Sacramento Core Heating up Just in Time for Summer

Every couple months I run a sales comp report to see what has sold recently.  This time I looked up: land, multifamily, office and retail sales that closed in the last 6 months. I own a couple properties myself.  I wish I had bought my properties when I moved to Sacramento in 1991. 

Land sales are strong.  Multi-family sites in Midtown are running about $50 to $100 per square foot.  In some cases the prices are higher, but this is due to unusual circumstances, say a property is essential to a larger development or it is strategically located. 

Sacramento Midtown Multifamily

Existing apartments are trading at all-time highs.  In the Midtown and Downtown markets, the median is about $215,000 for apartments with more than 10 units.  Smaller properties, say fourplexes, sell for much higher prices per unit. 

The office market is also very strong with $200 per square foot as the new baseline.  The Senator Hotel sold for $47,000,000.  Just three years ago it sold for $32,000,000. 

The retail market segment in Midtown is solid with a few properties trading hands.  The Porch Restaurant sold for a reported $2,000,000, or $555 a foot.  On Broadway, the mixed use building at 21st and Broadway sold for $227 a foot, and the property needs work. 

If you have been thinking about selling, refinancing or just thinking – but not sure what to do – I would be happy to assist in any way. Additionally, if you have any questions on the properties or transactions referenced in this article, don’t hesitate to reach out to our office for more information. Have a great summer. In the meantime, please take a look at www.sacramentobacon.com

Who Needs a Broker?

With all the information on line, many tenants are searching for office space without a broker. Can you imagine? I Can.

I get calls from tenants that are frustrated. The office market data is often out of date and many leasing options are not visible without a subscription. Beyond the lack of good data, tenants complain about the amount of time required to sort through all the information. Once I talk with a tenant about the benefits of working with a knowledgeable broker, the tenant breathes a sigh of relief; particularly when they realize that they don’t have to pay the broker to assist with office needs.

Nothing is free, but hiring a broker is as close as it comes. A tenant representative gets paid by the landlord only when a deal is done, similar to how a residential agent gets paid when representing a buyer.

Another reason you hire a broker is because finding new space and negotiating a new lease or a renewal is complicated. Finding space is just the tip of the iceberg, and a when you work with an agent you save time because the agent knows what is actually available, and the agent knows which landlords are “reasonable” and those who are not.

Many office users (occupiers, tenants, owner users,) whether they lease or own, need guidance even when they don’t need to move. Over 50% of the clients I represent need to deal with their office needs years before the lease expires. Occupiers outgrow their space, so they need to sublease and move, or they need to expand and extend their lease. Some tenants need to consolidate. What happens when business slows down, and you need to cut your real estate costs? What is the best way to go? Well, a good commercial agent will help you evaluate all the options. Once you have weighed the options you can move forward – with a clear objective in mind. We are just finishing up a lease where the Tenant has nearly 5 years left on their existing- they anticipated that they would need about 50% more space a year from now, so we negotiated an extension and expansion that included a significant tenant improvement allowance. Had the tenant waited, they would have been reacting and they would have had much less leverage in negotiations.

Business leaders, Executive Directors, Partners, all the C level execs, are smart – and they have not gotten to where they are by accident. Success is a deliberate process; so is dealing with commercial real estate. It is no accident that most these smart business leaders hire a commercial agent. It just makes sense.

Tom Bacon, CCIM, has been assisting commercial real estate clients in Sacramento since 1991, with an emphasis in office properties and Occupier representation. Click on the link to subscribe and download the free Commercial Real Estate Leasing Guide.

Institutional and Out-of-Town Investors Create Value with Perspective

Sacramento office investment sales are up. And the majority of investors are institutional and from out of town. Sacramento has always been considered a second tier market, but it seems that second tier markets are where all the Easter eggs are! Is it really almost Easter?

Institutional and out-of-town investors create value with perspective. Example: Seagate Properties from San Rafael recently bought the Senator Hotel Office building in downtown Sacramento. The lease rates have been increased significantly, but from Seagate’s perspective, the rates are still below many markets in the country. Seagate can also rationalize additional improvements such as a gym and a restaurant.

Research indicates that a record amount of investment capital held by private equity real estate funds is close to $300 billion. The current state of the market is also responsible for an institutional increase in real estate investments as new and existing investors are looking to lock in historically low interest rates.

