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How to Make Profitable Investments Throughout the Real Estate Cycle

Opportunities for profitable investments exist at every stage of the real estate cycle. Here’s how to identify which strategy is best for where the market is now.

During the recovery phase, just after a recession or pullback in the market, there is low demand for housing and high vacancy rates. Prices and interest rates are low, so if you have the liquidity, it’s a great time to buy properties below value, or to refinance.

When the market starts to recover, we enter the expansion phase. New construction begins and interest rates are still comparatively low, so your value-add properties’ equity is ready to capture with a refinance. Reinvest in new development, re-development, or purchasing additional value-add assets.

In the hypersupply phase, the market has become overconfident. An abundance of inventory compared to the demand means prices are ready to decline, and construction slows. This is the tipping point for high sales prices; sell now or buy a stable asset for long-term cash flow to get you through the next cycle.

Time for trouble: the recession phase. Over-inflated growth causes demands to plummet and default rates on mortgages and loans to soar. This is your chance to buy properties for rock-bottom prices, especially distressed sales. Go for value add.

Of course, in order to take advantage of the opportunities offered in any stage of the real estate market, you need to know where we are currently; for an in-depth analysis and “You Are Here” guidance, contact one of our advisors.

Source: Million Acres

Homes are Finally Getting More Affordable; Will Apartment Downside Risk Follow?

Housing price growth has moderated and mortgage rates have declined, leading to increased housing affordability at the same time as rising consumer confidence and incomes have prompted developers to start building more quickly. What will this mean for the apartment rental market?

According to CoStar Analytics, both existing and new home sales rose in August, with new single-family home sales increasing all summer and existing home sales increasing two months in a row. And single-family housing starts increased in August for the third month in a row despite continually rising costs, delays, and lot scarcity. This has resulted in the lowest home price growth since 2012, below 4% per year. Mortgages are getting cheaper as well due to monetary policy and 10-year Treasury yield changes; CoStar reports “NAR’s housing affordability index based on fixed rate mortgages was up more than 10% in July compared to a year ago.”

However, homeownership rates have not yet increased; overall, they continued to decline over the first half of the year. But as new data becomes available for the second half of the year, multifamily investors are advised to proceed with caution.

Source: CoStar Analytics

Three New Housing Bills to Impact Multifamily Real Estate Market

The multifamily commercial real estate market is likely to be impacted by three housing bills currently making their way through the California legislature. Senate Bills 330 and 13, and Assembly Bill 1485, each seek to relieve the state’s housing crisis by allowing additional construction and streamlining the approval process.

Sponsored by Senator Nancy Skinner (D-Berkeley), SB 330 will limit how strict cities can make their zoning. According to Bisnow, the proposal “prevents governments from downzoning until 2025; setting parking minimums or imposing housing moratoriums; or enacting other local measures that have made housing development nearly impossible in space-strapped areas.” It also “limits the number of public hearings on a zoning-compliant housing development proposal to five, and the length of time its permits can be considered.” Ideally this will make it easier and faster (and therefore cheaper) to build multifamily housing.

Assembly Bill 1485 aims to expand on 2018’s SB 35, a bill that was supposed to remove “discretionary review and other processes for mixed-income, completely zoning-compliant housing development proposals in cities not meeting their state-determined housing needs.” But due to strict qualification requirements, only three projects have been able to take advantage of the original law’s streamlining effort. The new law clears the pathway to more projects by loosening restrictions. Under AB 1485, 20% of new development units would be reserved for incomes of less that 120% of the area’s median income, a reduction from the previous requirement of 50%.

Finally, SB 13, sponsored by Senator Bob Wieckowski (D-Fremont), is designed to encourage the construction of accessory dwelling units (ADUs) by removing or decreasing fees. In addition, it “allows for automatic approval of an ADU permit application if a local agency has not acted upon the application in 60 days” and “removes the requirement that the owner of an ADU live in the main home while renting out the ADU, meaning both the main dwelling and accessory unit can be rented.” While this will not directly apply to the multifamily industry, the additional availability of ADU rental units may soften the rental housing market.

If they make it through the committee and amendment processes, each of these three bills will be voted on in early September.

Source: Bisnow

5 US cities with the highest cost of living

According to a recent report by Move.org, the Bay Area’s major cities continue to rank in the top five for the highest cost of living nationwide. San Francisco holds the top slot, with New York City close behind, followed by San Jose, Oakland, and Boston. The report measured the average monthly cost for rent (a 1-bedroom apartment), food (groceries and some restaurant meals), gas, utilities (electricity, water, etc.), and internet for each city.

Surprising no one, San Francisco, California is the most expensive, with rent among the highest in the nation; rent makes up 80% of the $4,210.60 monthly cost of living in the city. The city also has some of the highest gas prices at $197.88 per month, though residents who commute via bike or public transit can avoid these costs. Food is expensive, around the 80th or 90th percentile, but utilities are comparably cheap at $123.22 per month, about 30% of the national average. Internet costs are pretty middle-of-the-road compared to other cities, averaging about $66.62 per month.

