Tag Archive for: market

Forecasting the Capitalization Rate of Office, Industrial, and Retail Properties in the North Bay Area: A 5-Year Outlook

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The real estate market is constantly evolving. It’s influenced by various factors such as economic conditions, market trends, and investor sentiment. As such, forecasting the capitalization rate of  property types such as office, industrial, and retail properties, requires careful analysis and consideration of multiple variables. We at Keegan & Coppin will delve into the North Bay Area real estate market and provide an estimated 5-year forecast on the capitalization rate of these property types.

The North Bay Area, known for its picturesque landscapes and proximity to major metropolitan areas such as San Francisco, has long been a desirable location for real estate investors. However, like any other market, it is not immune to fluctuations and changes. Let’s take a closer look at each property type and their respective capitalization rate forecast.

Office Properties: The office market in the North Bay Area has historically been strong, driven by demand from various industries such as technology, healthcare, and professional services. However, in recent years, the office market has experienced some challenges due to changing work dynamics, including the rise of remote work and flexible office space options.

Over the next 5 years, it is expected that the capitalization rate for office properties in the North Bay Area will experience some upward pressure. This can be attributed to potential oversupply in certain submarkets, as well as the continued uncertainty around the future of office space demand. As remote work becomes more prevalent and companies reassess their office space needs, some investors may demand higher returns to compensate for increased risk. However, prime office properties in prime locations with strong tenant profiles are likely to remain resilient, and the impact on capitalization rates may be moderate.

Industrial Properties: The industrial market has been a standout performer in recent years, driven by the growth of e-commerce and logistics. The North Bay Area, with its proximity to major transportation hubs and favorable business environment, has seen strong demand for industrial properties from companies looking to expand their supply chain operations.

Looking ahead, the industrial market is expected to continue its upward trajectory, with the capitalization rate for industrial properties in the North Bay Area projected to remain relatively stable or even decline slightly over the next 5 years. The ongoing growth of e-commerce, the need for last-mile distribution facilities, and limited supply of industrial properties are expected to support continued investor interest in this property type, potentially leading to compressed cap rates in prime locations.

Retail Properties: The retail market has faced challenges in recent years, with the rise of online shopping and changing consumer preferences impacting brick-and-mortar retail. The North Bay Area, with its unique mix of urban and suburban environments, has experienced varying trends in the retail sector.

Forecasting the capitalization rate for retail properties in the North Bay Area is challenging due to the changing dynamics of the retail market. While some well-located retail properties with strong anchor tenants may continue to perform well, others may face higher vacancies and increased risks. As such, the capitalization rate for retail properties in the North Bay Area is expected to be mixed, with potential variations depending on the location, tenant mix, and property condition. Overall, the retail market is likely to face some headwinds in the coming years, which may result in slightly higher capitalization rates for certain properties.

In conclusion, the North Bay Area real estate market is expected to face some challenges and opportunities in the next 5 years. While the industrial market is projected to remain strong, with stable or even declining capitalization rates for industrial properties, the office and retail markets may experience some upward pressure on cap rates due to changing demand dynamics and increased risks.

As with any investment, it is crucial for investors to conduct thorough research, analysis, and due diligence before making any business decisions.

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affordable housing act

Repealing The Affordable Housing Act

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affordable housing act

Affordable Housing Act Repeal; California has a severe housing crisis that needs a solution.

It’s no secret that California has a severe housing crisis. It is no more evident than in the Bay Area and all of the surrounding neighborhoods devastated by the “unending” Wild Fires.

Finding a solution; solutions to this crisis calls for a myriad of co-ordinate efforts that involve not just owners, developers and builders but our cities, our towns, our counties, and all the municipalities that actually dictate and control the permits and regulatory restrictions that govern new housing and drive new construction.

Candidly; let’s acknowledge the complexity of the crisis, and (because of that) the fever to chase a simplistic solution such as rent control is understandable. However; Rent control and the repeal of Costa-Hawkins is “jumping from the frying pan into the fire”.  The underlying core issues of an inadequate housing supply are not only not addressed, but the new barriers that will require enforcement are a punitive drain on the very government agencies that should focus on new ideas and innovations that create more inventory.

Proposition 10 – Affordable Housing Act

The current initiative Proposition 10; the Affordable Housing Act does not create affordable housing. Instead it reaches out to restrict the options of private property owners by the repeal of Costa-Hawkins. It is a genuine misuse of our tax dollars and misuse the precious time and energy available from the sectors that can lead and orchestrate new development.

Restricting the rights of privately-owned property owners; while well meaning; will not create new housing and does nothing to garner all the necessary resources needed to join forces and create viable pathways to real solutions. Some of the effects of rent control include inhibition of new housing, deterioration of existing units, reduced property tax revenues, and bureaucratic distraction.

Municipal Efforts must be focused on building metrics between those who have the talent and the resources to actually build new units.

Things that could be considered immediately:

  1. Zoning Codes for Residential Development could be updated to allow for prudent density, and the City could immediately annex County areas where the City’s General Plan calls for Medium density housing in the County controlled properties. Currently, the City waits for the developer to apply for annexation. That is time consuming and can delay a project at least 6 to 12 months with no guarantee that the annexation will be approved. Many developers and home builders will not even consider a new project in these unincorporated areas slated for residential development.
  2. Encourage granny units and in-law conversions in single family neighborhoods with adequate land available
  3. Streamline the approval process to keep reasonable pace with the building process.
  4. Fees! Here a fee, there a fee, everywhere a fee fee! Fees must be in line with the eventual product that will be coming to the marketplace. For instance: the City has highlighted Southwest Santa Rosa as a target for new development, yet the fees there are higher than they are on the eastside where property values are higher. This may be a City strategy to offset the expense of the off-site work that will eventually be required, but the current fee structure has created a negative fiscal equation that is not sustainable to the actual marketplace.

The answer to the problem of scarce housing and rising rents is increased housing supply, and removal of inappropriate regulatory barriers to new construction.

“Doing the same thing over and over again and expecting a different result is the definition of Insanity”. That adage has never been truer then when evaluating the merits of repealing Costa-Hawkins; the Affordable Housing Act.

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It’s not just Cap Rates

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Commercial Investment Valuations are typically presented as cap rate driven: the lower the cap rates, the higher the price. Investors have the challenge of balancing asset security and safety vs. an acceptable Cap Rate return.

Security and safety include a matrix of attributes: Extended Lease Term, Quality Tenant with good credit history (and track record of business acumen), LOCATION (both the immediate demographics and street/area positioning), a favorable NNN lease, long term appreciation aspects, and financing desirability.  However; how low can you go? Cap rates in desirable urban settings wafting in under 4% need a compelling story to convince me.

REMEMBER the OLD Adage: “It’s not what you make; it’s how much you keep.”

Evaluating your cash on cash return is as important, if not more important than a cap rate. If your investment is predicated on a 4% cap rate but the cost of the funds is above that, you are going backwards. It can make sense if you are going into a Value-Added Property, or compelling project that offers an opportunity to increase the income to the current market conditions. No one size fits all but sometimes “all that glitters isn’t gold.”

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