Saturday, April 22, 2017

San Jose Skyline to Transform in 5 Years

Five years from now, San Jose’s skyline will look markedly different.
The city, with a population of just over 1 million people today, is booming with development. Many of those projects are not small endeavors, but tall, glassy, upscale towers that will bring new residents, office space and retail options.

Among the developments shaping the San Jose skyline is Silvery Towers at 180 W. St. James St., a glimmering 640-unit luxury condominium development with 30,000 square feet of retail space in two towers rising 228 feet tall. About a half mile away, the proposed Greyhound Station development would include two 23-story towers with 708 residential units and ground floor commercial space.

And in one of the biggest developments in San Jose's history, Trammell Crow is planning more than 1 million square feet of office and retail space under 325 residential units at 402 W. Santa Clara St., adjacent to Diridon Transit Station, which is slated to see high-speed trains come through by 2025.

Some, in recent months, have speculated that San Jose may be going through a renaissance — a true turning point for the city.

Chris Freise, a partner with San Francisco-based Lift Partners, is one of those who sees a shifting tide in San Jose. Freise is in the process of gutting and putting back together the historic building at 1 W. Santa Clara St. in San Jose’s downtown district. His is one of several old buildings in the area currently grabbing developers’ attention.

Across the street, San Francisco-based DivcoWest is renovating the historic building at 1 W. Santa Clara St., to make room for smaller, creative firms after the building for years has sat partially vacant.

Those projects are a part of a larger shift happening in San Jose, specifically in and around the downtown area, Freise said in an interview earlier this year.
“Downtown has got this great revitalization, or kind of urban renaissance happening, and the buildings in the historic district are a big part of why it is happening,” he said.

Older, authentic buildings have a way of drawing startups and tech companies, and that San Jose has a collection of the very few that exist south of San Francisco, Freise said.

It’s not the first time someone has suggested that San Jose, known as the capitol of Silicon Valley, may be on the verge of blossoming bigger. But this time, could they be right?

Crane Watch is starting with a focus first in the 176 square miles of San Jose. We’ll be logging and updating the status of the city’s projects that are 100,000 square feet in size or larger. In the coming months, we’ll expand the tracker to include other Santa Clara County cities.

Friday, March 24, 2017

How to Ride the Tide of California Home Prices

For decades, California has been one of the best places to invest in real estate. A lot of people want to live there. And, unlike the problem with Florida - another real estate favorite -  demand for housing isn't complicated by speculation in future retirement property. That said, strong demand in California tends to create boom-and-bust cycles driven by the fortunes of different industries.
Aircraft in Los Angeles, the navy in San Diego, finance and the Internet in San Francisco, computers and then biotechnology in Santa Clara county - all graft their rise and fall on top of a steady stream of in-migration from other states and abroad.
Homes in many California markets were high-priced well before a surge of sub-prime lending produced the great crash of 2008, so it's no surprise that prices dropped sharply at that time, but - and this is the important point - not nearly as much as in other boom markets like Arizona and Florida. The underlying appeal of living in California always produces a fast recovery.
In the past three years home prices have risen again - 25 percent in the LA area, 33 percent in San Francisco, similar amounts throughout California. And Local Market Monitor forecasts that increases of the same magnitude should be expected over the next three years.
When home prices rise like that, they eventually become unsustainable. That's the situation now in LA and San Francisco. That doesn't mean they'll fall any time soon - we do expect them to go higher for several years - but it does mean they have less room before eventually topping out. In such over-priced markets, it's difficult to buy rental property at a reasonable price - the ratio of home price to annual rent is too high. In LA that ratio is 26, in the city of San Francisco it's 44; a ratio of 20 is usually the highest you want to go.
In these markets, therefore, it's difficult to buy and rent out single-family homes; investment in rentals means apartment buildings. Or you can flip homes.
In other California markets, prices have risen briskly off the bottom but - because the crash was harder in these places - there's still plenty of room before prices get too high. These markets are of two types. Some, like Stockton and Modesto, were built out as cheaper alternatives to the near-by larger, expensive centers. Some, like Redding and Bakersfield, are currently mired in a poor local economy that may or may not recover anytime soon.
The investment strategy differs according to the kind of market you're dealing with. In the Stockton type, close to the larger centers, demand is almost certain to return - both for single-family homes and for rentals. Your main concern is that the physical structure you buy, probably put up in a hurry ten years ago, is in good shape.
In the Redding type, you'll need to spend more time assessing the economic prospects, how long before things turn around? - in California, markets don't die, they just transform - and in such markets it's best to invest at the higher end.
There are always investment opportunities. And in California there always seems to be another chance.

