Sacramento Rent Control?

Sacramento Midtown Multifamily

The Costa Hawkins Repeal & Rent Control

There has been a lot of talk lately about repealing the Costa Hawkins Rent Control law that was passed in the 1990’s. Costa Hawkins essentially curtailed a jurisdiction’s capacity to impose rent control.

Now Unions and Tenant organizations are seeking to repeal Costa Hawkins (CA). What is puzzling about all this, is that while the cities are looking to reduce the cost of housing, they are doing very little to make it easy or less costly to develop new housing. By imposing rent control laws without corresponding relief in development costs, jurisdictions like Sacramento are probably going to worsen the rental market for both the Tenants and the Landlords. Property values will go down, the incentive to build new units will diminish and property management regulations will increase.  Ultimately as property values go down, so does property tax revenue – that funds education and local services (police).

  • Cities such as Sacramento and Santa Cruz are looking at rent control policies to impose in the event the repeal of CA is successful this November. Richmond and Mountain View have recently passed rent control laws.
  • When Richmond instituted rent control it was retroactively applied. For example, the rent control policies went into effect November 2015, but the rents were retroactively controlled to July 21 levels. In other words, even if the Landlord raised the tenant’s rent after July 21, When the Rent Control went into effect, the rent was rolled back to what the tenant was paying prior to July 21st, 2015. If a tenant moves into a building after rent control is imposed, the rent the landlord charges will be based on a formula established by the city or jurisdiction.
  • If this 2018 Ballot initiative passes in California, this will open the door for rent control in many neighboring communities and ultimately statewide.

Here are some key takeaways if Costa Hawkins is repealed:

  1. Rent Increases could be tied to an index such as a CPI, so landlords cannot increase rents based on market demand or what a tenant is willing to pay. Landlords will be subject to the whims of the governing body.
  2. It will be very difficult for landlords to evict a tenant without cause, even if a tenant is month to month.
  3. Tenants will not want to move and – like in San Francisco – a tenant can sublease their apartment unit out to a friend at the below market rent just to keep the unit.
  4. To evict a tenant the Landlord will have to provide a reason for the eviction other than the desire to raise rents. So, even if a tenant is on month-to-month, and the landlord has a tenant willing to pay a lot more rent, the Landlord cannot evict the tenant.
  5. It is possible that the new rent control laws will include a provision that if the owner of an apartment building decides to sell, the seller may have to pay each tenant a fee in anticipation that the tenant might be displaced when the new owner takes over. For example, if the building is sold to an investor who wants to renovate certain units, the tenants affected will have received the displacement fee from the previous landlord.
  6. The Costa Hawkins Repeal is heating up for this November’s ballot. If repealed, all multifamily (including the possibility of single family homes) will be subject to rent control laws.
  7. The California Apartment Association has received $4 million from donors to fight the repeal initiative.
  8. Unions (Tenant Unions and Labor Unions) are orchestrating -and or- backing the effort to repeal Costa Hawkins.

Historically, Landlords have been able to work around rent control, but the new rent control measures will dramatically limit the landlord’s ability to work around the laws. What landlords have done in the past include:

  • Evicting tenants to get new ones and charge higher rents
  • Converting apartments into condos
  • Converting residential units into retail or office where rent control doesn’t come into play.

If Richmond is any indicator, a repeal of Costa Hawkins will not be good for landlords. In fact, some landlords I spoke with said that the City of Sacramento could create even more draconian policies. Plus with any new governmental intervention like this, new layers of government will be created to enforce the new rules. These layers are not free, and I suspect the entire financial burden will be placed on the property owner.

For additional information related to the Repeal of Costa Hawkins check out the links below.

Sacramento City Beat

Santa Ana

Tenant’s Together

Stanford Study – San Francisco

San Diego Tribune

Richmond

East Bay Times

Opposition of the Repeal

 

Sacramento’s Emerging Boulevard – Broadway

When I moved from Manhattan Beach to Sacramento in 1991, my new bride and I arrived behind the wheel of a Uhaul at 9:00 PM.  We had a 800 S.F. rental lined up on Harkness in Land Park.  We had no keys to the place, so we had to call the owner.  He staggered out of his car about an hour later speaking incoherently.

We got into the place and decided to grab a bite to eat.  At 10:00 PM there was literally nothing open other than a Burger King.  When we got back to the place with our Whopper, Fries and matching crowns, my wife Joanne stared at me in disbelief, started to cry, and then said, “I can’t do this.  I cannot live here.”  Well that was then, and besides the divorce (which was percolating from that first bite of the Whopper) there are probably 50 new restaurants in the Core (Downtown and Midtown) that did not exist.

