by Terrence Jones, Senior Broker Associate
Could it be that our current, crazed market represents a paradigm shift where demand forever outpaces supply?
The owners of existing rent controlled apartment buildings in San Francisco have seen three strong years of consistently rising rents and ever-increasing property values for their buildings. And that’s great, right? According to RealPage, as of the second quarter of 2013, San Francisco has now moved into the number-one metro market position in the entire country for rent increases with a hefty 7.8% annualized rent growth. When this rent growth is combined with the rent control rules in San Francisco, owners here are in one of the few markets where a vacancy is a reason to pop the champagne cork.
The big question is, will the party stop when rents go flat—or even drop? Many have suggested we are in another dot-com-like bubble, as we saw in the early 2000’s, and that we should be prepared to feel the pain of the bubble popping. There are others who feel we may have stepped over a threshold toward an upward trend that shows no sign of stopping. This group sees a paradigm shift to a new San Francisco rental reality. They believe that rents will continue their upward trend and reach world-record levels. They feel the world has discovered that San Francisco is a great place to live and work, and there will be no turning back on rents.
Let’s look at some of what the bubble advocates have recently been suggesting about a coming end to the good times for San Francisco. Recent articles and headlines from all different kinds of publications have predicted doom for San Francisco: “Bearish Ken Rosen Growls About Tech” from the San Francisco Business Times; “Vulnerable San Francisco Ignores Growing Tech Bubble Talk” from the San Francisco Bay Guardian; and “Shades of ’99: New Data Shows the Tech Boom Is Looking More and More like a Bubble” from Business Insider.
A Tale of Two Tech Booms
Despite the gloom of the above articles, I don’t think the bubble is ready to burst. Let’s start with a simple supply and demand analysis of the market. There are effectively no plans to create rent controlled apartment units in San Francisco outside the few below-market units in the pipeline attached to new construction. We can therefore make an assumption that there will not be significant growth of supply in the market for the foreseeable future.
That takes care of supply, so what about demand? In general, rents tend to move in step with new job creation. New office leases and expansion of existing company leases are one predictor of new jobs for the city. If we look at new and expansion leases (excluding renewals) we see an interesting story.
The top-10 leases in terms of square feet leased (either new or expansion leases) for the largest square footage, as reported in the San Francisco Business Times for 2013, are as follows:
As we look at this list, it is interesting to note the depth of companies signing new leases. Gone are the days of market-share or advertising-driven dot-com companies, who dominated the market during the last bubble. Many of those companies had business models that derived 100% of their income from advertising or future revenue based on market share.
A landlord friend of mine distinctly remembered that time:
| One aspect of the dot-com fiasco (in the early 2000s) was that many of the enterprises had as their primary business objective the capture of “market share.” They did not have a business model that promoted income but rather captured an ever-increasing percentage of market share. Using that business model, they paid operating expenses primarily out of capital dollars, since the revenue stream was weak or non-existent. When the capital market weakened, the enterprise failed and creditors (including landlords) were left holding the bag. The market (both commercial and residential) reacted accordingly as the demand decreased. In the long term, it was but a downward “blip” on a market that recovered. The short-term investor was vulnerable, as were businesses that expanded in the belief that the dot-com expansion would not end. |
Today, of the companies in the list below, only Google gets the lion’s share of its revenue from web advertising and market share. (I am willing to bet that probably 80% of all people in this state have a free Google email account.) At the end of 2013, Google noted that 91% of their revenue was derived from advertising.
The tech boom of the early 2000’s was susceptible to the popping bubble factor more than the companies that are successful today because the new jobs at that time were mostly at companies whose sole business plan was to provide a vehicle for web advertising. (If you remember, this was the single focus of Yahoo at the time.)
If you look closer at Google’s last three years of revenue, you will notice that each year they have actually been decreasing their web advertising revenue and increasing their other revenue. Perhaps all those PhDs on the bus from San Francisco to Mountain View are helping the company evolve to a less bubble-oriented strategy as a way to help keep their jobs. There are many new initiatives at Google, like their robotics program, their extending life expectancy program, the infamous Google Glass, the Google self-driving car, Google Shopping, Google Chrome, and many other diversification plans. I am willing to bet their future plans will not rely on advertising to keep the magic bus rolling.
Outside Google, we can see significant job growth in the biotech, healthcare, financial and software sectors as well. Many of these companies, like Kaiser and Visa, are mature, long-established companies—a far cry from the start-ups we saw in the early 2000’s. If 2014’s new and expanding leases continue along this trend, we will likely see a continued increase in jobs, which will increase the demand for apartments, which will inevitably increase rents.