Friday, March 17, 2017

Bay Area Tops Nation in Home Bidding Wars

Amid rising interest rates and widespread concerns about the cost of housing, one might expect the Bay Area’s real estate market to run out of steam.
Apparently, that’s not happening.
In February, the fiercest bidding on homes took place in the Bay Area, according to a new national report from Redfin, the real estate brokerage. In San Jose, 63 percent of homes sold above list price, followed by 62 percent in San Francisco and 59.1 percent in Oakland. Among all U.S. markets, those were the three highest shares of “over asking” bidding. Next in line were two markets in the state of Washington: Seattle with 49.3 percent and Tacoma with 36.3 percent.
February’s fastest-moving markets were, in order, Seattle (with about half of all homes pending sale within 12 days of being listed); Oakland (where homes typically spent 15 days on market); Denver (18 days on market); San Jose (21 days); and San Francisco (28 days).
Still, industry observers point to an underlying problem: The housing supply is low in much of the country, and that doesn’t make for a healthy market in the long term.
Nationally, the number of homes for sale declined 12.9 percent in February on a year-over-year basis. It was the third consecutive month of double-digit drops in inventory, Redfin reported.

The number of homes for sale fell year-over-year by 12 percent in Oakland, by 5.3 percent in San Francisco, and by 2.0 percent in San Jose. (Sacramento inventory practically fell off a cliff — down 25.4 percent from a year earlier.)
With “low-tier” affordable homes in particularly short supply around the nation, first-time homebuyers are struggling to get a foot in the door. That’s because, with inventory at such low levels, competition persists: Those buyers who remain in the game keep putting upward pressure on prices.
Taking all of this under consideration, Nela Richardson, Redfin’s chief economist, painted a half-rosy picture of the current market.
“The total level of home equity reached a new peak at the close of 2016, according to recent Fed data,” Richardson said. “While great for homeowners, continuously strong price growth across the U.S. since 2012 has posed significant challenges for first-time buyers, especially given such low supply in affordable price-tiers.”
But she pointed to a silver lining: “Rising prices and increased equity may tip the scales for homeowners who have been delaying their decision to move up,” she said, “which could add much-needed starter-home inventory to the market.”

Thursday, March 9, 2017

Sales of Homes Priced Under $500K Plummet from Bay Area Inventory

The real estate site Property Radar reported that home sales overall dropped 9.4 percent across the Bay Area in 2016, a decline of 6,466 receipts. In San Francisco alone the decline was 11.2 percent.

Most of the damage was to the affordable category of housing stock: Those priced $500,000 or less.

In 2015, 18,945 such homes sold. In 2016 it was only 14,276—a whopping 24.6 percent decline—just over 62,000 homes sold across the region in total.
By contrast, sales of homes that cost more than a million dollars rose, albeit only by 1.5 percent to 19,277. Numbers for all categories of homes cheaper than seven figures declined year over year.

Casting about for some non-Property Radar figures, California Resource, a title company, recorded 110 home sales in San Francisco in January of 2017.
Of these, only 10 cost half a million dollars or less, with just eight more selling between $500K and $700K.

For January of 2016 the same database records 22 San Francisco homes for $500K or less, with two more inching in above the line at $505K and $502K.

Of course, a big part of the reason fewer cheap homes are selling is that fewer homes are priced comparatively cheaply to begin with.

Property Radar estimates that, even though sales are down and growth is happening only in the highest price bracket, median prices still went up over the year.

The site says that the average price for a single-family home in the region right now is $750,000, up from $730,000 a year ago. In San Francisco it’s $1.17 million, up from $1.15 million this time in 2016.

