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?Sellers may move money across
the bay in search of higher
yields or park capital in
less management-intensive
single-tenant retail assets,? says
Mishkin.

SAN FRANCISCO-A research report that GlobeSt.com exclusively obtained from Marcus Millichap Real Estate Investment Services shows that for the San Francisco apartment market, renovating existing properties is key to outsized returns. According to the report, the apartment market here is arguably the strongest in the nation, and the impending construction boom will only have a minor impact on operations.

Job growth in the tech industry remains the key driver for occupancy and rent gains, and owners will likely have a strong negotiating position into next year, says the report. However, some early indications are emerging that rent growth will slow to a sustainable pace during the next several quarters, the report says.

Jeffrey Mishkin, first vice president and regional manager of the San Francisco office, notes that “class A vacancy is leveling off, while lower-tier vacancy tightens. As rents in the top-tier have climbed, many tenants are choosing to move down the quality scale rather than spending more of their income on housing,” he says. “Although new demand has been sufficient to offset these losses, new supply could tip the supply-demand bal­ance. Several thousand units will come online during the next two years, creating competition for class A properties. As a result, operators are expected to slow rent gains to maintain occupancy rates until the development cycle wraps up in 2015.”

Investors will remain active in the San Francisco market, though deal flow could be impeded by the number of available listings, he adds. “Sellers may move money across the bay in search of higher yields or park capital in less management-intensive single-tenant retail assets,” he says. “Some owners see the low cap rates and low interest rates as a favorable time to divest. Buyers, meanwhile, remain focused on the spread, which points toward a strong buy stance.”

Many of these investors are seeking older, larger units that can be upgraded, he says. “Changing a large studio to a one bedroom or a large one bedroom into a two bedroom can have a significant impact on asking rents.”

The new owner may have to wait for rent-controlled units to be vacated to execute this strategy, which could tie up capital for an extended period, adds Mishkin. Nonetheless, he explains, “the return could be much more lucrative than the average 5% yield for a class B asset in today’s market.”

Categories:

West,
Multifamily,
Acquisitions/Dispositions,
Development,
San Francisco

Natalie Dolce Natalie Dolce, editor of the West Coast region for GlobeSt.com and Real Estate Forum, is responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, Natalie was Northeast bureau chief, covering New York City for GlobeSt.com. Dolce?s background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats Arthur Frommer?s Budget Travel magazine, FashionLedge.com, Co-Ed magazine, and has also freelanced for a number of publications including MSNBC.com and Museums New York magazine. Contact Natalie Dolce.

Article source: http://www.globest.com/news/12_484/sanfrancisco/multifamily/Renovating-Existing-Property-Key-to-Outsized-Returns-327035.html

Yet most credible experts who track the complex world of office square footage contend that the region’s future looks promising.

How to explain that contradiction?

“I get that question from friends and business folks every day. I can’t get through a day without hearing it,” said John Frisch, regional managing director of commercial real estate brokerage firm Cornish Carey Commercial Newmark Knight Frank.

Last month, Cornish Carey reported that the Sacramento region’s office vacancy rate in this year’s first quarter hit an all-time high of 23.74 percent, equating to nearly 16 million square feet of vacant space. In 2002, the rate for the whole year was 12 percent.

The first-quarter numbers are the echo of the recessionary hammer that smashed the area’s commercial real estate market in 2008.

However, Frisch cheerfully expects “the office market to get better as the year unfolds.”

And Encino-based Marcus Millichap Real Estate Investment Services’ 2012 annual report also projects an office market turnaround in Sacramento this year.

The optimism lies in the ocean of numbers that’s an industry staple and the sometimes agonizingly slow pace of completing office building/leasing deals.

“We have not seen a tangible improvement in the region in years,” Frisch said. “However, the precursor to any changing in the vacancy rate is leasing activity in the market.

“And right now, we’re seeing better activity in the market than we were seeing six or 12 months ago.”

Frisch explained that it’s not unusual for deals to take six to nine months ? a timetable starting with prospective tenants looking around and ending when they finally move in. As a result, the recent bump up in office leasing might not show up on the region’s statistical radar for another year.