If we switch gears and look beyond the tangible factor of the job growth that has led to rent growth and we look at the quality of life issues that are also drawing young people to San Francisco, we see another interesting factor in our demand analysis. San Francisco has mild weather, a growing sports and food culture, and proximity to wine country and beaches. It is easy to see why companies are moving to the Bay Area. They want to be where young people—their employee base—want to live.
For me, I see the glass as half full. The long-kept secret is out and everyone knows it: San Francisco is a great place to live and work. We are in the middle of a paradigm shift where San Francisco continues to lead the world in technology, business and, yes, rents. I don’t see that ending any time soon.
Terrence Jones is a senior broker associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent controlled apartments. He has extensive experience with properties with special circumstances. He can be contacted at 415-786-2216 or by email at tjones@tricommercial.com. @terrenceojones
“Building Great Relationships.” Its not just TRI Commericial’s tagline, it’s an expression of our business plan. As we embrace the many technological advances in our world today, we still strive to be as “human” as possible with every client. It is just what’s required in our industry’s services. This GlobeSt.com article says it all.
By Rick Gersten, founder and CEO of Urban Igloo
We need to be as interactive with our clients as we are with our devices, says Gersten.
WASHINGTON, DC—I rely on my Uber app, but it’s the driver who gets me where I’m going. Match.com brought my friend an introduction, but there wasn’t a true connection until she went on the date. And while Siri is helpful, it’s no substitute for a personal assistant.
Technology helps us save time—both in our personal and professional worlds. It’s important to remember, though, that our industry’s services and expertise are best delivered when we come out from behind our keyboards and meet in person. We need to be as interactive with our clients as we are with our devices.
I won’t argue that a great deal of preliminary work can—and often should—be done online. A renter who’s taken some time to explore their options in general can begin a more meaningful conversation with their agent all the sooner.
Urban Igloo, which helps renters find homes in the Washington and Philadelphia metro areas, is currently developing an enhanced website that empowers renters to first choose the neighborhood that best fits their character and needs. This preliminary step fosters a common understanding between our agents and clients, leading to more qualified and trusting relationships—and better enjoying an otherwise stressful process
Of course, there are additional online and social tools we also use to enhance our face-to-face experiences. Versus a leasing process that’s 100% online, we believe in a model that encourages human touch. We treat our clients the way we would want to be treated. That means learning more about the individuals we’re assisting, serving as their residential guidance counselor, and helping them learn about and begin to immediately enjoy a new neighborhood. Those services—and others that expert firms in this industry provide—cannot be fully replicated online.
Choosing a home is an experience that benefits from the application of online tools, but it’s not like researching and buying a television on Amazon. Ours is an industry full of wonderful people who are eager for our assistance. Let’s set down the iPhone and help them.
Rick Gersten is the founder and CEO of Urban Igloo. He may be reached at rick@urbanigloo.com. The opinions expressed here are the author’s own.
By Sanette Tanaka – wsj.com
Real-estate agents, better take out that red pen.
An analysis of listings priced at $1 million and up shows that “perfect” listings—written in full sentences without spelling or grammatical errors—sell three days faster and are 10% more likely to sell for more than their list price than listings overall.
On the flip side, listings riddled with technical errors—misspellings, incorrect homonyms, incomplete sentences, among others—log the most median days on the market before selling and have the lowest percentage of homes that sell over list price. The analysis, conducted by Redfin, a national real-estate brokerage, and Grammarly, an online proofreading application, examined spelling errors and other grammatical red flags in 106,850 luxury listings in 52 metro areas in 2013.
For an industry without a universal stylebook, real-estate agents vary greatly in their listing descriptions. While some brokerages have created internal guidelines, much of the actual writing is still left up to the discretion of listing agents.
“It’s ubiquitous in this business. Bad grammar, misspellings, stray commas, missing periods—it’s all part of listing descriptions,” says Mickey Conlon, associate real-estate broker with Core in New York.
Good spelling and grammar may indicate the agent is attentive to other details as well, like pricing the home correctly and weighing offers, says Karen Krupsaw, vice president of real-estate operations at Redfin.
Source: Redfin and Grammarly
“You can get a sense of what the transaction will be like based on the listing description. If it’s exceptionally sloppy, then it’s a warning sign of a potentially sloppy transaction,” Mr. Conlon says.
Aside from errors, the analysis also looked at style preferences in listings. One of the most common: phrases written in all-capital letters. These listings saw the least success in terms of sale price, with only 5.6% of homes selling above list price. The practice is most common in Las Vegas, where 28.5% of listings were written in all capital letters in 2013, compared with 8.4% of listings nationwide.