That’s higher but still largely in line with figures like the $1.15 million that Zillow estimates (up from $1.14 million a year ago) and Trulia’s $1.13 million, up from $1.05 million a year prior.

The most recent report from the Paragon real estate group estimates San Francisco’s median much higher at just over $1.3 million (up from $1.25 in 2016), but is closer to agreement with PR about the rest of the region, estimating a $765,000 median sale price today.

Of course, only magic can predict with complete accuracy whether apparent waning demand over the past 12 months will start to push prices down. Growth did noticeably slow all last year, even as it stubbornly insisted on rising by inches and degrees.

Friday, March 3, 2017

A Real Estate Growth Market or a Bubble? How to Tell the Difference

Home prices took a nosedive during the Great Recession that started in 2008. Prices fell in all local markets, but much more in some than others. And afterwards some had a better recovery than others. Why? And, more important, could we have predicted that?
Job growth is part of the story, but not a very useful one because nobody can predict which markets will have more jobs in the future. Furthermore, how come San Francisco and Denver had the same job loss in the recession, but home prices fell 20 percent in the former and only 5 percent in the latter?
Something else is at work here and we can capture it by comparing real home prices with the "income" price -- the price that balances with local income. It is what we at Local Market Monitor call the Equilibrium Home Price.
Then we see that San Francisco was overpriced 50 percent right before the recession, Denver only 20 percent. Markets that were the most overpriced before the recession -- many in Arizona, Florida and California -- also had the largest drop in home prices.
The income price has been a very successful forecasting tool for decades -- not just in this recession. When markets are overpriced or underpriced, home prices always return to the income price.
We can use this to our advantage in 2017 because some investment strategies have a better chance for success in markets that are overpriced and underpriced.
Overpriced Markets

You might think an overpriced market -- or one that soon will be overpriced because of big price increases -- is one to stay away from. But, as long as you avoid buying at the peak, these markets can have the strongest price gains. And overpriced markets don't necessarily crash afterwards -- most of the time they just level off. In these markets you're speculating, no question about it, but you can minimize your risk by paying close attention to the dynamics of the price changes and the state of the local economy.
First, the price dynamics. An overpriced market got that way because home prices accelerated, and the peak of the boom is reached after they decelerate -- they still increase but at a slower and slower rate.
Next, the local economy. Once prices do peak, a crash is only likely if the local economy is poor. If job growth remains reasonable, prices are most likely to just level off.

Underpriced Markets

Unless the market is dying -- a small market that has lost its only large employer -- home prices will eventually recover. But is it worth your while to wait? This, again, is a speculative proposition. But the payoff can be good because recovering prices will not just return to the income price, they'll probably shoot well above it because of shortage of housing.
In short, look for underpriced markets where prices are in fact rising again, and make sure the rise in prices is linked to better job growth.

Thursday, February 23, 2017

California Home Buyers Push Vallejo as the Hottest Market in the US

The tight just keep on getting tighter. In the last, briefest month of winter (yay!) supplies were scarcer than ever in the residential real estate market, according to a preliminary analysis of our data here at®. Factoring in strong buyer demand, sales remained strong in February after a January in which the pace of existing-home sales was at a 10-year high.
And early birds were scrambling to get the worms … er, homes, which are moving off the market 5% more quickly this February than a year ago, and five days faster than in January. That’s even as prices remain at record highs.
“Spring has arrived early this year, at least in terms of the rapid decline in the age of inventory,” Chief Economist Jonathan Smoke of said in a statement. “Strong off-season demand powered new seasonal highs in prices and left us with a new low in available homes for sale. Potential sellers take note: This year is shaping up to favor you even more than last year.”

Another indication of the continuing strength of buyer demand is that the median list price remains level at $250,000, which is a steep 9% higher than one year ago. If this figure holds by the end of the month, it would be a record for February. Buyers are also ramping up their search online: saw the highest year-over-year increase in average views per listing since April 2015.

