Category: san francisco warehouse (13)

Source: CoStar News
By: Lou Hirsh
February 11, 2020

A new list of the federal government’s surplus properties targeted for disposal includes what brokers say is real estate that’s expected to be in high demand by developers of offices and housing in some posh West Coast locales where land is tight.

What’s more, the decades-old properties — most of them underused offices — could be revamped for new uses, ranging from distribution centers to high-end apartments, retail and other mixed-use combinations that could bring new life to the areas, brokers and analysts say.

On the list, which contains 12 underutilized properties nationwide that could bring in more than $750 million, is real estate in areas where development and business have been growing from Seattle to Silicon Valley. It includes an entire city block just three miles from Facebook’s headquarters in Menlo Park, California, that could soon be for sale.

“The Menlo Park property is located in one of the country’s strongest markets for tenant demand,” said Jesse Gundersheim, CoStar Group’s director of market analytics in the San Francisco Bay Area. “Sales activity in Silicon Valley and San Francisco is robust, and cap rates remain at historic lows which is indicative of strong investment interest.”

The surplus property list put forward last month by a federal advisory panel stems from a bipartisan 2016 law requiring the Office of Management and Budget and General Services Administration to identify opportunities for the federal government to reduce its inventory of nonmilitary properties. The list is just the first round of potential sell-offs, with more rounds of recommendations expected in coming months, as the government looks to consolidate locations, maximize property values and revenue and trim down a real estate portfolio that includes roughly 77,000 underutilized properties.

Some that aren’t in their city’s downtown or prime office district could face the bulldozer, as developers put the land underneath them to more suitable uses demanded by the market, such as apartments and single-family homes — provided their projects get the blessing of local governments.

Take for instance the property at 1352 Lighthouse Ave. in coastal Pacific Grove, on the northern tip of central California’s Monterey Peninsula. The property, that CoStar data says was built in 1952 and spans 11,220 square feet on 4.4 acres, is a Department of Commerce fisheries science center.

Located just 5 miles north of the famed Pebble Beach Golf Course overlooking the Pacific Ocean, that federal facility sits in a city where the median home value is $902,528 and the median monthly apartment rent is $3,300, according to data firm Zillow.

“That location could be very sought-after for high-end housing,” said Cale Miller, senior vice president in the San Francisco office of commercial brokerage Hughes Marino, noting the neighborhood currently hosting the fisheries center is generally not known for offices or other heavy commercial uses.

The same generally goes for the 1 million-square-foot Chet Holifield Federal Building, built in 1971 at 24000 Avila Rd., about 8 miles from the Pacific Ocean in coastal Laguna Niguel. That city, in Southern California’s Orange County, has a median home value of $844,539 and median rent of $3,300, both well above regional averages.

Miller said housing or other mixed-use elements serving that neighborhood — rather than offices — would probably see the most practical demand going forward.

Coveted Silicon Valley

At the other end of the spectrum, brokers are expecting the listed property in Silicon Valley’s Menlo Park to see the greatest future demand on the office side. Washington, D.C., attorney David Winstead, who serves on the federal building advisory board, recently told CoStar News that the city block surrounding the Menlo Park Complex at 345 Middlefield Road “could be worth hundreds of millions of dollars.”

With multiple major tech firms expanding their office footprints in the supply-constrained region, the location is a major draw. The Menlo Park federal complex, housing the operations of the U.S. Geological Survey among other tenants and spanning just more than 140,000 square feet, is 3 miles south of Facebook’s global headquarters and even closer to local office strongholds of companies such as Apple and Hewlett Packard.

“Menlo Park has been ground zero for tech expansion,” said Eric Luhrs, regional president in the San Jose office of brokerage Kidder Mathews. “That’s still a very strong market, and that’s a great location as well.”

Luhrs said he’s expecting the Menlo Park location to garner serious interest from multiple developers and future tenants, including the venture and financial firms that have thrived in Silicon Valley. It could also attract smaller nontechnology firms that have found it tough to find new space as the major tech giants, including Facebook and Google, have expanded throughout the region.