Las Vegas had the highest rate of for-sale listings in all-capital letters, even though the practice led to smaller comparative gains in sale price, according to Redfin and Grammarly. Zuma Press
Common abbreviations, like “bdrm” for “bedroom,” and short phrases fared well by comparison.
Amy Williams, a broker with Century 21 Real Estate Consultants in Charlotte, N.C., says abbreviations are necessary in multiple-listing services with low character limits. “That’s why we see people resort to abbreviations, to fit everything in,” says Ms. Williams, adding that her MLS caps listing descriptions at 500 characters.
Last year, Francine Chalmé Meyberg, an agent with Berkshire Hathaway HomeServices California Properties in Encino, Calif., had a $1.499 million listing for a five-bedroom home in Bell Canyon. In addition to the home’s many features, the listing boasted a kitchen “updated w/ redone cab. & recs. lit., & opens to the the bk. area & lg. fam. rm. w/ fipl. & access to the majestic outside.” Her cramming paid off. She sold the property within months of listing for $1.425 million.
Original article can be found here
Post by Bill Wilson – more at http://sfspaceadvocate.com/
“I was not predicting the future, I was trying to prevent it” – Ray Bradbury
Currently, there is “dancing in the streets”, figuratively, by the owners of San Francisco office space, after the announcement of the largest (714,000 sq.ft.) office lease in history by SalesForce. Still, we question whether the upward rush of rental rates can be continued. Recently it was announced that, on average, Class A rates rental rates have advanced by roughly 80% over the past three years. How many firms’ revenue has increased by a similar amount? The answer: very few, concentrated in the tech firms.
It used to be that firms who wanted to cut lease costs could go South of Market Street. Now, new buildings on Howard and Mission Streets, completed only in the last decade, are full at upper-market rents. The tech firms are displacing the Legal and Financial professions, which were the traditional residents North of Market, leaving them with few choices of inexpensive rental facilities. Moreover, the recent announcement that Microsoft is going to lease 50,000 sq.ft. of space in the B of A Building reinforces the message that this district, which was a home to the financial profession, is changing.
Alternately, the Legal and Financial fields have had to cut staff expenses or to “right-size” to get rid of the huge offices created over the last 40 years. This has taken many forms. For some examples: Wells Fargo has shifted some staff members to Salt Lake City, Portland and Seattle; Schwab is moving 1000 workers to Austin, Texas; Gordon & Rees, a mid-sized commercial litigation firm has chosen to send 20,000 sq.ft., largely consisting of staff workers, to Oakland.
Referring to the quote at the start of this letter, it is human nature to extrapolate trends. The fact that “the market” has performed so nicely, from the landlords point of view, has led to a myriad of construction cranes, promising over 4 million square feet of new space by 2017 at asking rates beginning at $65-75/sq.ft. to justify construction costs. Can you afford it?
If you have been at your current location for more than 5 years, the chances are that you aren’t reflecting the savings your competitors have been able to achieve. If you have a move to consider in your future (six months to two years), there are several defensive measures with which I can help you. Don’t go into the Market without a qualified representative!
Post by Bill Wilson from his website – http://sfspaceadvocate.com/
You probably remember the story about the little girl that gets lost in the forest and finally spots a friendly-looking cottage. The three bears living there were out, while their porridge cooled. Goldilocks entered the cottage, ate the porridge, broke a chair and tried out the Three Bears’ beds. She sat down on Papa Bear’s bed but she found it “TOO HIGH”; Mama Bear’s bed was “TOO LOW” and the Baby Bear’s bed was “JUST RIGHT”.
Is this an analogy for our current leasing market? In 2014, the modern Goldilocks, trying to find affordable space, would discover that San Francisco’s Class A rents are “TOO HIGH” ($60); the rents in San Ramon were “TOO FAR” ($28) and the rents in Oakland/Walnut Creek are “JUST RIGHT”($36), for some tenants.
Many tenants today are facing the daunting task of renewing their leases. Back in 2009, when their leases were commencing, the market was plunging in the face of the “Credit Crisis”. Now they are facing a 50%-increase in most sub-markets in San Francisco. For many firms that is “TOO HIGH”!
Back in 1982, Bishop Ranch in San Ramon lured two of our major corporations, Chevron and Pacific Bell, to leave San Francisco to build there. Bishop Ranch is now roughly seven million square feet of buildings with Robert Half International and Bank of the West having large “back-office operations” located there. BART runs trains to Pleasanton where many riders transfer to the Bishop Ranch fleet of modern buses. For Fortune 500 companies like PG&E and General Electric, having major operations there, is just fine; for others, it can be “TOO FAR”!