While the process is slow, Frisch said: “I don’t know if there is a better indicator for our local economy than office space vacancy. ? It’s pretty basic. When vacancy is high, things are bad. When it’s low, you have almost full employment.”

Local brokers also stress that it’s a mistake to view the Sacramento region as a monolith. Submarkets in the region are seeing widely varying degrees of progress, or disappointment.

Voit Real Estate Services’ first-quarter regional report for 2012 showed an office vacancy rate of 50.2 percent in the Rio Linda/North Highlands submarket. In downtown Sacramento, it was 10.1 percent.

There are also variations within the submarkets.

Robb Osborne, a senior vice president leading a team of brokers in Voit’s Roseville office, noted that the first-quarter vacancy rate in the Roseville/Rocklin market was 27.4 percent, but that number was affected by a 40-percent-plus vacancy rate along the Highway 65 corridor.

Prior to the recession, numerous high-end office buildings were built along Highway 65, reflecting the area’s economic boom. In the recession, much of that office space went empty.

The high percentage of office vacancies is an advantage for businesses looking to lease or buy.

“We have lost (clients) if they are price-sensitive,” Osborne said. “And right now, everybody is price-sensitive. They’re looking for the best deal.”

Cole Sweatt, an assistant vice president and broker in Voit’s Roseville office, said cost now outweighs all other factors: “In downtown Sacramento, parking has long been an issue, but now, everybody is looking for cheaper rent.”

Osborne and Sweatt characterized Roseville as a microcosm of the local office industry’s ups and downs.

The Voit team marketed the recent sale of the Eureka Corporate Center at 1544 Eureka Road in Roseville ? a modern-looking complex of gleaming offices with panoramic views. The complex wanted for tenants and was taken over by its lender.

Expansive second-floor offices that once housed Orange County-based John Laing Homes ? which filed for bankruptcy protection in 2009 ? lie empty. Sweatt expects the new buyer to fill the empty space with attractive lease offerings.

By contrast, a short drive away are twin office buildings at 3721/3741 Douglas Blvd. Of the 90,000 square feet of deals made by real estate firm Hines last year, about 50,000 were in the 3721/3741 buildings. Hines, which has offices at 400 Capitol Mall in Sacramento, owns about 850,000 square feet of space it’s looking to lease on the busy Douglas Boulevard corridor.

In 2011, Osborne’s Voit team completed 20 office sales totaling 186,000 square feet and 31 office lease transactions comprising 110,103 square feet.

Still, Osborne and Sweatt characterized the current environment as tough ? Osborne believes brokers will be swimming uphill for another year or so ? yet both see indicators of improvement.

Sweatt pointed to a rejuvenated San Francisco/Bay Area business/tech market: “We’re hoping that some of those (companies) will expand or relocate here.”

Osborne said a bump up in residential real estate in and around Roseville was a good sign “that if people are buying a home, they’re probably looking to stay in business.”

Osborne said dovetailing trends in the residential real estate and office markets are producing similar results: Buyers are picking up troubled assets for a comparative song, helped by low interest rates. Those picking up office buildings for a low price can better afford to “undercut” the market to lure tenants, charging square-footage rates well under competitors’ rates.

This creates another trend: Tenants being poached from other buildings with attractive offers.

Frisch said it’s all part of the game: “When Class A space drops to Class B levels, it’s a great opportunity to move up. When prices get really, really good, people who want to get into whatever trophy building there is can afford to move up.”

Frisch said attractive pricing is likewise contributing to leasing activity.

“Now for the first time in years, we are seeing people considering expanding instead of just hunkering down for a year or two to see which way the wind blows,” he said.

Frisch said that includes his own Cornish Carey firm.

“For the last four years, we have extended our lease two years at a time,” he said. “Now, we’re seriously considering expanding and relocating next year.”

Cornish Carey has two local offices ? about 7,500 square feet in Sacramento and 4,500 square feet in Roseville.

© Copyright The Sacramento Bee. All rights reserved.

Call The Bee’s Mark Glover, (916) 321-1184.

? Read more articles by Mark Glover

Article source: http://www.sacbee.com/2012/05/27/4517394/sacramento-area-office-brokers.html