Gundersheim noted that, based on its size, more than a million square feet on a 100-acre lot, the Laguna Nigel property could prove more valuable on a pure sales-price basis than the Menlo Park site. However, the Menlo location could represent a rare investment opportunity slightly east of that city’s most active section, the downtown area where most developers are now focused on revitalization.

In Menlo and other office locations, Luhrs said changeovers to commercial uses will depend on how the government chooses to transition out of them — for instance, whether the GSA sells buildings and immediately clears out the agencies that occupy them or chooses to stay in them for a period under leaseback arrangements with the buyer.

In the Seattle area, where older federal buildings on the list are not located in what are currently deemed the hot office markets, other types of nonresidential buyers and tenants could still find strategic uses for the properties.

That includes the property currently known as the Federal Archives and Records Center, operated by the National Archives and Records Administration at 6125 Sand Point Way NE. The warehouse and office building was completed in 1945, spanning 184,251 square feet on 10 acres.

Owen Rice, executive vice president in Hughes Marino’s Seattle office, noted the area that grew up around that Seattle facility over the decades is primarily a residential neighborhood, known as Hawthorne Hills.

“That area has not really been a big hub for commercial offices in terms of demand,” Rice said. “It’s also a very constrained market in terms of supply.”

Alternate Seattle Scenarios

He said possible future nonresidential users of that government complex could include those in the fast-expanding healthcare industry. For instance, Seattle Children’s Hospital has existing operations next door to the Sand Point Way property and is known locally to be scouting sites for future expansion.

Rice said another vintage property on the federal list in Washington state, a government complex at 400 15th St. SW in Auburn, is located in an area just north of Tacoma that has become a popular regional hub for mostly small to mid-size industrial developers and tenants.

He said the 119,000-square-foot property, built in 1950 and last renovated in 2006, has good access to area ports and freeways but is in an area of the Kent Valley that has so far not become a hotbed for office expansion by major tech giants such as Amazon. The e-commerce giant has been expanding its corporate hometown operations primarily in and near downtown Seattle.

It could take several office tenants to fill up the space at the Auburn facility, based on the size of companies that are currently predominant in that area, leaving the possibility for industrial and other uses of the property if it is sold off by the government.

“It really depends on what the zoning would allow and what the developer would want to do with it,” Rice said. “It’s hard to imagine that someone would want to tear down a building that was just renovated in 2006, but that’s a possibility.”

Miller said other factors to watch include how fast the properties get sold off by the government and whether officials decide to sell them as one or two large portfolios, or instead choose to shed some individually in one-off deals.

In several locations, the government could get more for the properties by selling them separately, but finalizing several separate deals could also take longer to dispose of the assets and garner the revenue that the government is seeking.

“They’re going to be incentivized to sell these in a relatively short time frame, if they’re looking to capitalize while the market is still at its current peak,” Miller said.

Because some of the federal properties are older and not in neighborhoods deemed the hottest for offices, brokers said their future owners will probably require substantial financial resources to weather long transition periods in which the properties are being approved for significant renovations or repurposing.

That’s a potentially time-consuming prospect in states such as California, where projects must clear numerous environmental and other hurdles, especially in coastal locations.

“It’s going to take patient money, from experienced developers who are able to afford the carrying costs for a project that might take five years to approve,” Miller said.

These are the Western U.S. properties on the national list of locations recently targeted for potential sell-off by the GSA:

Sacramento Job Corps Center, excess land sale only, 3100 Meadowview Road, Sacramento, California, Department of Labor.
Southwest Fisheries Science Center, 1352 Lighthouse Ave., Pacific Grove, California, Department of Commerce.
Veterans Affairs Denver Medical Center, partial sale, 1055 Clermont St., Denver
Auburn Complex, 400 15th St. SW, Auburn, Washington, GSA.
Menlo Park Complex, 345 Middlefield Road, Menlo Park, California, GSA.
Chet Holifield Federal Building, 24000 Avila Road, Laguna Niguel, California, GSA.
WestEd Office Building, 4665 Lampson Ave., Los Alamitos, California, Department of Education.
Federal Archives and Records Center, 6125 Sand Point Way NE, Seattle, National Archives and Records Administration.