Randle Communications

As the market cycle matures, office vacancies are expected to bump up to 13.6% nationally in 2020; presently the number sits at 13.2%. Rent growth is also slowing. So investors seeking higher yields, are looking to buy in secondary Markets and non-Gateway markets. Gateway Markets include San Francisco and New York and have historically attracted foreign capital funding.  A recent study seeking to quantify the top 10 office investment markets in the country included only two primary markets – Chicago and Manhattan. Please take a look at this article from CCIM Magazine, https://bit.ly/2U3ojgD

The Urban CORE is not the only place investors are looking. Institutional investments in Sacramento’s suburban markets like Roseville, Rancho Cordova, Folsom and North Natomas have seen a significant uptick. According to Real Capital Analytics, nationally Suburban cap rates are averaging at 6.8 percent, compared to 5.5 percent for central business districts. Investors are also looking to invest in second tier markets like Sacramento due to sustained demand, improved transportation infrastructure and local amenities. Sacramento is no longer a secret, and prices are showing it.

Take a look at this recent article in The CCIM Magazine for more information: https://bit.ly/2U3ojgD

Looking in Sacramento? Give us a call at (916) 930-0001! We have recently sold a few properties, so if you are thinking about selling, we would welcome the opportunity to help you with the decision making process.

Aerial Downtown Sacramento

Sacramento Commercial Real Estate Performance -“Enhanced” by OZ!

As a CCIM, I receive a monthly magazine focused on Commercial Real Estate. The March-April article, “Getting to know Opportunity Zones” reignited my interest. Anyone who is looking into Sacramento commercial real estate investment should know where the Opportunity Zones (OZ) are. Recently 830 K Street sold to a Los Gatos investor; 830 K is just three blocks from the Capitol Dome and DOCO – and it is in an OZ. For more information about OZs click here.

Also, if you are thinking about selling and your Sacramento investment property, and it is located in a OZ, you might be able to fetch a higher price if the eventual buyer wants to defer tax obligations

Along with Section 1031 exchanges, Opportunity Zones defer and minimize Capital Gain taxes. Sacramento is filled with Opportunity Zones and many of the areas will surprise you.

If you are looking to invest in the Sacramento Region, please give us a call at (916)930-0001. You can also email me directly at tom@baconcre.com.

Take a look at the CCIM Article here: https://bit.ly/2Kfy63i

Should You Rent or Own in Sacramento’s Core?

As Sacramento’s skyline continues to welcome new additions and development is spurring increases to property values in the Downtown region, one may be curious as to what the changes mean to their ability to acquire property. Renting and owning property both come with benefits and disadvantages, so which is the better option? Review of Sacramento’s Business Journal’s year-end commentary on renting and buying property in Sacramento reveals several takeaways including:

1.) More often than not, it’s cheaper to rent.

2.) This trend is expected to continue over the next 3-5 years

3.) Meaning more opportunities for apartment developers and investors

Currently, monthly mortgage rates take 32.9% of the median family’s income after a 3.5% down payment; while renting a 3-bedroom apartment takes 26.4% of the median family’s income. This gap is expected to get bigger, in favor of renters. Home prices are expected to increase, along with rental rates – but at a much slower rate. Currently it is less expensive to rent than to buy in the following zip codes: 95818, 95819, 95811, 95816.

Politics 

Politics are a driving factor in pricing of rental properties, rent prices, landlord’s incomes and their affectivity. The Sacramento Community Stabilization and Fair Rent Charter Amendment recently qualified for the 2020 city ballot and will strive to accomplish the following:

  • Cap rental increases at 5%
  • Annual rent increases would be tied to the Consumer Price Index, with a minimum increase of 2% and a maximum of 5%;
  • Restrict landlords’ ability to evict by requiring certain criteria to be met;
  • Require landlords to pay rental assistance of at least $5,500 to relocate a tenant if the owner wants to do substantial repairs, move in, take the unit off the housing market or demolish it;
  • Establish independent rental housing Board to govern over rent adjustments;

Groups favoring this bill include labor unions and various housing advocates.  

Many businesses, developers and apartment owners oppose the bill; these groups feel that this bill would only deter landlords from maintaining rental properties. Mayor Darrell Steinberg has also expressed concern that the bill could result in less affordable housing construction. Mayor Steinberg does support temporary rent control that would only apply to at least 20-year old buildings.