The Hot List:

Rank (February)20 Hottest MarketsRank (January)Rank Change
1Vallejo, CA32
2San Francisco, CA1-1
3Dallas, TX41
4Denver, CO84
5San Jose, CA2-3
6San Diego, CA5-1
7Sacramento, CA6-1
8Stockton, CA91
9Colorado Springs, CO134
10Yuba City, CA7-3
11Modesto, CA165
12Midland, TX2715
13Detroit, MI152
14Oxnard, CA11-3
15Fresno, CA10-5
16Columbus, OH12-4
17Boulder, CO258
18Boston, MA3214
19Santa Rosa, CA190
20Los Angeles, CA17-3

While nearly 425,000 new listings will have entered the market in February, there still aren’t enough to meet buyer demand. In fact, the sharp double-digit decline in for-sale housing inventory observed since October is continuing.
All this may sound like music to sellers’ ears, but not so much for buyers. However, buyers who are able to land the home of their dreams can reassure themselves that their investment is likely to be a solid one—especially in our hottest markets, where homes are selling fastest and there’s the most demand.
This month’s ranking has California dominating the list as usual, with 12 markets, but five other states made a showing: Texas, Colorado, Ohio, Michigan, and Massachusetts.
Leading the list is Vallejo, where the median days on market fell by almost half, powering it back into the top spot for the first time since August.
New to the list this month are Boulder, CO; Boston; and Midland, TX, which jumped eight, 14, and 15 spots respectively since January. Note that these metropolitan markets may also comprise neighboring cities or towns. For example, the Boston market also includes Cambridge and Newton, MA.

Wednesday, February 15, 2017

Real Estate Investing-It's All About the Business Cycle

Analyzing real estate is all about the cycles. Evaluating real estate investments, including real estate investment trusts (REIT), depends on evaluating three cycles: the economic cycle (primarily jobs), the building cycle, and the interest rate cycle.
We believe we are in a good spot in the economic cycle for attractive U.S. real estate returns, with steady job gains and an improving domestic economic growth outlook. The building cycle for real estate shows little sign of the type of overbuilding that has ended previous cycles. Finally, although we expect interest rates to rise, we expect increases to be modest, and for the increases to be driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate stocks.
Based on these metrics, our real estate outlook is favorable, especially for income investors in the case of REITs. Below we discuss these cycles and what they mean for publicly-traded real estate in 2017.

Cycle #1: Economic Cycle

We believe real estate is well positioned for this stage of the economic cycle. Job growth has been steady, with an average of 195,000 jobs created monthly over the past 12 months. Jobs put workers in offices. Jobs give workers the wages to shop in the malls (or online, creating demand for warehouse space). Jobs enable workers to pay higher rents for their houses and apartments. And jobs help create inflationary pressure that gives real estate owners the pricing power to raise rents. All of these factors tie real estate to employment. This close relationship is evidenced by the 0.9 correlation between real estate stocks and total private employment [Figure 1], highest among the 11 S&P 500 sectors. Note that the stock performance leads the job count by about six months.
So where do we go from here? We have indicated that we expect job growth to slow in 2017, but several factors suggest the potential for continued solid gains and support for real estate investments. Fiscal stimulus from tax reform, infrastructure spending, and deregulation could help stimulate job growth, although the help may not come until late in the year. Consumer and business confidence are high, which tends to result in additional hiring. The employment component of the Institute for Supply Management’s manufacturing index is strong, having increased five straight months to 56.1 (50 is the breakpoint between expansion and contraction). All in all, the job picture looks good, although some slowdown in the 2016 pace would not surprise us, especially considering the economic expansion is nearly eight years old and unemployment is near its expected long-term rate.
Other cycle gauges we watch include the yield curve (the difference between short-term and long-term interest rates) and the index of leading indicators (LEI). These indicators, among others, suggest the cycle has a ways to go and further gains for real estate may lie ahead. And don’t forget interest rates are still low and the Federal Reserve (Fed) has only hiked rates twice, suggesting the economic cycle has a good amount left in the tank.