Link to article: Government Surplus Properties

The reported industrial vacancy rates in San Francisco and surrounding Peninsula areas increased slightly to 3.8% at the end of Q2 2019 (up from 3.6% in Q1 2019). However, the Bayshore Corridor of San Francisco witnessed yet another decrease in vacancy to a sub 1% rate of .9% (down from 2.5% in Q1 2019). The San Francisco/Peninsula market reported a delivery of 233,576+/- square feet of new construction, and 741,368 square feet in construction starts, primarily in South San Francisco. The largest project currently underway is a flex R&D/biotech project in the South SF/East of 101 Freeway submarket totaling 512,000 square feet. The industrial core of San Francisco (Bayshore / Potrero Hill / Dogpatch) reported 56,100 square feet of product under construction, with zero deliveries, or construction starts specific to the Bayshore Corridor.

Q2 2019 ended with averaged over-all asking rents (industrial and flex) down from $2.49 per square foot to $2.30 per square foot, representing an 8% decrease over the previous quarter. Comparatively, current average US industrial asking rents are reported as $.71 per square foot (remained static from Q1 2019). Asking rents specific to warehouse product increased from $1.88 psf in Q1 2019 to $2.04 at the end Q2 2019. Quoted daily warehouse asking rents for the Bayshore Corridor as of June 30, 2019 remained static at $2.04 per square foot. Year-over-year market rents have grown by 4.8% for the San Francisco/Peninsula industrial/flex market.

Q2 2019 Industrial sale transactions are up from Q1 2019 with $308M in sales volume averaging $328.61 per square foot compared to $274M in sales averaging $323.46 per square foot in Q1 2019. CAP rates averaged 4.90% in Q2 2019, representing a minimal increase over Q1 2019 CAP rates of 4.85%. National CAP rates averaged 6.7% in both Q1 2019 and Q2 2019.

Calco Commercial has leased and sold 918,760+/- square feet of industrial, flex, office and land in 2019 comprising 43 transactions, with 510,590+/- square feet and 19 transactions in Q2 alone. Following are the notable Q2 2019 transactions: 1500 Tennessee Street-1475 Indiana Street, San Francisco (120,000 +/- sf – industrial portfolio/sale), 202 Littlefield Avenue, South San Francisco (63,700+/- sf industrial lease), 330 8th Street, San Francisco (22,500/- sf commercial/lease), and 30 Tanforan Avenue, South San Francisco (215,539+/- sf warehouse & land/lease). Calco Commercial is a leading industrial & commercial real estate firm with decades of experience in Landlord /Owner representation, and repositioning assets into net leased properties with in-place income streams. Let us help make the most of your real estate properties and investments.

If you would like to discuss your real estate options, or would simply like more information related to current market conditions, please call our office a 415.970.0000, or directly contact one of our professionals.

Click here for the full report: Q2 2019 Industrial Market Report – San Francisco & Peninsula

Scott Mason of Calco Commercial has represented a multi-property sale in Potrero Hill including: 1400-1496 Minnesota Street, 1475 Indiana Street, 1050-1090 26th Street, 1501-1599 Tennessee Street, 2930-2990 3rd Street & 826 26th Street. Comprised of nearly two city blocks, and multiple units totaling 120,000+/- square feet, the properties recently sold for $47,750,000.

The subject properties are situated in a very desirable Potrero Hill/Dogpatch location near the 3rd Street corridor light-rail, I-280, restaurants, cafes and other specialty retail exclusive to San Francisco. The buildings include highly functional industrial units with high ceilings, concrete construction, dock-high and drive-in loading capabilities. The portfolio had been held by BIC Bisco for 45+ years, and was acquired by Terreno Realty Corporation.