19th and J Street

The new additions to the Sacramento skyline will surely impact the market and will pose drastic changes to the way of life in the Sacramento Core; one should consider the pros and cons of renting and purchasing in the current climate. Got questions? Call us at (916) 930-0001, or check out our website, https://sacramentobacon.com/

Accidental Investor? What Now?

In 2017 Buildium and All Property Management administered the annual Property Owners Perspectives Survey to nearly 700 property owners in order to gauge interests and desires related to ownership of property; the results were consistent with the first survey – showcasing the types of property owners and their perspectives on managing real estate.

Types of Property Owners

In the Survey, property owners were split into two categories: Intentional and Accidental Investors (the Accidental Landlords category was added in the 2018 iteration of the survey – please contact us for a copy of those results). Intentional Investors are individuals who typically acquire between 2 and 40 properties as a vehicle to better their retirement. On the other hand, Accidental Investors own a couple properties due to circumstance (say inheritance or divorce) and typically do not plan to expand their portfolios – unlike unintentional investors who plan to continue investing.

Key Findings

As identified by the first iteration of the survey, maintenance and tenant management continued to be the two biggest stressors. 61% cited maintenance, repairs and replacement as the primary stressor, 52% cited dealing with problem tenants, and 49% cited filling vacancies.

Stress Free Tenants

The next two most popular responses were both tenant related; good tenants equal less stress.  The top three qualities of a tenant that a landlord looks for are: 1. Tenant is Responsible (54%) 2. Good Credit (39%) and finally, 3. Cleanliness (34%).

Property Management

According to the survey, 50% of property owners self-manage their properties, 41% hire a property manager, and 9% are thinking about hiring a property manager.  The primary motivators to hire a Property manager are: maintenance and emergencies (60%), day-to-day management issues (52%), and finally finding tenants – along with not wanting to think about the property – are tied for the third at (34%).

Property ownership can be very lucrative, and a good property manager can minimize the challenges associated with ownership. If you are looking to invest in real estate, or you fall under the Accidental Investor category and need some help, give us a call at (916) 930-0001, or visit our website for more valuable information.

This post was co-authored by Pawel Ryzinski.

Technology and Innovations in Development Enhance Sacramento’s Value Proposition

Sacramento has followed a consistent trend of economic, social, and political growth for the last few years. As new opportunities arise, non-government jobs are being created while the population increases every year. To keep up with the increased demand, High Density Residential (HDR) urban housing projects are cropping up throughout Sacramento’s CORE. Nikky Mohanah’s Micro Unit HDR project at 19 & J Street in Midtown Sacramento is slated for completion this year and will  serve work force and millennial individuals who would rather rent than buy.  HDR projects like 19J are working to fill a housing void that has needed attention for a long time as the supply of affordable urban housing has diminished.  19J offers micro units consisting of less than 400 square feet for around $1,000 a month.  19J also is introducing stackable parking, designed by HRG Architects,and administered by City Lift.

Just as the real estate market adjusts with projects like 19J, transportation options including alternative fuel vehicles, ride sharing services (JUMP Bikes, Uber and Lyft)  have become the norm.    Innovations in housing and transportation are essential to Sacramento’s future.  All these innovations improve quality of life, reduce waste and cut transportation costs.

Envoy Technologies, a provider of shared on-demand, community-based electric vehicles, has become associated with Sacramento’s housing market through new partnerships encouraging the use of electric vehicles. Envoy also offers a “envoy car sharing” program that pairs well with the proposed housing projects in Sacramento. In this program they offer both charging stations and on demand electric vehicles as amenities for properties. By Increasing the value of rental units and clearing the air, envoy seems to be on the right track. 

This seemingly coordinated response (involving multiple industries) to changes in Sacramento’s economy and demographics is illustrated throughout the City’s CORE and we will see more HDR developments like 19J in the  future – particularly when the various modes of transportation expand. For more information on Sacramento’s growth, please click here.

For more information on developments such as 19J feel free to give us a call at (916) 930-0001.

This post was co-authored by Emma Bacon.

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Opportunity Zones – Ten years of Hard Time.

Opportunity Zones might help you defer Capital Gains taxes, but read the fine print! 

