Rev Projects Acquires East Lake Merritt Apartments
East Lake Merritt Apartments is a fully-occupied apartment community in Oakland that provides stable and consistent income. Rev Projects acted as adviser and manager and closed the acquisition at the end of August. The building was extensively renovated with newer kitchen and bathroom finishes, new roof, electrical, plumbing, siding and paint and windows, and leased to a new set of tenants. The location is a short walk to Lake Merritt, which provides a peaceful retreat for the residents. JP Morgan Chase provided the loan at a fixed rate of 3.3%.
In high-priced cities like San Francisco, where every costly square foot of housing is becoming more efficiently planned, developers are designing smaller but more affordable spaces. Co-living is one solution that arose out of this affordability problem. OpenDoor, a startup in the East Bay, defines co-living as: "a modern form of housing where residents share living space and a set of interests, values, and/or intentions. It’s a new take on an old idea, imagined by a millennial generation that values things like openness and collaboration, social networking, and the sharing economy." Coliving operators essentially build a number of bedrooms in an existing house or building, and leave room for shared amenity space like kitchens, living room, and any other flex space. Think of it as an upscale dormitory, but for urban working professionals.
The Coworking Model
Coworking space is quickly growing into a significant portion of tenant demand in commercial office real estate, providing entrepreneuers and independent contractors refuge from loud, crowded coffee shops. Over 3,700 coworking spaces are already operating in the US and Europe and it is projected that 37,000 will be in operation worldwide by 2018. Two trends are dramatically fueling the shift in the workforce toward self-employment: the growth of the Millennial generation as a share of the population, and new technology that continues to arm entrepreneurs with tools to work independently. Surprisingly though, a survey by CBRE reports that millennials only account for 25 percent of the coworking workforce and 63 percent are between 31 and 50 years old, suggesting that the coworking model sustainably supports a variety of industries and points in one's career.
WeWork is the standard bearer of the coworking model with their national and international expansion, but the market is large enough for niche competitors: Impact Hub caters to workers in social justice, non-profits, community-oriented businesses and they have 81 locations around the world, including in SF and Oakland. Covo SF is a coworking provider that seeks to truly combine work and play by blending the line of office space / coffee house / pub and adding special printing and libraries for architects and structural engineers. Capital 360 Cafes act as both bank branches and open office cafes. There are many more examples and new concepts being created all the time.
Oakland Real Estate News
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
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.
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.
Household debt as a percent of GDP as of today, compared to a peak of 92.5% in 2009.
Student debt outstanding as of 4Q 2015, which as risen from $567 billion in 2006.
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.
Oakland Real Estate News
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.
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.