Click here for the Sale Profile: 1400 Minnesota – 1501 Tennessee SOLD

The reported industrial vacancy rates in San Francisco and surrounding Peninsula areas increased to 3.6% at the end of Q1 2019 (up from 3.3% in Q4 2018). Demand for warehouse space specific to the Bayshore Corridor of San Francisco continues to outpace supply as referenced by the critically low vacancy rate of 2.5% (down from 2.9% in Q4 2018). Few new industrial properties have been constructed in San Francisco proper in the last decade, with zero new deliveries in Q1 2019. South San Francisco & the Peninsula has a reported 2+ million square feet of mostly R&D and biotech product currently under construction, with 460,000+/- square feet slated for delivery in Q2 2019.

Q1 2019 ended with over-all asking rents (industrial and flex) up from $2.45 per square foot to $2.49 square foot, representing a 2% increase over the previous quarter. Comparatively, current average US industrial asking rents are reported as $.71 per square foot. Asking rents specific to warehouse product increased from $1.87 psf in Q4 2018 to $1.88 at the end Q1 2019. Quoted daily warehouse asking rents for the Bayshore Corridor as of March 31, 2019 are reported as $2.04 per square foot, up from $1.94 psf as of December 31, 2018. Year-over-year asking rents are up 21.5% from Q1 2018 ($2.05 psf).

Q1 2019 Industrial sale transactions are up slightly from Q4 2018 with $274M in sales volume averaging $323.46 per square foot compared to $225M in sales averaging $313.00 per square foot in Q4 2018. CAP rates averaged 4.85% in Q1 2019, representing a decrease over Q4 2018 CAP rates of 4.875%. National CAP rates averaged 6.7% in both Q4 2018 and Q1 2019, respectively.

Calco Commercial has leased and sold 408,170+/- square feet of industrial, flex, office and land in Q1 2019 comprising 24 transactions. Following are the notable Q1 2019 transactions: 2070 Newcomb Avenue, San Francisco (20,000 +/- sf – industrial/sale), 2600 Geneva Avenue, Daly City (12,000+/- sf – warehouse & 307,000+/- sf land/lease), 245-247 Utah Avenue, S. San Francisco (17,263/- sf warehouse/lease), and 615 Bayshore Boulevard, San Francisco (10,200+/- sf warehouse/lease). Calco Commercial is a leading industrial & commercial real estate firm with decades of experience in Landlord /Owner representation, and re-positioning assets into net leased properties with in-place income streams. Let us help make the most of your real estate properties and investments.

If you would like to discuss your real estate options, or would simply like more information related to current market conditions, please call our office a 415.970.0000, or directly contact one of our professionals.

Click here for the full Q1 Market Report 2019: Q1 2019 Industrial Market Report

Source: CoStar
By: Diana Bell

Prologis, the country’s largest owner of industrial real estate, is raising its projected earnings for the coming year by more than 2% as it pursues further rent increases and seeks to capitalize on a preference for smaller warehouse developments.

The real estate investment trust, headquartered in San Francisco, said rent growth will be about 4% globally, principally driven by the United States, though Europe is expected to outperform later in the year, Chief Financial Officer Thomas Olinger said Tuesday on a conference call with analysts discussing first-quarter financial results.

Prologis plans to spend $2 billion on starting development and $600 million on acquisitions but seeks to reduce its ownership in open-ended European funds from 28 percent to 24 percent to accommodate “partners and bring ownership in line” with a long-term target of 15% on the continent, Olinger said.

The REIT signaled a focus on smaller-sized warehouse space, with only about 25% of its portfolio comprising big-box regional facilities over 250,000 square feet. About two-thirds are less than 250,000 square feet.

“We are seeing higher rent change on roll under 250,000 square feet versus bigger box, and that spread is accelerating. We are well-positioned to capture that opportunity,” said Olinger.