You have probably heard about Opportunity Zones: Opportunity Zone Investments allow the investor with a capital gain to defer and reduce their tax liability.  The longer you hold the investment the better the tax consequences. Investing in Opportunity Zones does not eliminate your gain- it reduces and defers.

Opportunity Zones were added into the tax code in late 2017. Opportunity Zones consist of 8,700 census-designated “economically challenged” communities, where new investments are eligible for tax benefits to incentivize investment. 

You don’t need to live, work or have a business in an Opportunity Zone to to invest; however one must invest – through a Qualified Opportunity Fund (QOF) – into an income producing entity (like investment real estate) that is located within the Opportunity Zone. Examples of QOFs include the Virtua 506(c) Opportunity Zone Funds as well as the Caliber Investment Fund.

 How do you Invest in a QOF? 

With established funds (like the two referenced above) the steps are minimal. However, if you are looking to invest in a specific property within an opportunity zone, say a 50 Unit apartment building, you have to jump through a few more hoops. 

In order to take advantage of an Opportunity Zone, without investing in a specific fund, you will need to form a corporation or partnership by filing the appropriate forms with the Secretary of State. Once an entity is established, it must be self-certified by filing IRS form 8996 with your federal income tax return. Then annually, you will report that the QOF meets the investment standards designated by the tax code. Once the QOF is established, you can invest funds – equal to a recent capital gain – into a property within an Opportunity Zone. The capital gain is not restricted to real estate; the capital gain can be from the sale of stocks. Investments must 1. be a minimum of $50,000, 2. are limited to equity investments in businesses and real estate and 3. are subject to substantial rehabilitation requirements.  Rehabilitation requirements state that – in the first 30 months – you must invest additional capital equal to or greater than 100 % of the initial adjusted basis of the property. So, in other words, you can’t just buy an apartment building, collect the rent and call it good. You have to substantially invest in the property and increase the assessed value significantly. 

So What is the Bottom Line? Reduce and Defer.

Opportunity Zones reduce your tax liability and Opportunity Zones defer your gain. The longer you stay in the investment, the better your savings.  To illustrate: assume you have a capital gain of $100, and you reinvest into an opportunity fund. How long you hold the investment determines the net effect:

If you hold the Investment 5 years, you can reduce the original capital gain by 10%, so when the opportunity fund is dissolved, your original $100 gain is essentially $90. So your taxes associated with the original capital gain are reduced. Any appreciation in the opportunity fund is still taxed as a normal. 

If you hold the Investment 7 years, you can reduce the original capital gain by 15%, so when the opportunity fund is dissolved, your original $100 gain is essentially $85. So your taxes associated with the original capital gain are reduced. Any appreciation in the opportunity fund is still taxed as a normal. 

 If you hold the Investment 10 years, you can reduce the original capital gain by 20%, so when the opportunity fund is dissolved, your original $100 gain is essentially $80. So your taxes associated with the original capital gain are reduced. Here’s the the kicker: when you hold the investment for 10 years: any appreciation in the opportunity fund is TAX FREE. 

What’s Government Got to Do with it? 

Local and state governments are gearing up for harvesting this tool and utilizing it to its full capacity. Governor Newsom’s recently released 2019-2020 state budget proposes utilizing synergies between QOF and Enhanced Financing Districts to aid California’s housing crisis. Sacramento city officials intend to leverage city resources, including tax revenue, to aid projects. Sacramento officials are hosting a free forum February 1st to discuss investments and implementation issues. Click here for more information including registration and thde agenda.

Want to take advantage of Opportunity Funds?

If you are interested in investing in Properties within an Opportunity Zone, Bacon Commercial can help. We have access to all properties in Opportunity Zones- anywhere -and locally we are in a position to unearth off-market investments as well. Call us at (916) 761-1202.

Balance

What do you get when you cross a log-splitter with a mechanical bull?

A New Year’s Message From Bacon Commercial Real Estate

Business goal setting and New Year’s resolutions can be tough. Both require some extra introspection, and that’s typically easier when everything is going just right. New Year’s resolutions are usually personal, while business goal setting is clearly about business. But let’s face it – business and personal life (especially in the field of commercial real estate) are intertwined. I am a big believer that you need to maintain balance – and find fulfillment – in areas outside of the business.