And  in case you didn’t notice, the Broadway Corridor is not-so-sneakily emerging as the next popular destination in Sacramento.  Broadway has always been a destination for many going to Tower Theater, Tower Cafe and several ethnically diverse restaurants including, Mexican, Chinese, Thai, and Ethiopian cuisine.  One restaurant trail blazer on Broadway is Bill Taylor who opened Willie’s Burger in 1991- and later – Flat Iron on Broadway.

The Broadway Renaissance has been awakened with several notable developments from the east to west:

Selland’s Cafe and Bike Dog Brewery at 9th and Broadway.  Selland’s opened up in early 2017, and since then, there has always been a line to order up lunch or dinner.  Selland’s features a special dinner for two with a bottle of wine for $25.  If you get tired of the wine you can go checkout Bike Dog next door for your favorite brew!

Selland’s and Bike Dog Brewing rounding out the west end of Broadway

Broadway’s Redux  by Indie Capital, a niche developer that develops smaller infill residential projects, is building a few homes along the north of Broadway between 9th and Riverside.  They also just closed on some additional land in the vicinity.

Indie Capital’s Broadway Redux at 1015 Broadway

Noah’s Bagel with Pete’s Coffee, Sour Dough Bread Co. and Chipotle is currently being developed next to Willies Burgers on 16th and Broadway.  For several decades the northeast corner of 16th and Broadway was a parking lot that served as parking for Tower Records (Now Dimple Records).

Hoppy Brewing and the Real Pie Company at 24th and Broadway.  The Hoppy is moving from 65th and Folsom and they should be open any day now!  The Real Pie Company is already open, but the sign on the door said Open Wednesday!

Real Pie Company and Hoppy Brewing moving to 24th and Broadway

The Mills A residential development project at 5th and Broadway.  The Mill’s Development is situated on the former Setzer Lumber Mill.  Homes range from around 750 Square feet to about 2,000 S.F.

401 Broadway Then there is the resurrected Developer, Sotiris Kolokotronis in partnership with Grupe, who is planning to build a four story 59 unit apartment project  https://bit.ly/2JOua5n .  Grupe acquired this site several years ago, and now the market is ready for it; rents have risen to support new apartments and houses.

So, if you are looking for some good food or a contemporary place to live close to Downtown, Land Park with easy parking and great access, then you need take a look at Broadway!  If you are looking to buy or sell or lease real estate – or you just need a little market insight – call or email me at (916)761-1202 or tom@baconcre.com.

It’s Just a Matter of Time

I attended a Panel Discussion Moderated by Randy Getz of CBRE at the Sutter Club in Downtown Sacramento this week.  Chuck Trainor, Managing Partner of Trainor Fairbrook, introduced David Taylor.  David Taylor humbly recounted his first development projects. Taylor has arguably had the most impact on Sacramento’s Skyline, developing The Sheraton, 1201K Street, 1215 K Street, Sacramento City Hall, 621 Capitol Mall.  But David doesn’t just build buildings; he creates a sense of place.

David highlighted some interesting facts that illustrate how far Sacramento has come.   Notable points include:

  • In 2015 Bloomberg ranked Sacramento #6 as the most affordable fun city.
  • Before counting the expense of the arena, in the recent past, over one billion dollars has been spent downtown on new developments, of which 58% are privately funded.
  • Since 2014, 25 properties have traded hands valued at over $538 million.
  • Of 900 people surveyed, 1/3 say they would like to live downtown, and 2/3 of the millennials surveyed want to be in the Grid.

Following Taylor’s introduction, a diverse group of panelists came up on stage.  The panelists included:  Denton Kelley, Partner with LDK Ventures, oversees the Railyard Development; Sandy Sharon, SVP and Area Manager for Kaiser; Ron Vrilakas, a prolific Central City Architect; and finally Ali Youseffi, Vice President of CFY Development.   Randy Getz led an insightful and interactive discussion with an audience of about 150 commercial real estate experts.  Each panelist shed light on their optimistic view of downtown Sacramento’s future and the developments that they have been involved with.