That leaves Oakland and Walnut Creek in the middle of the two extremes. In past cycles, when rents got too expensive in San Francisco, several major corporations left. For example, in 2000, CSE Insurance sold their 100,000-sq.ft. building at 6th & Market and relocated to Walnut Creek. They were followed in 2002 by PMI Insurance, which erected a 190,000-sq.ft. office structure in Walnut Creek; and, in 2009, AAA Insurance sold their multi-building complex in S.F. and built a 250,000-sq.ft. Walnut Creek headquarters near the Pleasant Hill BART Station. The Class A rents could be “JUST RIGHT” at an average of $36/sq.ft./year.
Back in San Francisco, in the current business cycle, we haven’t experienced major corporate losses to the East Bay. The exception is Gordon & Rees, a major S.F. law firm, who removed 20,000-sq.ft. from their 90,000-sq.ft. offices at 275 Battery and transferred it to Oakland, reducing their rent by an estimated $25/sq.ft. (Most of the square footage contains support staff, but there are also some attorneys, practicing intellectual property law.)
So, what should we expect? Many S.F. tenants won’t move because they want to remain in physical proximity to valued clients and/ or for the educated labor supply. However, there is still some appeal to reducing Class A asking rents from $55-60/year to $32-38/year in the East Bay. Many homeowners or apartment dwellers in the East Bay would also welcome reduced commute time and reduced reliance on BART.
Ultimately, when it comes down to considering the alternatives to remain in S.F. versus enhanced profits, be sure to take the “JUST RIGHT” choice for you! Many S.F. tenants feel that they have no choice but to “tough it out” in San Francisco. In that event, follow the advice at the end of the story: “Goldilocks was so happy to see her mother (read “stakeholders”) that she promised to never wander through the forest alone again”.
Don’t go it alone: give me a call to explore your options today!
Bill Wilson – 415.268.2229
Post by Tony Brettkelly
There are some truly staggering deals in the works. The winners for last year included over $2B in hospital projects with CPMC and the Google lease of 386K square feet at Halls Plaza worth $125MM.
This year is likely to top last year with the Salesforce lease up maybe reaching over $1MM square feet. With cranes everywhere and new ordinances coming into play to limit annual office construction, we may be starting to max out.
Published in the SPOSFInews March 2014 edition
If you knew you were going to be selling your building in six months, what steps would you take to secure the highest possible sales price? The following is my “Top 10” list of items to assemble and to consider before putting your rental property on the market. They’re roughly in order of importance, but in some buildings the order may vary depending on specific conditions.
Assembling supporting documents
1. Leases: By far the most important documents you can have are copies of leases for all tenants. Without a written lease for all tenants, the value of your building is significantly reduced. In San Francisco, tenants can make insane claims of supposed rights. Unless you have a written lease that specifically states what those rights are, a tenant’s spurious claims can decrease the value of a sale and scare off potential buyers.
2. Estoppel Certificate: This document gives the buyer critical information on the relationship between the owner and a tenant. Without it, the first time many new owners discover that one or more of their inherited tenants is “protected” (with all the attendant rights) is after it’s too late to do anything about it. Protected tenants can decrease the value of a building by $50,000 or $100,000. If you have these certificates in hand before the sale, indicating that none of the tenants are protected, you are far more likely to get the highest price for the building.
3. Building plans: Go to the Department of Building Inspection (DBI), 1660 Mission Street, and check the microfiche files on your property. If plans for the property exist, it’s a good idea to go through the slow process of getting copies for your own records. In some sales, I’ve found that these building plans have uncovered opportunities to exploit unrented space that the current owner did not know was possible.
4. The 3R Report: The Report of Residential Building Record is generally considered the definitive source for the number of allowable units in a building. It also lists incomplete permits that can devalue a building at the time of sale. It’s an essential disclosure form and can be ordered online through DBI. It’s also a good idea to know what the city has on record about your building.
5. UST Clearance: Article 21 of the S.F. Health Code requires owners of real property in San Francisco with underground storage tanks to remove them at their expense. Back in the day, such tanks were often used to store oil for heating buildings. If you purchased your building after July 1992, this would have been covered in the sale. In any case, proof of UST clearance is a good investment.
6. Expense documentation: If you can document historical expenses, your agent can identify areas for various passthroughs that a new owner may be able to take advantage of to increase rents.