Cycle #2: Building Cycle

When assessing the building cycle, the key question to ask is whether the real estate industry is overbuilding. One consequence of the 2008-2009 financial crisis was that the supply of real estate was significantly constrained by the severity of the recession and reduced credit availability. The slower pace of building leaves the commercial real estate market in better supply-demand balance today than it has been at this stage of prior cycles. Case in point, the level of commercial construction in the latest gross domestic product (GDP) data, at $440 billion, is still only about halfway to the 2000 and 2007 peaks despite the $100 billion increase since the post-crisis trough in early 2011 [Figure 2]. Not only that but the pace of construction has pulled back since 2014, further evidence of the lack of froth.
Our proprietary LPL Research “Over Index” (a component of the Recession Watch Dashboard) also sheds light on the question of whether the real estate industry is overbuilding. This index has three components: overspending, overconfidence, and over-borrowing. Scaled to 100%, the over-borrowing measure—based on both consumer and business debt?—?is at just 32% (based on available data as of January 6, 2017), indicative of a disciplined market. The other two components are both at 40% or lower.
We do not see evidence of excessive froth in real estate lending markets. The latest Fed loan officer survey showed more tightening of commercial real estate lending standards than easing, although the survey showed less tightening over the past two quarters. Depending on the path of bank regulation, we could see further easing, but the key here is these data reflect discipline. The latest survey conducted by the Real Estate Roundtable indicated that those expecting tighter commercial real estate financing conditions are equal to those expecting easier conditions, and the ratio has been improving over the past several quarters. Finally, commercial real estate loan delinquency data indicates a healthy market, with a delinquency rate of 0.87%, below the troughs of the 1990s and 2000s. A healthy market coupled with disciplined lending practices is a good combination. Overall, we see good balance in the commercial real estate markets.

Cycle #3: Interest Rate Cycle

Rising interest rates are one of our biggest concerns when considering real estate. Higher interest rates reduce the attractiveness of potential distributions offered by REITs, and they increase borrowing costs for developers. As a result, real estate securities tend to underperform the broad equity market when interest rates rise. This relationship is shown in Figure 3, which presents the relative performance of real estate (compared with the S&P 500) plotted against the inverse of the 10-year Treasury yield. This relationship does not always hold, but certainly has over the past five years.
Higher interest rates are not all bad news. The interest rate cycle is tied to inflation, an important component of real estate values. Real estate owners often have the ability to raise rents in an inflationary environment and preserve or enhance the value of their assets. Higher rents support REIT dividend growth, which has historically exceeded the rate of inflation. In fact, the income component of REIT returns has exceeded inflation, based on the Consumer Price Index (CPI), in 15 out of the past 16 years based on S&P Dow Jones Indices data.
We expect interest rates to rise gradually over the course of 2017 and into 2018, presenting a headwind for real estate relative performance. However, should equity market returns in 2017 be modest as we expect, real estate?—?especially REITs?—?may have the potential to deliver an above-market total return.

Other Considerations

We believe the aforementioned cycles inform the majority of the decision regarding investing in real estate, but here are a few other things to consider:
  • Cyclical vs. defensive sectors. We expect the macroeconomic environment to favor cyclical sectors, a potential headwind to real estate relative performance. Cyclical sectors are more economically sensitive, while defensive sectors are less sensitive to changes in economic conditions.

  • Valuations are slightly rich. Although the market values for publicly-traded real estate are slightly below net asset values (the actual values of the underlying properties), valuations based on cash flows are above average and cause for some concern. Cash flow growth is expected to be modest and may not support valuations.

  • Tax reform uncertainty is high. While some form of tax reform is very likely and should help the economic backdrop, some measures under discussion may have a negative impact on real estate, in particular the possible elimination of the deductibility of interest on debt. A border adjustment tax as part of tax reform may also increase the cost of construction. The timing and nature of tax reform remain a source of uncertainty for real estate.

  • Stand-alone sector lift? Being split out of financials into its own S&P sector may still lead to greater interest among generalist investors (discussed here). Generalists remain underweight the sector.


Evaluating domestic real estate depends on evaluating three cycles: the economic cycle, the building cycle, and the interest rate cycle. We believe we are in a good spot in the economic cycle; the real estate building cycle shows little sign of overbuilding that has ended previous cycles; and although we expect interest rates to rise, we expect increases to be modest and for the increases to be driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate stocks.* It’s not all clear skies, but we believe the outlook for real estate in 2017 is favorable.