Chairman Hamid Moghadam doesn’t see weakness in large space demand but said “there are some markets on the periphery like outlying corridors of Chicago where there are a lot of big buildings and market rent is softer now until those buildings get absorbed.”

The executives declined to name locations Prologis is considering, but Moghadam said the REIT is staying out of overdeveloped markets.

“The big boxes got their growth early in the recovery cycle. They are up significantly on 40% to 50% in the past four to five years. Now they are taking a back seat to the medium and smaller spaces,” he said.

The REIT’s strategy this year will be to push rents up. “Don’t be surprised if you see occupancy be a little lower throughout the year,” said Olinger. “We are going to make the right long-term decision, which is going to be pushing rents and extending term.” Prologis expects to end the year with an uptick in occupancy to 97.5%.

As the first developer to build a multistory warehouse in the United States, Prologis has faced headwinds with leasing the three-story, 589,000-square-foot Seattle building known as Prologis Georgetown Crossroads, where it is asking for rents in the range of $1.30 to over $2 a square foot.

Of the Seattle property, Olinger said, “We have done a 100,000-square-foot lease in this asset, and one lesson we’ve learned about this is there is a process that we have to go through with customers. It is a new product in a new location. We need to get a premium and we think we’ll get that premium, but deal gestation periods are long and they will continue to be long until customers are basically more accustomed to this product.”

The REIT said it will pursue opportunities with Seattle-based online retailer Amazon, its largest customer.

“Broadly we are seeing customers like Amazon and other customers focused on e-commerce with some network rollouts involve a combination of large buildings and a series of higher number of smaller buildings that are located close-in to larger population centers, all of which fit really well for our portfolio,” said Olinger.

Moghadam noted the smaller-footprint buildings these types of tenants are favoring offer more options in terms of parcel size and have higher clear heights with more mezzanine floors, which effectively increases space utilization.

Of the 772 million square feet Prologis had within its portfolio as of March 31, 59% was U.S.-based and is expected to generate 77% of the REIT’s net operating income for the year. Prologis has about $97 billion in assets under management.

Some of the largest shippers and household-name companies lease from Prologis, with Amazon in first place contributing to 3.6% of its net effective rent. Amazon leases about 20.7 million square feet. Shippers DHL, UPS and FedEx, retailer Home Depot and automaker BMW all rank within Prologis’ top 10 largest customers. Retail giant Walmart is in 11th place with 4.4 million square feet. And the U.S. government ranks 19th, with just over 1 million square feet.

This year, Prologis expects to complete just under 12.4 million square feet of development activity for properties it will fully own and manage spending $1.1 billion to do so. Roughly half of that development is planned for the Western United States. For 2020 and beyond, so far it has docketed 1.6 million square feet in development solely in the West.

Of the $239 million Prologis spent on development starts globally in the first quarter, just 41.2% is build-to-suit, showing a bulk of speculative industrial work.

Despite recording a decline in net earnings in the first quarter, the REIT saw rental revenues jump year-over-year to $696.8 million compared to $555.9 million. Occupancy was roughly flat at 96.8%, but Prologis leased 43 million square feet in the first quarter, compared to 33 million the in the same quarter a year ago.

The results follow what Moghadam called Prologis’ “strongest year ever” in 2018. The REIT embarked on $3.1 billion in new developments globally totaling 36 million square feet. The year also saw Prologis sell off an 86-property portfolio to MapleTree and acquire Denver-based industrial REIT DCT Industrial.

Link to article: Prologis Sees Opportunity in Smaller Warehouse Footprints

Source: CoStar
By: Diana Bell

Related Companies, one of the largest developers in New York City and a significant builder nationally, established an opportunity zone fund targeting $250 million in investments to become the latest investor to take advantage of the program designed to spark development.

The move signals that interest keeps growing among investors to stream capital toward opportunity zones, which are federally mandated swaths of land in economically depressed areas that carry tax breaks for commercial real estate investors.

