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Consolidated Market
May 2017
This is it, if you want a market to sell into. Real estate in Berkeley and Oakland is highly valued right now based upon metrics from cap rate to GRM to rental rate to the current projections for investment cycle and interest rates.
Most owners want to hold their real estate through the cycle and even though we’re likely at the top now, they’re perfectly willing to slog it through the next 8-12 years to the hopeful top of the next cycle. It’s a smaller group of owners that has a reason to sell sooner than that who are looking at getting the highest price now on at least part of their portfolio.
Here are some reasons you might want to sell now near the top of the market:
• You want to trade into a different type of investment, such as Net Leased or non-real estate
• You need to divest from a partnership sooner than 10 years from now
• You want to take profits now into cash so you can reinvest in a softer market
• You want to diversify your portfolio
In these or similar scenarios my team can help you get the job done. In fact, we are uniquely qualified to work with you step-by-step to obtain the highest sale price on your Berkeley or Oakland Multifamily and Office real estate.
Call me for an Estimate of Value on your property: 510-919-4919

 

 

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Are You a Buyer or Seller: I’m Both
April 2017
Sophisticated Owners are always on the alert for the opportunity to profit, whether that means buying or selling. Why is that? Because the whole point of owning real estate is to make money. You wouldn’t run a Doctor’s office for free, or a grocery store. Likewise, investment real estate has to make money to justify all the work you put into it, and sometimes that means buying or selling.
Why? Can’t you just hold forever? You can, but two things will happen: 1. Over time you’ll get less leveraged, more of your net worth locked into one location, less depreciation deduction in an older and older building over time, and 2. You’ll miss golden opportunities to increase your wealth along the way.
As time goes by, real estate loses value relative to the real estate market as a whole unless you’re lucky, work hard, and in some ways, you just lose regardless.
Here are some ways:
• Your sub-market has to outperform others
• You have to constantly rebuild your asset as it gradually falls apart
• You have to put less money in than the rents but not let the property deteriorate
• You have to be vigilant and catch problems like dry rot before they destroy your asset
• You have to raise rents
• Your tax depreciation runs out and you can’t stop that
Against this backdrop of decline relative to other opportunities we as owners can make the choice to consider those other opportunities.
Here are some examples that will change the entire trajectory of your wealth and your real estate business over time:
• In every market, there is a point at which values are high relative to income. This is a point at which to hoard cash, refinance and keep the money, sell and pay taxes if that’s your long term plan, sell and trade into a different part of the country or a different product class such as Net Leased.
• In every market, there is the reverse point at which values are low relative to income. Buy. Find a way.
• Maybe most important, in every part of every market, that means this can happen right now, anytime, opportunities to sell at a high price or buy at a low price come up. This is much better than timing the market because it’s famously difficult to time markets. Just look for deals and be willing to sell if you get a high offer.
The last part requires being in touch with a couple of good brokers. That’s were we come in.
Call me for an Estimate of Value on your property.
Let’s make it happen. 510-919-4919

 

Granola Shotgun

I explore towns and cities all across the country and describe what physically exists as well as some of the reasons why things are the way they are. The same basic conditions are in evidence in most places and it’s not always pretty. This raises the hackles of locals who proclaim, “Hey! You don’t know our town. But since you think you know it all why don’t you offer some solutions instead of just putting us down?”

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I’ll use Rockford, Illinois as an example of how I think things will play out over time. But it’s important to understand the town’s historical trajectory first. The downtown of Rockford exists because of the Rock River. It was possible to cross or ford the river at this location without a bridge back in the early days so this was a natural gathering spot for commerce and trade. The surrounding forests and farmland…

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Join me and fellow panelists at the 9th Annual EBRHA Trade Expo today in Oakland, CA.  We’ll discuss strategies for improving your real estate portfolio.

EBRHA

Here and There

Berkeley and Oakland have occasionally had a fraught relationship. Berkeley has the long-term support of UC Berkeley, while Oakland sits at the geographic center of the Bay area and was long known as a national capital of crime. Divergent stories. But in mid-2015 do the stories of Here and There continue to diverge?