Downtown Sacramento is the Ultimate Corporate Campus

What surfaced from all the comments is that the game – and the players – have changed.  Downtown’s value proposition has risen (Sacramento Delivers, Private Sector Grows), with an abundance of new amenities including health clubs, bars and restaurants.    And all the development would not be sustainable without the good paying Jobs being created downtown (Kaiser Hospital took down 18 acres in the Railyard for a future hospital and they bought 501 J for a new medical office building.)

With this momentum, it is just a matter of time until companies like Facebook, Salesforce or Linkedin establish a presence in Downtown Sacramento.  Just this week the Bay Area Tech Company, Support Pay, announced it was moving into Sacramento.  SupportPay expects to grow in Sacramento, in a big way.

As David Taylor said in closing, Downtown Sacramento is the Ultimate Corporate Campus with everything right there for employees to work and play.  It’s just a matter of time.

Sawyer

Sacramento’s Big Man is just getting started.

How About Those Sacramento Kings?  The Kings won last night without their Big Man, Cousins.  Frankly, they looked like a whole new team, with contributions from everyone, with six players in double digits.  Willie Cauley-Stein had a career high 29 points.

Would the Downtown market be on such a winning streak without its Big Man? I don’t think so. Property is selling in the Midtown and Downtown Markets (THE CORE) for prices that are justified by increased demand for housing in Core, the Arena (The Big Man) and a multitude of other developments. Believe it or not, the demand for properties is going to increase and sustain itself, so long as the trend for migration into the Core continues. Another factor bolstering values is the replacement cost for commercial properties has increased by over 30% in the last 5 years. This is due to increased labor and material costs.

When the Arena was announced, overnight, property values in the vicinity of the site went up at least 25%. Buildings like 555 Capitol Mall, 501 J Street, The Travelers Hotel Office building and the former Greyhound Bus Station are just a few examples. For Sacramento, the Arena changes everything; consider this blog post comparing The Golden 1 Arena to San Diego’s Petco Park: For Sacramento, The Arena is the Cake

Midtown hasn’t needed the Arena to take off. For many years rents have been suppressed in this market, and as new developments come on line, the rents will be commensurate with Midtown’s value proposition and Vibe. All the new residential development, coupled with the new Sutter Hospital and the Ice Blocks are a few of the projects making it happen.

Below are a three comparable sales that demonstrate the viability of Commercial Property in the Core.

Sale #1: 831 L Street. This site consists of a 27,200 s.f. parcel with a 44,000 s.f. building with over 50 parking stalls on the site. The price was 5,000,000 which amounts to about $113 foot for the building and a land value of about $184 a foot. I see this property having two lives, one for the next 5 to 10 years as a leased building.  In its next life, the property will make way for a new development that maximizes the site.

Sale #2: 910-930 K Street. These vacant buildings sat on the market for at least 5 years, and sold about 2 years ago.  Total site consists of 20,909 s.f of land with 31,600 S.F. of buildings. PRICE: $5,300,000, that pegs the underlying land value at $250 a square foot and $167 a foot for the vacant buildings. To put this in perspective, just one block away 770 L Street, a 169,000 square foot (90% occupied) class A office building sold for $173 a foot before the Arena was announced.

Sale #3: 2020 I Street. This 9,500 S.F. building sold for $2,802,500 ($295 / SF). This building is home to Trumpette, a specialty childrens clothing store. The property sits on a relatively large lot with great parking. Wouldn’t be surprised to see some “alley activation” here.

The sales listed above are notable examples of properties that have sold at exceptional values, values that reflect where the Core is heading. This doesn’t mean that a property worth a $100 a foot is going to immediately sell for $150 a foot, but it certainly builds a solid case for optimism and positive momentum.

Golden 1 Center Arena

Sacramento’s Golden One Arena Makes Almost Everything Better

The Sacramento Kings staying in Sacramento was great, but the Golden One Arena and its profound ripple effect  is the biggest game changer since the Gold Rush. Other cities (San Diego, Denver, San Francisco, etc.) have developed new arenas and the impact on their economies have been great. However, in relative terms, Sacramento’s Arena will probably turn out to  be far more significant.  We have already seen an appreciable uptick in investment activities. Hotel development is happening with more to come, office buildings are selling and Landlords are feeling pretty good.  For  both retail and office tenants (and this is where the “almost” comes in) the future is complicated; On one hand you have an evolving Core with added amenities, then on the other, you have spiking rents and diminished choices.

When compared to other cities, the reason why The Sacramento Arena project is more significant in relative terms is because Cities like San Diego and San Francisco already had a lot going for them: international destinations, corporate support, and natural beauty.

