North Bay Overview 2012

The last quarter U.S. GNP has been revised upwards to 2.8%, not great but better than the 2% GNP growth rates of the previous two quarters. Are we pulling out or falling back? We still have not had the kick up in employment which signals that new job growth has brought in new entrants to the market. However, the Palo Alto-Santa Clara job market has reported one of the best in the country and South of Market is exploding with new major leases with leasing rates rising 46% in one year.

While the national investment market for office buildings at the institutional level increased by 37% last year, the private capital investment has not rebounded the same. What we have is a bifurcated market, one for institutional investments and one for private capital.
So what is our forecast for commercial leasing and sales for the North Bay in 2012? I’d say more of the same spotty market conditions. We have had new corporate start-ups in 2011 so leasing of “A” space has been good but the real economic bellwether-leasing of “B” space is just beginning.

Local commercial lenders are back in the market with loans in the 5% and 6% interest rate region with increasing leasing and bottom of the trough pricing, real estate investments are a good choice today.

Compared to the paltry returns for fixed and debt instruments and the risks of the stock market, commercial real estate is the best investment choice for many.
While companies and owners looking for a long term home for their business snapped up the bargains available through institutional and lender wholesales of property, investors are only beginning to take advantage of leased up buildings and the lowest loan constants in 40 years.

We also believe that the Main street businesses will gradually come back, tired of waiting on the sidelines to see what’s happening to the economy and will increasingly expand, consolidate, move and add new locations.

While some economists are predicting that the next quarter is at risk of not rising at 2.8% GNP growth, others see positive signs on the horizon.

We feel the latter will happen in the North Bay. The favored industries that are projected for job growth are all located here: healthcare, tech, medical devices, telecom and alternative energy.

The expansion pressure of the South Bay tech companies and the exploding San Francisco social networking companies will continue to keep real estate values and growth in the North Bay on an upward slope.

The Northbay Commercial Market is Strong and Continues to Recover in spite of the National Economy

The market is shuttering a bit as a result of the debt ceiling debacle but the optimism of the Northbay is overshadowing all the state and federal bad news.

With nominal vacancy rates of 8%, 15%, 22%, retail-industrial-office, the commercial market is fairly balanced.  The office market remains strong in Marin and Sonoma due to the high demand for office space in S.F. spilling over to the Northbay.

Many industrial users have added space in the first half of 2011.  Industrial space in larger sizes is hard to find.  Going forward we will see shortages in certain size categories of industrial space.  With a shortage of land and burdensome development fees, we won’t see too many new flex or industrial developments.  This also creates an opportunity for investing as this is the bottom of the market in pricing of industrial product.

Retail space occupancy has enjoyed steady improvement as consumer spending begins to bounce back.

Overall the commercial real estate markets, including office, will see increased demand and reducing inventories in spite of a slowdown and possible double dip national economy.  We have a diversified economy in Northern California that is one of the most innovative and resilient in the world and will continue to outpace the nation (even Texas-Rick Perry) while being responsive to the environment and energy efficiency.

Jobs-Jobs-Jobs Mr. President

While the politicians and bureaucrats respond to the Tea Party and Wall Street, we in the commercial real estate business feel the sluggishness of real economy should be the focus and the most effective strategy is for government at all levels to back off regulations. Free business to do what it does best-innovate and create jobs. Allow our local and regional banks to open up lending to more risk adverse start-up businesses. Encourage municipalities to mitigate regulations that stifle start-up business. The big banks should get out of the trading business and back into making loans to small and medium size businesses. Get banks to form coalitions and support small and medium size businesses. Main Street is the foundation of our economy and the fabric of our communities.

2011 Marin County Forecast

The umpire threw his hands out from his side and yelled “Safe”, the runners advanced but only scored one run to tie the game,  similar to the commercial real estate market in 2010, “Safe”, but moving forward slowly.

