Oakland's Latest Growth, Unicorns Get Reality Check

Oakland Real Estate News

• Travel and leisure magazine wrote an article covering the new hot spots in Oakland and the tensions in the cultural changes Oakland is now experiencing. A very good overview of Oakland.
• Uber, with it acquisition of Uptown Station, is paving the way for a wave of tech startups seeking space in Oakland.
• The last large block of vacant space in Oakland was just leased to AECOM, the the world's largest engineering design firm by revenue.  The 120,000 square foot lease will tighten Oakland's office market further below 5% vacancy. 
• The same developers of Uber's Uptown Station headquarters is now in contract to buy a recently vacated office tower in Uptown Oakland. This building, once renovated into creative office finishes, will provide a large block of space for another major tenant to enter Oakland. (...perhaps WeWork?)
• This is a map of major residential developments in Oakland. Units are planned for construction all throughout Oakland, but they will have difficulty getting built.
• Following the steps of many other cities, Oakland's City Council implemented a Housing Impact Fee increasing the costs to build new units in the city and further dampening the housing supply.

The AT&T building at 2150 Webster Street in Oakland will be converted in creative office space to make room for another new large tenant.

The Unicorn Gets a Reality Check
I highly recommend readinging Bill Gurley's article on the boom private investments in Unicorns and its risks.  

Private tech companies achieved new capital injections too easily, and leaned on new funding rounds to sustain growth rather than real profitability.  That merry-go-round is coming to an end and companies are being forced to tighten their belts. Compared to just a year ago, venture capitalists have reduced funding by 11% to startups.  The sentiment in the Bay Area, certainly in the last few months, has been a higher expectation of profitability instead of hyper-growth, and now many of these companies see their funding resources tapped out and must squeeze out profitability with their current operations.

Interestingly, Mark Cuban predicted this over a year ago in this blog post
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Numbers and Facts
The overall US economy is showing steady vital signs, with employment growth and reasonable leverage ratios. Certain areas though are particularly at risk, namely the private investment boom mentioned above, and the boom in education costs and lending. 

146.6 Million 
Total US employment as of February 2016, which is over 5 million greater than the previous peak and 13.8 million greater than the trough in 2009.

71.3% 
Household debt as a percent of GDP as of today, compared to a peak of 92.5% in 2009. 

$1.3 Trillion 
Student debt outstanding as of 4Q 2015, which as risen from $567 billion in 2006.

Book Recommendation
The Great Recession of 2008 doesn't seem so long ago, but financial bubbles of its kind will inevitably return in various forms. Wary of the next one, knowing that bubbles are difficult to predict, I read A Short History of Financial Euphoria, by John Kenneth Galraith, a nobel-prize winning economist of Harvard University. It's a light overview of financial bubbles throughout modern history, starting with the Tulipomania of 1636, that contains important and relevant points on the common denominators in all bubbles.

• Memory Loss of Previous Euphoria: The consequences of previous bubbles fade in memory, sometimes quickly. Often, similar euphoric experiences arise and a younger and over-confident generation props up a new speculative episode. This has been the case for centuries, and will continue in the future.
  
  
• Overconfidence in New Technology or Innovation:  The bubble is built around the discovery of an innovation that claims to offer radical financial returns. In 1636 it was the tulip bulb; in 1987 it was high-yield junk bonds; in 2000, it was dot-com companies; in 2008 it was mortgage-backed securities; and today it is _______ (I'll let you fill the blank).  
  
  
• We Equate Money to Intelligence:  "...there is a strong tendency to believe that the more money, either as income or assets, of which an individual is possessed or with which he is associated, the deeper and more compelling his economic and social perception, the more astute and penetrating his mental processes."  We know that this is far from true--consider the bright minds and individuals running investment banking divisions before the Great Recession; and the consequences of their investment decisions were no different eighty years earlier: Goldman Sachs launched a fund in late 1928 to trade and speculate in stocks and issued shares at $104 and rose to $222.50 a few months later. In spring of 1932, they bottomed to $1.75 each. Today's environment with tech companies flush with billions of dollars in funding who can do no wrong have leaders and individuals who are heading in a similar direction.

How can we apply these concepts in the real estate markets? Some things to watch out for in particular are:

• Expansion of speculative real estate development without signed leases
• Vacant space becomes more valuable than occupied space
• Senior mortgages creeping up the capital stack to replace mezzanine loans
• Mezzanine lending creeping up the capital stack to replace equity