For this discussion, let’s take a look at San Diego and the impact of Petco Park. The total project cost about $450,000,000. Petco Park was competed in 2004. Since then, there has been over a $2 billion in development around Petco Park. The development consisted of 3,500 residential units, 957 Hotel Rooms, and 610,000 square feet of office space. Since 2004, the assessed value of real estate tripled. Petco Park created 19,200 jobs.

But the Boom in San Diego is like adding an extra layer of frosting on an already amazing chocolate cake. For Sacramento, the Golden One Arena is the cake. The Arena combined with the potential expansion of the convention center is going to change our whole community. There will be more hotel rooms, restaurants and housing. The tax revenues are going to increase commensurately, and the City of Sacramento will realize a solid return on its investment. According to the San Diego Business Journal, the City realized an annual return of 7.6%.

By 2021 I predict that we will see the addition or renovation of 1,000 hotel rooms (The Sawyer adds 250 rooms and there are rumors of about 300 rooms near the Tower Bridge in West Sacramento.)

The CBD office market will tighten considerably, and there probably won’t be more than 500,000 square feet added to the inventory in the next 5 years.  There are several sites, but the cost of construction requires rents the market is not quite ready for.  Plus we need more tenant demand in the private sector.  Certainly Kaiser Hospital Helps.

The Arena (like Bacon) makes everything better.  If you are looking to make a move in the office sector (whether you are looking to develop buy or you need to renegotiate your lease or find a new location) Please contact me at (916) 761-1202.  tbacon@kiddermathews.com.

Sacramento’s CORE: Par, Birdie, Eagle. Albatross next?

Sacramento’s Core (Midtown and Downtown) is not very sneaky. In fact the whole world has taken notice.  One thing I didn’t now about Core is this:  Core recently took up golf, and in 2015 made the PGA Tour.    In a matter of months, Core has risen to the top of the money list!  At the  2016 Player’s Championship, Core was interviewed after a remarkable 3rd Round, and he shed some light on his success.

Reporter:  So Core, how do you feel about your round today?

Core:  Well, I gotta tell you, I don’t think I can hit the ball much better.  The first day, I played alright, but I was still working out the kinks, you know, past few years have been tough.

Reporter:  I noticed that.  Your first round you scraped it around and managed to keep yourself in the hunt.  But then you really turned it on.  What do you attribute to your resiliency and significant bounce back?

Core:  Well before I picked up my new coach….

Reporter:  Your new coach?

Core:  You know, they call him (pause) The Golden One.  (smiling) I call him GO.

Reporter:  How could I forget?  He has been a big part of your rise to the top of the money list, huh?

Core:  No doubt.  I was making progress with my trainer, HDR, and my previous coach, Trend..  But when GO showed up, things really started to click.

Reporter: So what do you see for the final round tomorrow?

Core:  I can’t imagine going as low as I did today, heck, I only had 16 putts.  But I feel pretty good. I am looking forward to solid final round.

Reporter:  Thanks, Core.  Good Luck Tomorrow!

With the exception of some notable deals, like the sale of the Wells Fargo Center, it doesn’t take a brain surgeon to note that values are up in Midtown and Downtown.  In looking at the statistics (Costar) for 2014 through 2016 here are the basics:

Commercial (non residential) properties sold for an average of $99 a square foot in 2014, $151 in 2015, and in 2016 the average price per square foot increased to $205 a foot.

Multifamily properties sold for an average of $95,000 per unit in 2014 with a GRM of 10.92. In 2015 the price per units edged up to $116,000 per unit with the GRM jumping to 13.15. In 2016 the Price per unit increased to $150,000 per unit with a GRM of 13.32.

Land sold for an average of $94 per square foot in 2014. In 2016 the average increased to $131 per square foot.

nwc-11th-and-k

The Ransahoff (11th & K)

This survey is only for properties selling between $1,000,000 to $10,000,000.  The price increases are not surprising given the development of the arena and the trend of people wanting to live in the Midtown and Downtown area.  However, I think you can say that a 50% increase in the price of Multifamily (price per unit) from 2015 to 2016 is more of a spike than a bump.  Notable: the Gross Rent Multiplier (GRM)increased nominally between 2015 and 2016.  This means rents escalated significantly in 2016, nearly in step with the values.

Many of the commercial properties sold (non-residential) in the midtown area were to users.  For quality properties with parking, the prices exceeded the median significantly.