We are now in our second calendar year of the recovery, the economy has been stabilizing and is rebuilding, some economists say at a slightly faster than expected pace through the end of 2010. This was fueled by double-digit growth in business equipment, rebuilding inventory and software investment and an increase in consumer spending, pushing growth at 2.6 percent through the fourth quarter of 2010. The economy is expected to grow 3.2 percent this year which is up compared to a 2.7 percent forecasted in October. Goldman Sachs amended its U.S economic growth prediction from 2.0 percent to 3.4 percent for 2011 and the International Monetary Fund (IMF) raised its 2011 global economic forecast from 4.2 percent to 4.4 percent.

A few of the reasons for the economists’ growing optimism are: end of the year stock market gains, workers received an additional 2 percent payroll tax holiday which went into effect at the end of 2010, lenders lessening up loan restrictions and have minimized fires sales, especially for quality assets and a government that seems more sympathetic to the needs of small businesses, which historically accounts for two-thirds of new hires.

The outlook for the Marin County commercial real estate market is also brightening; the breeze is light but steady and the chill has given way to the sun as it peaks through the clouds. Office rates are stabilizing, and those all time low rental rates are slowly subsiding, which means that property values will start to increase again. The Marin office market net absorption recorded 127,547 square feet of positive leasing activity, but the overall year to date figures showed that 2010 was basically flat, which is a significant improvement from 2009.

All the indicators are pointing in an upward direction, a slow but steady economic recovery. Inflation is forecasted to be moderate in Marin County but will increase in two to three years. A great deal of the recovery will depend on the innovation that Marin prides itself on and the availability of new financing, venture capital and investors climbing back into the ring and taking risks in new and expanding companies.

 

Sonoma County Commercial Real Estate Brief

The commercial real estate investor market in Sonoma County is still experiencing some difficulty securing acceptable financing – although it is improving. Loan-to-value used to be as high as 70-80% a few years ago, but now 60-65% is about the best one can expect. Therefore, investors need a lot more cash to make deals.

SBA financing has been the instrument of choice for owner/user acquisitions with rates in the 6-6.5% fixed rate and loan to value of 80-90%.

Rental rates remain in flux, as anxious owners looking to fill empty spaces are offering discounted rates, but usually for just short term leases.

I believe that the commercial market is beginning to see signs of improvement as financing eases up a bit and leasing activity increases.  Office space inventory has moderated, with the higher end space being absorbed at a greater rate than class B- and below.  Deepest discounts are being offered at the lower end of the spectrum.  There are a few retail tenants poking around and the industrial segment continues to be the most robust. Tenants are heeding  the call from brokers to position themselves now, often in nicer space at the same or reduced rental rates, for future growth.

-Joel Jaman, Partner

Due Diligence

The Chinese have two brush strokes that combine to form the word “Crisis”. One stands for danger and one stands for opportunity.

I like this term because it illustrates the nature of some outstanding opportunities in this economic climate to purchase real estate; and those who can should take advantage of this “buying window”.

There has never been a better time for an occupant to take advantage of the 90% leverage SBA loans and a great time for astute investors willing to take a prudent risk.

How to protect yourself when purchasing new real estate becomes a lot simpler after you put together a Due Diligence road map to assist you in accomplishing your real estate goals.

The following is a Due Diligence list to help you formulate your buying strategy:

