Uber's Uptown Station in Oakland, Low Interest Rates

Oakland Real Estate News

• Though it's old news by now, it's still worth mentioning that Uber's purchase of "Uptown Station" (the former Sears building) will seat over 2,500 employees and make it the largest private employer in Oakland. The building is under renovation and is slated to be occupied by 2017. Developers will struggle to gain approvals to supply new housing with the slow pace of government bureaucracy. ​Uptown Station is at the heart of Uptown Oakland's development. The building will feature grocery-anchored retail on the ground floor and direct stairway access from the 19th Street Bart station.

​Institutional investors are crowding into the Oakland market, and they are active landlords and seeking return on investment. Their construction and renovation activity will prepare them for the influx of tenants from San Francisco.

• Uptown Oakland's Auto Row will burgeon into a retail oasis, with the support of Oakland's City Planning, and it's heating up with major new developments. This 225 unit apartment building at 2400 Valdez will be at the center of it.  At the northern end of the district, 425 units are replacing an old Chevy dealership, next to the new Sprouts Market.

OAKLAND MARKET FACTS

FACT:  Office market vacancy is 5.4% as of the end of 2015.

FACT:  Multifamily effective rents grew 19.3% in 2015.

Oakland's market fundamentals grew very tight, particularly in the past 24 months, as San Francisco's tenants and residents were pushed out of the market due to pricing. This is a familiar trend in every past bull cycle, and we now see Oakland establishing itself as a stronger, independent submarket. Time will tell whether it will be a third market pillar in the Bay Area behind San Jose and San Francisco.
Source: Axiometrics and CoStar


Cap Rates vs. Treasury Rates and Market Peaks

With the recent volatility in the markets, it's worth discussing our current standing in this market cycle. I won't prognosticate on the course of macroeconomic trends or peak pricing. Instead, here is a thought from a recent presentation by HFF, which analytically views cap rates from another perspective. Cap rates today have compressed to the lows found during the peak of the 2007 bull market, a sign of overoptimism. The major difference in the bull markets is that the 10 year treasury yield averaged 4.5% to 5.0% during the 2007 peak, while today they are 1.9%. With the spread between cap rates and treasury rates still 2.5% to 4.0%, real estate still provides attractive spreads compared to the risk-free rate.  So why are interest rates so low?

​Stagnation in Foreign Economies = Low Interest Rates

Compared to the rest of the world, investments in the United States, including US treasuries, continue to look like a safe haven, keeping interest rates low. The major economies outside the US all have their share of problems.

• China's debt load is growing, when instead they should be deleveraging. In the short term, they either face further devaluation of the RMB, which is already anticipated by corporations and investors voting with their feet with billions of dollars of capital flight leaving the country, or face a painful contraction in investment, employment, and construction. 
  
  
• Japan, now with negative interest rates, can't depend on Abenomics any longer to revive their dying economic growth. Mainstream media doesn't extensively cover the Japanese cultural tendencies that structurally limit their economic growth: low female labor participation rate and their xenophobic leanings which limits net immigration, and thus GDP growth.
  
  
• The Euro zone has been stubbornly sluggish: both GDP and inflation are projected to be near or below zero in the near term. 
  
  
• Brazil, once a stalwart of the BRIC economies is in an recession and experiencing political turmoil. This is particularly damaging due to its confluence with the curse of hosting the Olympics--countries suffer with a large bill to pay due to over-investment. Topping it all off with the Zika virus, the next couple of years will not be pretty for Brazilians.

The conclusion is that our interest rate is affected not only by the US economy but also by the performance of economies around the world.