will have to wait until next year. One such policy approves projects in phases, so a given project might be able to start work on half of its square footage this year and resubmit the second half for approval next year; the idea is that this helps projects get started moving forward more quickly. However, it also means that they take longer to complete. From The San Francisco Business Times: “Doing so means ‘uncertainty, and it means a longer approval process,’ said Ryan Patterson, a partner at Zacks, Freedman & Patterson. ‘Time is money. So longer approval processes mean more expense. And that means even higher office rents.’”

Some developers have been able to carve out exemptions by getting voters to approve them; the Shipyard project in Hunter’s Point got its 5 million square feet of office space approved this way. The current system doesn’t seem likely to go away, though, leaving commissioners with a lot of power and developers with a lot of waiting.

Source: San Francisco 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

Tina Qi joins NAI Northern California as Investment Advisor in San Francisco

Expert in residential real estate joins the team in San Francisco

NAI Northern California is pleased to announce that Tina Qi has joined as Investment Advisor in San Francisco to focus on residential real estate. Tina brings over nine years of experience, working side by side with developers in getting their residential projects ready for sale. Tina handles everything from DRE Public Reports to working with attorneys and the city government in drafting legal documents necessary for CC&R and Bylaws, and ultimately selling the finished products. In the past few years, she has been increasing her business in land acquisitions and commercial transactions.

 

John Caronna joins NAI Northern California as Vice President in Oakland

Multifamily real estate specialist joins the team in Oakland

NAI Northern California is pleased to announce that John Caronna has joined as Vice President in Oakland to focus on multifamily real estate. John’s combined experience as a multi-unit real estate specialist, property owner and manager makes the transactions stress free for his clients.

Jonathan Kelly joins NAI Northern California as Senior Investment Advisor in San Francisco

Specialist in residential real estate and technology industries joins the team in San Francisco

NAI Northern California is pleased to announce that Jonathan Kelly has joined as Senior Investment Advisor in San Francisco to focus on multifamily investment properties. Jonathan uses his entrepreneurial mindset to develop creative products and solutions for his clients, and spends his free time analyzing market conditions and evaluating potential properties.

 

NAI Northern California’s Tim Warren named East Bay/Oakland Top Sales Broker by CoStar Power Broker Awards

Tim Warren recognized with CoStar Power Broker Award as a Top Sales Broker for the East Bay/Oakland

The CoStar Power Broker Award winners for 2018 were recently announced, and one of NAI Northern California’s top producers, Tim Warren, was named a Top Sales Broker for his work in the East Bay/Oakland market.

As a commercial real estate services company, NAI Northern California was also recognized as a Top Sales Firm in both San Francisco and the East Bay/Oakland markets.

Check out all the CoStar Power Broker Award winners here.