  1. Know your market; Educate yourself; Loopnet and MLS; Review all your options; Drive the neighborhood and area.
  2. Make sure you understand the sales contract (every clause, don’t just sign).
  3. Access your Buying Power, and know all your options – talk to a few lenders; get the best option. UNDERSTAND THE PRE-PAYMENT PENALITIES in your loan documents.
  4. Be present for the physical inspections – be there if possible to observe, report, and ask questions.
  5. Review the preliminary title report; go over each item; obtain microfiche detail of all exceptions, easements, etc.
  6. Review a copy of CC&Rs, association documents, all leases documents. Make sure you understand all options that run with the leases.
  7. Check closing papers for interest, bond and tax prorations.
  8. Verify size of site, the building and property boundaries.
  9. Check if property is in Alquist-Priolo area and/or Federal Floor Insurance map area. Make appropriate disclosures to Buyer and Seller. Provide a Natural Hazards Disclosure Report.
  10. Buyer to obtain a Phase I investigating the hazardous waste risk for all sites and of all buildings, if necessary.
  11. Check the deed for correct legal description of what property is being conveyed. Very important!
  12. Make sure the Liquidated Damages Clause are initialed and written in a bold type or on a separate sheet.
  13. Obtain environmental clearance, zoning verification,and General Plan compliance.
  14. Make sure you obtain Estoppels indicating the leases are in full force and effect, if applicable.

Don’t hesitate to hire a qualified professional to lead your team! Don’t wait to buy real estate and wait; BUY REAL ESTATE AND WAIT.

Life Shrinks and Expands According to One’s Courage

“Taking Advantage of the Current Economic Climate”

This quote is attributed to the famous poet Anais Nin who probably was referring to self-actualization as opposed to accruing a fortune, but it’s akin to a universal principle in life… that “The greater the risk; the greater the profit.”

There lurks a prevailing attitude in the marketplace that the “other shoe” is about to drop in Commercial Real Estate; that the Commercial Real Estate Market is about to collapse under the stress of the commercial loans coming due. There’s an anticipation that property values will continue to decline as business interests consolidate and fuel vacancies.

It’s important to take a step back from the “Chicken Little Mentality” and apply some critical thinking. What aspect of Commercial Real Estate are “they” referring to? Commercial Real Estate is a Broad Umbrella Term for a host of real estate investment products; almost anything that isn’t a single family home.

Commercial Real Estate includes Apartment Buildings, Office and Medical Buildings, Land (all kinds of commercial development opportunities), Agricultural Land, Mobile Home Parks, Retail Centers, Warehouses, Industrial Buildings, Self Storage Facilities, and NNN Leased Investments just to highlight the most common product types. There are investors out there searching for Apartment Buildings and Mobile Home Parks in strategic areas because these investments have taken advantage of the housing need fed by the rash of single family foreclosures.

You can see where I am going with this. It is simply inaccurate and short sided to group all these different investment categories into one lump sum, and make a broad assumption about the potential of Commercial Investment Opportunities. It may be time to recognize that new opportunities are morphing in this evolving existing economic landscape.

Many prudent investors are stuck on the sidelines making 1% returns on their equity waiting to react to financial indicators to signal a time to jump in again when the time is right. The cliche of is the glass “have full or half empty?” is cliche is for a reason.

There are some indicators out there that are telling us the proverbial “shoe” may have already dropped.

Orders to U.S Factories rose 1.3% in March according to the Commerce Dept. (A decline had been expected), and this widespread activity offset a steep drop in commercial aircraft. Previously occupied homes sales rose 21% from a year earlier, and MasterCard Inc. said its first quarter profits in 2010 jumped 24 %. Banks appear to be delaying foreclosures, and starting more concentrated efforts to create work-out programs for clients; both residential and commercial.

The cultural phenom of “Buy and Flip” continues strong as small and large investors gobble up the home residue of the sub-prime loan antics, which is continuing to drive up the median price of homes in many areas.

Yet Investors continue to hold their cash in lackluster vehicles that are barely returning 1-1.5%; at the expense of missing out on outstanding income properties.

Cap Rates are higher than they have been in 20 years; easily 7-8 % (or more) for strong/positive tenant credit; in growing demographic areas of the country. Interest rates remain low and reasonable. Many Owners are willing to be creative to sell their properties. Banks have a lot inventory to sell, and are open to creative work-out deals themselves to both gluts of inventory.