“Nationally there has been a spike in investor interest and activity for opportunity zone properties,” said Darin Mellot, head of research for the Americas at commercial brokerage firm CBRE. “There is really nothing I am questioned about more, except when is the next recession.”

Related declined to comment to CoStar News with further information explaining the investment goals of the new fund, reported in a Securities and Exchange Commission filing last week, such as which markets it is targeting.

Related is not the only big name in commercial real estate to launch a fund under the federal Opportunity Zone program. Normandy Real Estate Partners has a $250 million fund, Starwood Capital and RXR Realty have each launched $500 million funds, and CIM Group has a $5 billion fund.

Created by Congress in 2017 as part of the Tax Cuts and Jobs Act, the Opportunity Zone program encourages investments of at least five years in order to defer portions of capital gains taxes. For example, an investment of $10 million would, if sold after five years, be taxed on just $9 million. After seven years, the taxable amount would be $8.5 million. If held for at least 10 years and sold, gains would become tax-free.

“Opportunity zones are a generational type of incentive, not just for New York City but across the country. There are real advantages to be reaped with the program, and it’s no surprise that multiple institutional groups are rolling out funds. The investor pool for this strategy has expanded significantly,” said Victor Sozio, executive vice president in the investment sales group at commercial real estate services firm Ariel Property Advisors.

Of the 258 opportunity zone funds tracked by CoStar News, just over 33 percent plan to raise at least $100 million, and about 14 percent are targeting at least $250 million. Roughly 22 percent of the funds could be traced back to investors in New York and New Jersey, based on zip code. The 22 percent concentration combining New York and New Jersey outstrips the next-largest clusters of investors. About 8 percent of funds tracked hail from California, followed by 6 percent from Virginia.

New York state has a significant number of census tracts designated as opportunity zones, with 514. By comparison, California, a state three times the size of New York, has 879. There are 8,700 Opportunity Zones identified across the country.

New York City Investment

“In New York City, we’ve already seen increased activity in contract signings due to properties located in Opportunity Zones,” said Sozio, adding that his firm’s assignments under contract achieved 10 percent to 30 percent more in asking price because of stiff competition for Opportunity Zone investments.

But because of the cost to develop within New York City, neighborhoods in northern Manhattan and the Bronx are attracting a bulk of activity.

“The program is designed to incentivize development in depressed areas, but in New York City many of the areas that have been designated as Opportunity Zones are in areas that are already emerging markets, such as Mott Haven in the Bronx and Harlem, Washington Heights and Inwood in northern Manhattan,” Sozio said. “Inwood, for example, is benefiting from a double whammy of investor interest. It has been rezoned to allow more density and it is located in an Opportunity Zone. It is a neighborhood in Manhattan where pricing is still conducive to build rental buildings, and investors can also benefit from the Opportunity Zone structure. Inwood is a bit more attractive because you can buy land at $130 to $140 per buildable square foot.”

Manhattan has an Opportunity Zone in Hell’s Kitchen and one on the Lower East Side, but these areas below 96th Street prove challenging because their development sites have been trading based on condominium executions, noted Sozio.

“The program is not designed for a condominium developer because they don’t typically hold for 10 years. How do you secure a site that makes sense for a rental play in Manhattan? It is difficult because of pricing,” he said. “For parcels, you need to buy at $300 per buildable square foot in the Lower East Side to make it work … and sellers won’t sell because that is below market pricing. Those parcels are trading at $500 per buildable square foot.”

James Nelson, head of tri-state investment sales at commercial real estate services firm Avison Young, has predicted that 2019 will experience a 20 percent uptick in sales of development sites within the five boroughs of New York City because of opportunity zones.

“The investment possibilities that opportunity zones can provide in New York and around the country are huge to real estate and non-real estate investors. For real estate investors it is clear and intuitive. They look at the deal and invest. But for investors with non-real estate capital gains that cannot use a deferral program like 1031 exchanges, opportunity zones provide a great new avenue to accomplish a similar deferral with the possibility of back-end appreciation that they would not otherwise have,” explained Adam Sanders, an attorney specializing in investment transactions at law firm Rosenberg & Estis and its resident expert in opportunity zones.