Land sales have picked up considerably as well, and values are up at least 5o% from 2014.

ice-blockexterior-cropped

R Street’s Ice Blocks

For detailed Sales and leasing information including sales comps for 2016,  contact Tom Bacon at 916-761-1202 or tbacon@kiddermathews.com.

It’s not the Gold Rush but for Sacramento, it may be the next best thing

It’s not the Gold Rush…….Sacramento Commercial Real Estate Update

Gradual Value Appreciation? I think not. Property is selling in the Midtown and Downtown Markets (The Core) for prices that are justified by increased demand for housing in Core, the development of the Arena and a multitude of other developments (see this October 14 Post on Urban Land Value. Believe it or not, the demand for properties is going to increase and sustain itself so long as the trend for migration into the Core continues.

When the Arena was announced, overnight, property values in the vicinity of the site went up at least 25%. Buildings like 555 Capitol Mall, 501 J Street, The Travelers Hotel Office building and the former Greyhound Bus Station are just a few examples. For Sacramento, the Arena changes everything; consider this blog post written over two years ago comparing The Golden 1 Arena to San Diego’s Petco Park: Sacramento Kings Arena.

Midtown hasn’t needed the Arena to take off. For too many years rents have been suppressed in this market, and as new developments come on line, the rents will be commensurate with Midtown’s value proposition and Vibe. All the new residential development coupled with the New Sutter Hospital and developments like Whole Foods at 20th and L Street. Land is selling, and more land is sure to trade hands in an accelerated pace the next three years.

Below are a three comparable sales that demonstrate the spiking values of Commercial Property in the core.

Sale #1: The half Block of 9th and S Street, home of Insight Coffee and former HQ of Murray Industrial Supply. This property sold for about $70 a square foot. Two years ago, this property may have fetched $35 a foot.

Sale #2: 910-930 K Street. These vacant buildings have sat on the market for at least 5 years. Total site consists of 20,909 s.f of land with 31,600 S.F. of buildings. PRICE: $5,300,000, which pegs the underlying land value at $250 a square foot and $167 a foot for the vacant single story buildings. To put this in perspective, just one block away 770 L Street, a 169,000 square foot (90% occupied) class A office building sold for $173 a foot.

Sale #3: 915 Broadway. This 15,400 S.F. building sitting on 1.8 acres sold for $2,600,000. Land Park residents will be pleased once The Kitchen opens up here. The Kitchen has been located off of Hurley Way for decades, and is now moving into the Core.

These sales listed above are notable examples of properties that have sold at exceptional values, values that reflect where our Core is heading. This doesn’t mean that a property worth a $100 a foot is going to immediately sell for $150 a foot, but it certainly builds a solid case for optimism and positive momentum.

Restaurants To Open In Iconic Folsom Boulevard Building

The site of the former Rosemount Grille — which operated in East Sacramento from 1945 to 1989, and — should be dishing out some amazing food by the end of this year.

The 11,000 square foot building on Folsom Boulevard will house what is sure to be an incredible addition to the neighborhood.  One side is going to be occupied by OBO’ Italian, the newest Selland Family Restaurant; on the other side you will find Kru, an extremely popular midtown sushi restaurant.  Spearheading the redevelopment of the property is John Mikacich.  John has extensive experience in development, having worked with Swinerton Builders where he helped build office, hotel and retail.  Most recently (the last 20 years) John oversaw the development of the Cache Creek development that includes a Hotel, Casino, retail and the award winning Yocha Dehe Golf course.

With OBO’ Italian, Randall Selland continues his tradition of focusing on the food.  The intent is for the 4,700 square foot dining room to be a casual Rome-style café, with take-out and catering available.  A full-bar and patio dining are also planned.

For quite a while, Kru chef and owner, Billy Ngo, has wanted to move to a larger space that is able to accommodate all of the people wanting to experience his modern Japanese offerings — without waiting in a long line.  The new location will provide just that and have an innovative bar program featuring specialty cocktails, to boot.

The Rosemount Grille served “fine food to fine people” at this location for 44 years.  Andiamo Restaurant and Bar was there for 16.  The most recent tenant, Good Eats Restaurant and Market, operated until 2011.  The building has been vacant since.  After various tenant improvements — the first being a separation (demising) wall — the new restaurants should be set to open.  With the 100,000 square foot UC Davis Medical Center opening up across the street December 2015, Kru and OBO’ Italian will get a significant boost from a few hundred medical professionals and visitors.

Sacramento is America’s farm-to-fork Capitol … later this year there will be two more reasons to savor our City!