We’ve seen pricing on assets in Berkeley increase while inventory diminishes. In Mid-July our team made a competitive presentation on a Multifamily building near Ashby and Telegraph at $350,000 per unit and almost $500 per square foot. This was not next to UC campus but way out in an area that is usually considered more marginal. That’s Berkeley and we’ve seen this sort of market before. But what is the bigger regional picture and how does that relate to the Berkeley market?

Enter Oakland. Berkeley’s neighbor to the south seems to be benefiting from this current economy in a big way also. From Rockridge to Temescal, Jack London Square to Adams Point on Lake Merritt we see Multifamily pricing pushing upwards towards…$500 per square foot. Wait, didn’t we just say that was high for Berkeley? How could…Oakland… The point seems to be that this economy is hitting Berkeley’s neighbor harder than past booms. Why exactly is that?

Where?

San Francisco is suddenly on the map. Did you know that it wasn’t before? According to members of the panel at the July 14, 2015 RealShare Convention in San Francisco, when real estate investment groups not based in San Francisco talk about a top handful of U.S. markets they mention LA and NYC and they also mention San Francisco. It’s on the global map and this is affecting real estate values regionally, as there is a global demand for San Francisco real estate. Berkeley and Oakland (and the entire Bay area) are caught up in something bigger than themselves. And one has to wonder what comes next.

Conventional wisdom holds that we’re 6-7 years into an economic recovery and likely have 3-4 years before a pullback. I remember the recession of 2001: my rental units in Berkeley and Oakland had shorter lines of tenants, they didn’t beat me to the property for showings, I had to show each unit several times to get the rent I wanted, and I still got an increase in rent every time I turned over a unit and spruced it up. Basically, no big change. I remember the “economic meltdown” of 2007-8. Just read the lines above again because that was my experience then, too.

What is the “pullback of 2018” going to look like for rental owners? Rather than glibly state that it will be the same as those past two recessions, let’s look at two factors that might be different: maximum rent per square foot and renter income. In the example above, a multifamily building near Ashby in Berkeley, the owner’s most recent rental per square foot per month is over $4. That’s off the charts high. Is it sustainable? Maybe. Because people in urban environments are favoring smaller, well-located, highly functional spaces to live. That’s trend number one.

Renter income is the other trend to watch. We have not only a whole country but a whole world of people who want to live in a city that’s on the world map. They want to be Here. Even during a downturn it is likely that San Francisco, Berkeley, and Oakland will all still be Here and those who live There will still want to come check us out.

Sale Price Chart for Aug 2015 Kent Mitchell Newsletter

Did You Know?

According to citylab.news average recent commute times for residents of Berkeley, Oakland, and San Francisco residents were 25, 27 and 29 minutes, respectively. This not entirely surprising statistic may tell us something important about living near Downtown San Francisco: it’s possible that you’re closer in Downtown Berkeley or Oakland. After all, who has a better view of San Francisco, the City itself or its next door neighbor?

SUMMER OPPORTUNITIES
We’ve been in a strong real estate market for several years and this summer we’re seeing rents and resale prices higher than ever before. The 2007 recession has diminished in our collective rear view mirror. So what is next? An important task property owners should take on now is to observe where their property’s market and sub-market has been recently and where it may be headed. For example, while the Oakland multifamily market has been booming for several years, the Berkeley market near UC campus was moving powerfully ahead even in the depths of the recession. And the Fairfield market is just now hitting the level of rental demand that we saw prior to 2007. At what stage is your market? For example, if you own property in the Fruitvale district of Oakland, you are now seeing simultaneously strengthened rental demand and dramatically increased resale value for a given rent—a powerful combination for an area that has been historically slow to pick up during each recovery cycle!

WHAT’S THE PLAY?
If you sold a $2MM, 6-unit property beside Lake Merritt in Oakland today on which you had a $1MM loan and were receiving an annual cash flow of $45,000, you could purchase the $4MM property I have listed at 307 E Tabor in Fairfield and have a cash flow of well over $100,000 per year. That is more than double the cash flow for a two-part transaction we can facilitate with confidence.