Time Sensitivity

According to a 2019 real estate investment survey released by global business law firm Seyfarth Shaw, 32 percent of respondents said they will take advantage of the federal Opportunity Zone program as either an investor or a sponsor in 2019. Of that group, one-third are doing so to tap a new source of capital and a quarter are doing so to defer current taxable gains.

“Nationally the market is over a trillion dollars between capital gains of households and corporations, so there is significant capital moving into investment vehicles to take advantage of the capital gains savings,” said real estate adviser Greg Kraut, a managing partner of New York-based investment firm K Property Group and the CEO of bipartisan think tank Economic Policy Project.

One important caveat to opportunity zones is that they are time-sensitive. On December 31, 2026, a lump sum of taxes owed, based on hold times, are due.

“The tax benefits are time-sensitive, tax obligations are reduced more the longer you hold. You can only defer taxes for the period of time until 2026,” said Mellot. “Keep in mind that the IRS looks at two sets of gains, the original gain and the gain from the investment in the opportunity zone itself. There is no preferential tax treatment on the gain from the investment itself if you hold for 0-9 years.”

Facing an ever-dwindling timeline, the rush to invest nationally is being played out via pricing premiums on property trades.

“We are aware of some premiums being for paid for properties in opportunity zones, with some data showing a 5-percent to 10-percent premium on trades in select zones,” Mellot said of select zones nationally, but added he could not say for sure that finding is uniform.

Working It Out

But there is some uncertainty on key aspects of the Opportunity Zone framework, for which investors are still waiting on further guidance from the government. One significant area that has not been clarified is the federal government’s stance on refinancing an opportunity zone property. That would enable investors to recoup a bit of capital and would make it easier for smaller investors to play in the space.

“Certain ambiguities regarding technical details, such as whether that can be a distribution of proceeds during the hold period. If you can’t refinance and distribute proceeds during the hold, that doesn’t make much sense for investors. It especially puts smaller developers at a distinct disadvantage, because they don’t have the capital depth and scale to hold for a decade [compared to larger institutional investors.] Large funds have sufficient liquidity and scale to weather that,” noted Sozio.

A seminar scheduled for January to work out these kinks was canceled because of the government shutdown and investors are expecting additional guidance in the coming months.

One issue to watch, according to Kraut, is whether opportunity zones are artificially creating demand by forcing investment. Sanders said that the more complicated a transaction or development play, the more concern investors are showing until more guidance is released.

“For example, in New York City, a good amount of development is done on ground leases. Currently, New York views long term ground leases as real property but the IRS still has not confirmed that. This is holding up development on ground leases that want to utilize the OZ Program for investors,” he said.

Asked his perspective on pros and cons of opportunity zones, Sanders said, “Pros are that the Opportunity Zone program will provide an additional benefit for investors on deals that they were going to invest in already and potentially draw investors to deals for developments that are just on the edge of being viable. Cons are that some developers and investors are going forward without proper ongoing legal and accounting guidance.”

In light of the uncertainty, investors would be wise to step back from the fervor and scrutinize the merits of the investment strategy for a property or land parcel.

“Governors can designate up to 25 percent of their census tracts as opportunity zones, so there is a large volume of zones, but you still need to have an investment strategy. Sound investment principles still apply. Not all zones will make sense for investment. The OZ deals must have a market reason to make sense,” said Mellot.

“Investors should be cautious in these funds to make sure the underlying investment is viable, not just jump into it because it is located in an opportunity zone,” Sozio noted.