New York, New York is just $250 behind SF, with an average cost of living of $3,956.11. Food is the problem here, costing over twice as much as San Francisco, at $468.60 per month. Rent is also extremely high, at $3,126.35. Gas is more expensive than the national average, around the median value, at $155.55 per month, and internet is just about average at $62.77. Utilities cost a little less than elsewhere, around $142.84 per month.

San Jose, California is the third most expensive city to live in, with lower rents than SF or New York but high gas prices and above-average food costs. The $3,289.07 cost of living includes $2,555.85 for rent, $186.15 for gas, $359.85 for food, $63.36 for internet, and $123.86 for utilities (significantly cheaper than the national average).

Despite Oakland’s reputation for being cheaper than the City, its cost of living is still fourth-highest nationwide, at $3,212.14 per month, only about $1,000 less than San Francisco. Rent and gas are the highest costs compared to the median, at $2,481.65 per month and $175.95 per month. Food is just a little more expensive than the national average, around the 30th percentile, at $347.33 per month. Internet and utility costs are pretty average, at $65.00 and $142.21.

In the last spot of the top five is Boston, Massachusetts, with New York’s high rent and food costs. An average cost of living of $3,211.51 includes $2,420.26 for rent, $435.78 for food, $145.35 for gas, $62.97 for internet, and $147.15 for utilities.

Source: Move.org

Bay Area cities rank in top 10 for most LEED units

California has more LEED-certified multifamily properties than any other state, over 57,000 units worth, and the Bay Area has over 12,000 of these green apartments and condos, with three cities ranking in the top ten statewide. Just behind Los Angeles, San Francisco ranks #2 for the most LEED units, at 8,090, and San Jose is just two spots behind at #4 and 2,545 units. While Oakland hasn’t quite caught up to these levels, it still ranks in the top ten, at #8 with 1,648 units. 

According to Multi-Housing News, “While LEED certification positively impacts the health and well-being of people, as well as the planet, it’s a valuable feature for investors, as it translates to faster lease-up rates and higher resale value.” Owners of LEED multifamily buildings are primarily real estate investment trusts; AvalonBay Communities, owner of the various Avalon, AVA, and eaves complexes in the Bay Area, and the Essex Property Trust, owner of over 80 Bay Area buildings, hold over 9,000 units between them.

The green housing trend really took off in 2008, jumping from 315 LEED-certified apartments and condos statewide in 2007 to 1,947 the next year. The numbers continued to grow through 2017, with a slight dip last year from 7,378 in 2017 to 6,185 in 2018. The developments still are mostly an urban trend, clustered in and around California’s major population centers, though the report only included communities with at least 50 residential units.

Source: Multi-Housing News

Transit-oriented development on the rise

Cities across the Bay Area are opening up to transit-oriented development, building high-density housing with ground-floor retail near BART stations, including on BART-owned land. Despite neighbor complaints, cities are revising their zoning restrictions to allow bigger buildings near major transit hubs.

Most of the development is happening in the East Bay, with completed projects near at least eight stations and more under construction including a 402-unit apartment complex at MacArthur Station with 13,000 square feet of commercial space; 94 units at Fruitvale Station; 200 units at Pleasant Hill Station; 410,000 square feet of commercial space at West Dublin/Pleasanton Station; and 596 units at Walnut Creek Station. Planned projects in Millbrae, West Oakland, Lake Merritt, North Concord/Martinez, Balboa Park, and Fruitvale total over 2,300 units and over 2 million square feet of commercial space.

As zoning codes begin to relax near transit, future development opportunities could open up, strengthening the local markets for existing multifamily buildings as well as retail and office assets.

Source: SF Chronicle

NAI Northern California Presents: Record-Breaking Sale of 25 Units in Lafayette

Sale of 3535 Brook Street in the East Bay Area by NAI Northern California sets record price per unit and per sq. ft.

LAFAYETTE, CA –  August 6, 2019 –  NAI Northern California is pleased to announce the sale of 3535 Brook Street in Lafayette for $12 million, which shatters the previous pricing record by more than $50,000 per unit and $44 per square foot. The Mitchell Warren Team and Berger Mandel Team represented both the buyer and seller, delivering an unsolicited all-cash offer. This 25-unit apartment building is blocks from Mt. Diablo Boulevard and from the Lafayette BART station.

“The buyer was looking for assets in the Lafayette market, and our team was able to secure a property that he had wanted to purchase for many years,” according to Vice President Tim Warren. “This was definitely a win/win transaction for both the buyer and seller.”

3535 Brook Street is a fully leased 25-unit apartment complex, a rare multifamily asset in the Lamorinda market. It features an on-site laundry, swimming pool, spacious garden, and generous parking. The site is conveniently located just a block away from Lafayette Square and the downtown shopping district and within walking distance of local schools, library, restaurants, and other amenities.