Some Analysts are cautiously signaling the beginning of an economic recovery, and it may be time to consider researching and uncovering opportunistic values. Now is a good time.

Now is a good time to begin to explore the numerous incomes producing investment opportunities that are on the market. Begin to consider taking advantage of the inventory, creative financing, and income opportunities. The market will recover, and there’s a window of opportunity to jump ahead of the fray… Taking time to investigate and decipher the income potential could reap handsome financial rewards. Your chance for potent equity appreciation and exceptional cash-flow is the best it’s been in years. Opportunities are plentiful now for those with the courage to take action.

Why Commercial Real Estate?

One tremendous advantage that you receive from investing in Commercial Real Estate is the ability to leverage your money.  With a percentage of the total purchase price (usually about 25% to 40%) you can expand your range of appreciation potential on the purchase price (not just your cash down payment). Unlike the stock market or your own residential property; with Commercial Real Estate you can take advantage of the tax benefits of a depreciation schedule and all the other tax write-offs.

In addition to receiving the income stream from your Commercial Real Estate, you have the additional potential to participate in the Real Estate appreciation as well.  With a commercial real estate investment you are eligible to take advantage of the 1031 Exchange program. This gives you the potential to build up equity and receive the tax advantages of your depreciation schedule while continuing to let your equity build over time without the interruption of “tax bites” out of your principle.

What’s the catch?  Let’s explore some of the different types of income property currently available.  Basically, I’m going to highlight 3 different categories of Investment property and present basic advantages and disadvantages.  Every one of these categories has a proven formula for success.

THE 3 CATEGORIES INCLUDE (we include apartments as commercial):

  1. Multi-Family Residential Real Estate / Apartment Buildings: One of the most desirable advantages of buying a Multi-Family Properties is the advantage of the best financing available in commercial real estate.

    Lenders view apartment buildings very favorably. They are considered low risk because there is little chance for a drastic reduction in income, as all tenants will probably not move at the same time. Apartments are probably the most sought after of all investments because most people inherently understand residential income property (everyone has to have somewhere to live).With sparse inventory and high demand, some Investors are willing to sacrifice income to speculate on future appreciation. Local municipalities contribute to this strategy with expensive, cumbersome regulations that make new construction difficult and time consuming; thus creating an artificial value to EXISTING residential income property.

    The downside to Apartment/Multi-family Investments can be the labor intensive issues you must deal with. Lots of tenants and you can be beset with an on-going list of repairs and replacements which will significantly interfere with your intended “cash-flow expectations”. It’s great to purchase enough units to be able to absorb the expense of a manager who will handle all the day-to-day problems and annoyances as they occur. Typically, there is a strong pool of people (i.e. retired) who welcome this position in trade for a free apartment unit or one with reduced rent. Retirement communities often have a number of couples that covet this kind of opportunity to sublimate their pensions or Social Security Income.

  2. NNN Leased-Investments: This typically will be a leased-investment that is developed by a substantial Corporate Client who will find the property, build the building and turn around and market it to the Investment Community at a certain return on their investment.  They are able to construct a scenario that gives them the ability to just about pay for their new location even before they open.  Depending on the financial strength of the organization, the return on one of these NNN-LEASED INVESTMENTS is somewhere between 6-9%.

    Some of the more well-known companies using this formula include Chevron Gas Stations, Walgreen’s, Krage Auto-Parts, CVC Pharmacies and a plethora of fast food and restaurant concepts (Denny’s, Taco-Bell, Applebee’s, Burger King, TGIF Friday’s are a few that come to mind). The plus side to this investment category is an absolute “No Worry (coupon-clipper as they’re affectionately known) Investment”. The company assumes all responsibility for the maintenance and repairs of the building or they take care of everything with the exception of the sidewalls and the roof (some will even take care of absolutely everything including the roof and walls). You receive a check like clockwork from the parent company. The downside to this investment vehicle is the risk that the company could go bankrupt, that the location could one day become obsolete, or that the tenant may vacate one day and you will be faced with the task of selling or re-leasing the property (potentially expensive and time consuming). However, these sites are carefully selected to reflect high visibility, a strong surrounding demographic base and will be a desirable location to other retailers seeking a high visibility and convenient site.