Years ago, I would find fulfillment playing golf. I went to the driving range constantly, I watched the golf channel daily, and I found solace from domestic turmoil playing golf. But for the amount of golf I played, I sucked. I maintained a “vanity handicap” which is the opposite of being a sandbagger. It is also very expensive.

One day my swing resembled the offspring of a mechanical bull and a log-splitter. They say, “A bad day on the golf course beats working.” Well this particular day, I would have rather been an untrained trapeze artist.

As the round progressed, things got worse. Around the 10th hole, I snap-hooked a wedge out of bounds, and my temper got the best of me – I nearly broke my toe when I slammed my wedge onto my foot (intended target was the ground.)

I guess you could say, I hit rock bottom. I was hiding golf from my wife, and I was neglecting work and kids. Well, they say that “when one door closes another door opens.” It was at this moment I decided to play guitar again. Am I any better at guitar than golf? Probably just a tad, but the beauty is that with guitar, it’s free, and it is forgiving. Golf is not forgiving – until you learn to forgive yourself.

At a Rotary lunch a few years back, the guest speaker said something that has resonated since. The key takeaway was, manage your expectations. This simple shift changed everything. There has been plenty of disappointment along the way, but shifting expectations eliminated my greatest critic. The Rotary speaker also talked about balance, one of the most overstated, but under-implemented mantras.

Fast forward to the beginning of 2018. Bacon Commercial Real Estate opened for business. Then about three months into the year I got a call from Julian Alcala who was looking for an internship. I asked him to send me his resume, and 30 minutes later, the resume was in my inbox. Two weeks later he was in my office, and on Christmas Eve he earned his real estate license. Aside from a couple past mentors/managers, hiring Julian Alcala has had a significant impact on my career; if you ever met him you would understand why.

Looking to 2019, I’m remembering this important mantra: “Don’t worry about the commission, focus on the relationship.” Fulfilling relationships last a lifetime. Commissions pay the bills and create tax consequences.

Here is to a balanced and successful 2019! If you are thinking about renewing or re-negotiating your lease or perhaps you want to buy or sell, please contact Bacon Commercial Real Estate at 916-930-0001 or check out our website at: www.sacramentobacon.com. There you will also have the opportunity to request a free office lease negotiation guide.

Happy New Year!

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Rotary is not Just Lunch

Rotary Is Not Just Lunch

Sacramento Rotary currently has about 300 members. Worldwide there are over 1.2 million Rotarians. Rotary International is tackling Polio, helping impoverished villages in third world countries build irrigation infrastructure and teaching children to read.  In Sacramento, since the 1920s, Rotary has been helping many deserving charities. Today we are in the midst of a significant fundraiser for the Sacramento Children’s Home Crisis Nursery. The Crisis Nursery has been helping families in distress since 1867. Here is a story about one family the Crisis Nursery helped:

“Brittany”
“Brittany called the Crisis Nursery in desperation. She had come to Sacramento to make a fresh start only to have her housing fall through. None of Brittany’s friends in the area were able to take her or her two young children in. Thankfully, the Crisis Nursery was there to give her kids a safe, nurturing place to stay while she worked to better her situation. The kids especially enjoyed playing outside, riding in the wagon, and drawing with chalk. Brittany visited her children often while she searched for permanent child care and a new home, spending quality time with her kids whenever she could. Meanwhile, Crisis Nursery staff put Brittany in touch with vital community resources to help her find safe, stable housing. At the end of the kids’ stay, Brittany was overjoyed to have the children come to their new home. She was ready to begin her new life in Sacramento, and she thanked the Crisis Nursery staff for taking such good care of her children in her time of need.”

Not everyone can join Rotary, but I am amazed how many people contribute to Rotary’s causes, particularly the Crisis Nursery. On October 6th Sacramento Rotary is hosting The Sacramento Century in Downtown Sacramento. All the proceeds are earmarked for the Sacramento Children’s Home Crisis Nursery. If you would like to contribute, it is not too late to sign up for the ride. If you are not quite ready to hop on the bike, you can contribute to the cause by clicking on this link: Donate to the Crisis Nursery

While Rotary is not my day job, I really enjoy helping disadvantaged youth, sharing lunch with many of Sacramento’s leaders and participating in a variety of fun events that Rotary sponsors.  Rotary is a daily reminder how lucky we all are, and Rotary gives us the opportunity to help others that may not be so well off.

See you October 6th!