DID YOU KNOW?
You can get from Downtown Oakland to Downtown San Francisco in 11 minutes by BART. If you were a renter looking for a place, would you consider Cole Valley in San Francisco, 35-45 minutes by Muni from downtown? Or would you first take a hard look at Downtown or Uptown Oakland, 11 and 13 minutes from San Francisco by BART? These areas of Oakland are full of daytime and nighttime activities (and job opportunities) and are three times “closer,” in travel time, to Downtown San Francisco than most of San Francisco itself. This is one major reason Oakland is doing well right now.

The Kent Mitchell Team has recently closed several Multifamily, Office/Retail and Mixed Use buildings. Call Kent today for an estimate of value: 510-548-2554.

FURTHER DEVELOPMENTS IN OAKLAND
Looks like the passion for Downtown Oakland real estate is unabated. And I think we can all see why. Have you driven across the new Bay Bridge from Oakland to San Francisco recently? There are new high rise residential structures going up as fast as you can say “I want that condo.” Faster than I can say it, anyway. But why?
Silicon Valley is uncool. Sorry, it’s just true. And so all the smart hipster tech people have finally gotten fed up with driving from San Francisco to Palo Alto or Mountain View every day. Why not just live and work in the City? So all of a sudden the past several years Oakland is sitting right next to one of the biggest transfers of wealth and brainpower in the world at this time. Goodbye pocket protectors, hello gastropub…and everything else new that you can think of.
DID YOU KNOW?
Condominium prices in premium Oakland locations are less than 50% of San Francisco prices? Oakland is more hip than Mountain View? So even though just about everyone in high tech would like to live and work in SF, they can rent a comparative palace by BART in Oakland 20 minutes away.
This is pushing up prices near BART stations in Oakland. A good time to buy, sell or trade up if you can do it right.
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OAKLAND OFFICE BOOM
Who doesn’t know Oakland is going through a Renaissance? A year ago Downtown (and Uptown) Oakland was a mixed bag of A to C office uses. It still is, but something has changed in the well-located C office market: assets close to BART are attracting attention from B office users, tech transplants from San Francisco, and developers. And they are attracting B office prices.
Call me for details on the 25,000 sq ft building now in contract that fits this model. Three blocks away a 23,000 sq ft building that sold for $2.2m last year is offered now at $3.5. That’s not the end of that sequence, however. That $3.5m building should be tradable above $4.6m to the right buyer if this market holds up. Will it?
DID YOU KNOW?
The Multifamily and Office Markets in San Francisco are so far beyond Oakland in pricing that they are lending not only support but growing momentum to the Oakland market. The Oakland market is entering a consolidation phase in which property values begin to be based upon highest and best use as opposed to current. Current income doesn’t hurt, but the buyer is hot to take the property to the higher use. We have seen this in San Francisco and Peninsula markets for some time. Downtown Oakland is newer to the fold and thus still a richer opportunity for both Buyers and Sellers.

OAKLAND OFFICE MARKET FLUSH BUT STILL CASH-FLOWING

The Downtown Oakland office market is changing. Where before we saw vacancies as high as 20-50%, depending upon the specific product and location, now we see compression to below 10%. For office, that represents full occupancy because a 10% or lower vacancy means an owner can choose to rent a space by simply lowering the price incrementally or by offering tenant improvements to draw a tenant way from a competitor.

As long as this office rental market is sustained in Oakland it makes a well-located office or office with retail purchase much less risky. That’s important because, while cash flows on multifamily have been under pressure for a long time cash flows from office have not: it remains possible to purchase a well located office building in Oakland with capitalization rate above 6% and cash-on-cash return above 10%. That is no longer possible in the multifamily market.

But the key question in relation to cash flow is risk. Call me to discuss Oakland Office opportunities.

DID YOU KNOW?

Current 10-year fixed-rate loan rates allow for long term protection against interest rate changes while still allowing for high cash-on-cash return for properties (such as well-located Oakland office) with cap rates in the 6+ range.

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NAI Northern California
475 14th St. Suite 700
Oakland, CA 94612
BRE LIC #01870488
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