Lafayette is known for its pastoral rolling hills, good schools, and wealthy inhabitants. In 2016, the median household income in Lafayette was over $140,000, more than twice the statewide average and about two and half times the national median.

It is rated #5 in “Best Places to Live in Contra Costa County” and boasts a thriving nightlife without sacrificing the “small town” feeling and pleasant weather for the variety of outdoor amenities in the vicinity.

Lafayette is also near several local attractions, including but not limited to the Lafayette Hillside Memorial, Lafayette Reservoir Recreation Area, and Briones Regional Park.

The Mitchell Warren Team is comprised of Kent Mitchell, Tim Warren, Randell Silva, and Alex Lin. The Ethan Berger Team is comprised of Ethan Berger, Benjamin Mandel, and Garrett Blair.

 

About NAI Northern California

NAI Northern California is a full service commercial real estate firm serving the San Francisco Bay Area and beyond. Our team delivers technology-enabled commercial real estate services that create value for our clients, industry, and communities.

NAI Northern California is a partner of NAI Global, the largest commercial real estate brokerage network, with more than 375 offices worldwide and over 6,000 professionals completing in excess of $20 billion in commercial real estate transactions globally.

Recently on the San Francisco Business Times Book of Lists, NAI Northern California hit the top 5 and 6 spots in San Francisco and the East Bay and top 15 Bay Area wide. NAI Northern California is part of the NAI Global network, recently recognized by Lipsey as the number 4 most recognizable commercial real estate brand.

NAI Northern California Presents: Record-Setting Sale of Multifamily Building in San Pablo

Sale of 2394 Road 20 in the East Bay Area by the Ethan Berger Team sets record price per unit

SAN PABLO, CA –  July 16, 2019 –  NAI Northern California is pleased to announce the sale of 2394 Road 20 in San Pablo for $4.495 million, setting a new record for price per unit for San Pablo multifamily properties. The Ethan Berger Team originally represented the seller, a local multifamily private equity group based in the Bay Area, when they purchased the apartment building in June of 2017 as a value-add opportunity in need of significant renovation and improved management. After successfully renovating and rehabbing the property, the units were re-tenanted, yielding nearly a 110% increase in the gross rents. The seller then enlisted the Ethan Berger Team (Ethan Berger, Benjamin Mandel, and Garrett Blair) to determine a value and market the property. They quickly developed multiple competitive offers and identified a buyer, achieving a record-setting price per unit of $249,722 and a total return on investment for the seller of nearly 95%. “After we identified the opportunity, we leveraged our local-market expertise and knowledge to help our client throughout the process of buying the property, improving it, and completing the sale.” said Ethan Berger, Senior Vice President at NAI Northern California. “Our relationships and extensive marketing platform were key in maximizing our client’s ROI.”

2394 Road 20 consists of fifteen large 2 bedroom, 1 bathroom apartments and three 1 bedroom, 1 bathroom apartments in a core Bay Area location. A complete renovation of the property and all of the units was completed in 2018. Each unit features laminate-wood flooring throughout the living spaces; brand-new kitchen and bathroom cabinetry; and new countertops, fixtures, and stainless-steel appliance packages. The exterior of the property was also upgraded with new paint, outdoor design features, landscaping, sewer lateral replacement, and parking lot striping. The building has on-site coin-operated laundry and is located within 10 minutes of El Cerrito Del Norte and Richmond BART Stations and less than one mile from Contra Costa College.

 

About NAI Northern California

NAI Northern California is a full service commercial real estate firm serving the San Francisco Bay Area and beyond. Our team delivers technology-enabled commercial real estate services that create value for our clients, industry, and communities.

NAI Northern California is a partner of NAI Global, the largest commercial real estate brokerage network with more than 400 offices worldwide and over 7,000 professionals completing in excess of $20 billion in commercial real estate transactions globally.

Recently on the San Francisco Business Times Book of Lists, NAI Northern California hit the top 5 and 6 spots in San Francisco and the East Bay and top 15 Bay Area wide. NAI Northern California is part of the NAI Global network, recently recognized by Lipsey as the number 4 most recognizable commercial real estate brand.

Housing development and building pipeline up to a record high in San Francisco

In San Francisco in 2019 the overall pipeline of housing being developed hit a record 72,865 units, up over 5,050 from Q1 2018.

The number of units in developments which are currently under construction and should be ready for occupancy within the next year or two has increased, from 8,100 at the end of last year to 8,500 in the Q1 2019, which is within 3 percent of the current cycle peak of 8,800 set in Q3 2015.

Around 16,800 permitted and approved units are in play, while some major housing projects in Treasure Island, Park Merced, and Candlestick area.

Read more on Socket Site

 

Is Bay Area housing still a sizzling hot housing market?

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.

Read more on NAI Northern California’s Newsletter