  3. Mini-storage facilities: These can be extremely hard to find as these cash cows have a very loyal following of investors.  Mini-storages offer the investor extremely low-maintenance requirements for personnel, have a multi-demographic customer base and give an investor a superior return on the investment dollar.

    The downside is increased competition. Developers are always looking for new sites and increased competition can create market saturation that can eventually impact the occupancy rate. Keep in mind that many cities have an aversion to these bland structures and can be extremely hesitant in allowing more to be built.

Just a few ideas to consider.

Time for Antiquated Zoning Reform

There are a hundreds of factors involved in coordinating our Community’s efforts to continue to develop an economic environment that is powerful, accelerating, and moving forward.

We all want innovative ideas and efficient programs that will positively affect and empower Sonoma County’s economic engine. No one would argue the importance of supporting small business and small business’s role in advancing the economy. Small business/small business entrepreneurship continues to be a driving force in moving the economy forward; not just locally, but nationally. People with a drive to create, lots of discipline, a résumé and a great idea are a major piece of the economic puzzle that the City needs to empower and support in all ways possible.

The City of Santa Rosa adopted an “Economic Sustainability Strategy Program” in May of 2010 to pledge to the citizens and the business community that they were on-board to create a business friendly environment. The Chamber of Commerce recently adopted a program called BEST to promote innovation in the business Economic environment.

In the spirit of continuing to develop a business friendly business environment, it is time for the City Planning Department to re-visit its use permit policy and consider all avenues available to simplify the current zoning code.

The City’s procedures for business owners to get zoning clearance to occupy buildings has quietly become a lengthy procedure that is hampering the business development in Santa Rosa.

Currently, there are over 500 PD (Planned Development) zoning designations in the City of Santa Rosa.

Presently, if a property is located in one of the PD zones it often requires a use permit in order to get a zoning clearance to occupy that building. In order to get a use permit you have to pay a $2400 fee, and you have to be prepared to wait 8-10 weeks to get the use permit approved. Keep in mind that going through the process doesn’t necessarily mean you will be approved.

This policy ineffectiveness is further exacerbated by the current abbreviated City planning hours and the number of part-time staff available to process the use permits.

I am not referring to uses that “do indeed” need to be scrutinized for neighborhood suitability, i.e., a church, a school, medical marijuana dispensary, medical use in a neighborhood, card room, adult bookstore etc.

The problem is the PD zoned properties are often subject to this laborious use permit process and it is stagnating business development.

For instance, I have a client who bought a small craftsmen building on Mendocino Avenue who was told that ANY USE there would require a use permit. Doesn’t it seem a little narrow that the City can’t identify any uses for that building that would not require a use permit in order to promote occupancy for that building? Currently the building is vacant, and has been for months.

What about selling/buying a building?

Most commercial purchases with a loan contingency require a 30 day due diligence period and a 60 day period for loan approval. Consider the fact that nothing will happen to begin the purchase process until the buyer knows the City will approve the use. That can mean an 8-10 week delay for a use permit approval before you can even begin the purchase process.

15 years ago a use permit cost $50 and Santa Rosa had a full staff of people on-board to process such documents, but things have changed dramatically.

I realize scrutinizing over 500 PD zones will require a lot of focus and will be time consuming to simplify, but the fact this behemoth system even exists is reason enough to re-evaluate unreasonable restrictions and streamline the business occupy process in Santa Rosa.

Reducing the red tape and expense connected to zoning compliance in the City of Santa Rosa is critical to creating a business atmosphere that will contribute to job development and job retention. The various economic development programs would do well to focus attention on this area that functions as a bedrock for business growth.