7. Inspection reports: The most helpful ones are contractor’s, termite, and sewer inspections. Keep in mind, however, that inspections may uncover and document problems you may not want or cannot afford to address. Of particular concern is the termite inspection, which must be filed with the state, and once done becomes public record.
8. Record of complaints with DBI: Often, a building has a significant history of DBI complaints on record. If so, it’s far better that you, the seller, find out what the complaints are before the buyer does. Fortunately, there is a simple way to see what’s on record by going online. Review the complaints, determine if they are valid, then take the appropriate steps.
Other considerations
9. Should I do a tenant buyout? A vacant unit is nearly always a positive for the sale of a building. Given that a unit delivered vacant is generally worth far more than one with a long-term or protected tenant, it may be worthwhile to consider a tenant buyout. But tenant buyouts can be tricky, and are best approached with the guidance of an attorney.
10. What, if any, improvements should I make? The most frequent question I get is, “What improvement will give me the greatest return on my investment?” The answer varies according to the building and one’s budget, but there’s no question that wisely considered improvements can make a big difference in both a building’s appeal and ultimate sales price.
By attending to these 10 things well before putting your property on the market, you’ll be in a stronger position to get the best sales price possible.
Terrence Jones is a Senior Broker Associate with TRI Commercial and specializes in the marketing and sale of investment properties. His business specialty is San Francisco rent-controlled apartments. He has extensive experience with properties with special circumstances.
For a no-cost, no-obligation comprehensive valuation of your apartment building, contact Terrence at (415) 786-2216 or by email at tjones@tricommercial.com.
Pruning Back the Hedge – Terrence Jones
Even though I trained to be an economist at Berkeley, back when the bubble burst in the early 2000s, I was drawn into San Francisco apartment sales and investment. Working in the business seemed to be one of the best pathways to gaining a competitive advantage in ownership. When I first started, one of my early mentors was very successful at investing in apartment buildings. He began by buying a small multifamily building when he was only 30 years old; by the time he was 80, he and his partners owned more than 2,000 units. When I asked him about investing in San Francisco apartments, his advice was firm. He said, “No one should ever invest in a rent control market because the business of owning real estate is sensitive to inflation…and rent control does not allow you to keep pace with inflation.”
Fast forward to today and, ironically, here I am, still helping investors buy and sell rent-controlled apartments in San Francisco. Over the years, I have often been asked by both long-term landlords and real estate neophytes if buying apartment buildings in San Francisco is a good hedge against inflation. We know what my mentor would have said, but before I considered my own answer, I needed to start by looking at the basics of inflation, particularly local inflation here in San Francisco. (To make this a relatively simple discussion, this article only talks about short-term investment hedging and is not a discussion of a long-term total investment hedge that may come from appreciation after the sale of a building.)
Read the rest of the San Francisco Apartment Association publication here. http://ow.ly/vS6Ad
Real estate transactions can be complicated. And if you represent buyers and/or sellers of multiunit buildings in San Francisco, like I do, it’s important to pay attention to the details. Most deals go off without a hitch, but even the most experienced broker can run into landmines. When this happens, what do you do?
Read the full San Francisco Apartment Association article here.
TRI Commercial Real Estate/CORFAC International is broadening its reach in the Sacramento region, having brought aboard nine new agents within the last few weeks at offices in Roseville and Point West.
This week, the company announced Steve Griffin, Greg Redman, Graham Clemons andRichard Smith, formerly of Grubb & Ellis, have joined the company, with plans to look for more, said company senior vice president and regional manager Ed Benoit. “In business, one thing I’ve learned is you always have room for good businessmen,” Benoit said, adding TRI’s structure is a good fit for veteran agents and brokers who have been with larger firms with a national presence. “Great agents attract great agents.” Benoit said a newly opened office in Point West, which has five agents with Griffin as head, could have as many as 20 eventually.
The company’s focus there and at offices in Roseville and Rocklin will be regional business and strong relationships with clients, he said. “If we have a good idea, we can execute it quickly,” he said. “We’re a destination for agents who look to themselves and their client relationships to be successful.”
In addition to the four agents from Grubb & Ellis, TRI Commercial/CORFAC International has
added Dennis Shorroch and Bruce Wirt of Cornish & Carey Commercial Newmark Knight
Frank, Drew Wheatley of Cassidy Turley, Bryan Wirt of Ethan Conrad Properties and Daniel
Dabkowski of Commercial Realty Group in Sausalito in recent weeks to its Sacramento-region
offices.
TRI also added two former Grubb & Ellis agents to its San Francisco office this week.
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Date: Wednesday, April 17, 2013, Ben van der Meer, Reporter – Sacramento Business Times |
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