I answer your questions on commercial real estate investment, operations, markets, strategy and anything else in the commercial real estate world. All questions are welcome, so please submit one on the contact page of this site. The first set of questions I received are here below:
What do you recommend as the first commercial real estate investment for someone new to the field? Why?
I recommend that investors starting in commercial real estate focus on traditional multifamily apartments (note that commercial multifamily is generally defined as buildings with five or more units), which are the most straightforward product to understand. Though there are a variety of sophisticated residential strategies, most investors get the idea: it's a residential building and the tenants are people, not businesses with complicated operations. Multifamily is generally lower risk as an investment class. It is also a large asset class, with more opportunities, despite the competition among investors. I recommend that first time commercial real estate investors focus on gaining experience and knowledge in the investment process, build relationships with operators and investors, gauge how involved to be in an apartment project, and decide whether to hire good operators or managers for the investment; making a quick profit or achieving out-sized returns is less important than learning from the process.
What are qualities of a good commercial real estate developer?
To start with the basics, developers need to be good with numbers and manage many ongoing components of a project concurrently. And of course, they need to work well with people--in concert with many other members in the industry, including lawyers, contractors, and investors. Interestingly, developers come from a variety of different backgrounds or areas of study: traditional finance, law, and architecture to name a few. One thing I’d like to highlight is that developers all have in common the ability or willingness to take sizeable calculated risks on the projects they pursue. The fruit and payoff of their work often take years to achieve, and they are willing to endure the entrepreneurial struggle to see a project to its completion.
Now from an investor’s perspective, to find a good developer or operator to invest with, you must spend time with them. Ask all of the vital questions and see that they are willing to answer your questions without reservation. You are building a relationship with this person, and hopefully a long-term one, that will endure ups and downs. Just as entering any venture with a business partner, you should understand this person's character and vision.
How much of my portfolio is reasonable to invest in real estate assets?
This question should be directed to your personal financial adviser, who can tailor the answer for the complexity of your specific portfolio. But I do have some thoughts to offer. Take for example sophisticated investors like pension funds, endowments, or sovereign wealth funds. Up until the 1980s, these institutional investors did not accept real estate as a core asset class. But over the past 30 years, they began to embrace modern portfolio theory and gradually increased their allocations to real estate. Today, any reputable fund or endowment allocates between 10% to 20% of their portfolio to hard real assets. This allocation seems to hold true among high net worth individuals, with many sources showing that they allocate approximately 10% to real estate. For investors who have more experience with real estate, or are more comfortable evaluating investments, the allocation seems to be much more.
Value-Add Asset Across from Tesla’s Rapidly Growing Electric Car Factory
Fremont, CA – April 24, 2018 – Rev Projects (Rev), a commercial real estate investment and development firm, announced the purchase of 46335 Landing Parkway in Fremont, CA in a transaction valued at $9,600,000. The seller of the building was an owner-user named Molex, a subsidiary of the industrial giant, Koch Industries.
The 52,000 square foot office and R&D building is a value-add investment located in the core of the Bayside Technology Park, directly across from Tesla’s expansive car-manufacturing factory. Tesla’s factory is creating an automobile supply chain in the area, which has attracted Tesla’s suppliers and a variety of other tenants, including artificial intelligence, robotics, and industrial firms. Other strong attributes of the property’s location include its visibility from the I-880 freeway and its proximity to the recently built Warm Springs Bart station.
Eric Wang, Principal of Rev Projects, commented, “This acquisition aligns with my strategy to seek after assets in the path of growth in emerging submarkets. Fremont is emerging in that sense as a location where tenants, including Facebook and Tesla and its suppliers, expanded their footprint and brought in interest from institutional investors. Many other commercial tenants relocated to Fremont after seeing the rent discount below the core Silicon Valley submarkets. Employers now understand that much of their tech workforce, as well-salaried as they are, just can’t afford the average median home price of $3.2 million in Palo Alto and have found a relatively affordable, high-quality of life in Fremont. A natural decision for these employers is to set up offices closer to their workforce.”
Rev will implement an extensive renovation plan to the recently vacated building and bring it to market-ready condition, making it available for occupancy in the second half of 2018. A leasing plan will engage prospective tenants seeking to occupy the entire building, or any of its smaller divisions of either 37,000 or 15,000 square feet.
Rev Projects has just sold Old Mother's Cookies Lofts, a 35,000 square foot live/work loft community in Oakland, for $9.86 million. The building is the site of the original Mother's Cookies Factory.
Rev Projects completed several value-add capital projects under its ownership: over half the building units were renovated, major roof repairs were completed, the parking lot was secured with new gated security, the fire-life safety system was fully repaired and upgraded, and bike racks were installed in common areas.
A statement from Eric Wang, principal of Rev Projects:
"I committed to the revitalization of the Old Mother's Cookies Lofts with major value-add improvements, while respecting its historic character. Tenant demand recognized this work, and a new stream of vibrant and creative residents flocked to its community. The capital markets also recognized this work, resulting in a strong exit I am glad to share with investors."
Election Round Up: Rent Control
Varying versions of rent control in several Bay Area cities were, defeated, enacted or tightened due to election. For example, in Oakland, where rent control already exists, voters approved moving the effective date of rent controlled units from 1980 to 1995. Here are the results for the other cities:
San Francisco Apartment Supply
Apartment rents in San Francisco fell approximately 8% to 10% this year, which is significant in percentage terms; but if one-bedroom rents peaked at nearly $3,500, a 10% decrease to $3,150 still doesn't seem that cheap. Should a one-bedroom apartment ever cost more than $3,000, anywhere in the first place? The reason it did is because of the inflow of over 100,000 jobs in San Francisco over the past five years, with virtually no new housing supply. The recent fall in rents is a very welcome release of pressure, and mostly due to the over 3,500 units of new supply recently released to the market. And with another 3,600 units of new supply coming online to the market from now until the end of 2017, rents will continue to fall further. It's important to note that the recent fall in rents is not a dark foreboding of any impending implosion; it's simply the market working through the new supply of units. By no means has the SF apartment market entered hyper-supply or overexpansion. We need every unit of supply we can get.