Link to article: Opportunity Zone

Calco Commercial has leased and sold 1,112,761+/- square feet of industrial, flex, office and land in 2018 comprising 66 transactions, with 20 transactions totalling 409,070+/- square feet in Q4 alone. Following are the notable Q4 2018 transactions: 30 Tanforan Avenue, S. San Francisco (215,539 +/- sf – industrial/lot lease), 695 Minnesota Street, San Franicsco (25,000+/- sf – warehouse/lease), 350 Harbor Way, S. San Francisco (24,600+/- sf warehouse/sublease), and 301 Toland Street, San Francisco (36,000+/- sf warehouse/lease). Calco Commercial is a leading industrial & commercial real estate firm with decades of experience in Landlord /Owner representation, and repositioning assets into net leased properties with in-place income streams. Let us help make the most of your real estate properties and investments.

Click here for the full Q4 San Francisco/Peninsula Industrial Market Report:

Calco Commercial has recently sold both the 260 Shipley Street & 969 Folsom Street buildings. 260 Shipley Street is a two-story 3,750+/- square foot commercial building located in the SOMA with second floor office & ground floor warehouse. The property features skylights, private conference room, and a kitchenette in the office area and a drive-in roll-up entry for the warehouse.

969 Folsom Street is a 8,150+/- square foot commercial building located next door to 260 Shipley Street in the SOMA. 969 Folsom Street features 7,300+/- square feet of warehouse area with one drive-in loading door and 850+/- square feet of office with open and private areas and a kitchenette.

Calco Commercial specializes in the leasing and selling of commercial, office, industrial and NNN properties in and around San Francisco. If you have any questions about how to best re-position your asset in the Bay Area market, are a Tenant looking for space or have general market questions, call our office at 415.970.0000 and we can provide expert service.

Source: CoStar
By: Randyl Drummer
Link: Commercial Appraisals

Office of the Comptroller of the Currency, Constitution Center, Washington, D.C.

A new federal rule doubling the threshold for commercial real estate deals requiring an independent appraisal will reduce the time, cost and regulatory burden associated with processing smaller real estate deals, banking and real estate analysts say.

The Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency adopted new rules exempting commercial property sales of $500,000 or less from the appraisal requirement. Regulators originally proposed raising the minimum from the current $250,000 to $400,000 but bumped it up to $500,000 after determining the higher threshold posed “no material loss risk to financial institutions.”

Under the new rule which used CoStar’s comparable sales data and repeat-sale indices to track pricing changes and other sales metrics over time, financial institutions must still perform a property evaluation for deals of $500,000 and below, but do not have to engage an independent appraiser.

“Deregulation is a major theme of the Trump Administration and this updated regulation is a smart move,” according to Justin Bakst, CoStar director of capital markets. “Moving the [sale] threshold up to $500,000 creates very little additional risk to the system,” he added.

Comps Data Used to Track Smaller Deals
In determining the level of increase, the agencies considered the change in prices for commercial properties measured by the Federal Reserve’s Commercial Real Estate Price Index (CRE Index). Since 2012, the CRE Index has been compiled using data from the CoStar Commercial Repeat Sale Index (CCRSI) as one of its data sources.

“The agencies examined data reported on the call report and data from the CoStar Comps database to estimate the volume of commercial real estate transactions covered by the existing threshold and increased thresholds,” according to the final rule.

Bakst said the agencies determined the small transactions affected by the new threshold, while large in number, did not create the type of leverage and risk that contributed to the last financial crisis. Banks have healthier capital ratios today and commercial real estate leverage has largely remained well under control, he added.

Banks can perform acceptable loan evaluations in house using sources of comparable sales data like CoStar, Bakst added.

“Although the property sales total affected by this rule change is a drop in the bucket compared with overall commercial property volume, the cost savings are noteworthy,” Bakst said. “For example, if we estimate appraisal costs at between $2,000 and $4,000 per transaction, this represents an aggregate savings of $300 million to $600 million.”

Banking regulators carved out an exception for construction loans on one- to four-family residential properties, which will no longer be included in the same category as commercial property loans to avoid potential confusion with single-family permanent financing and as an added consumer protection for home buyers. The sale threshold for appraisals on those properties will remain unchanged at $250,000.

Lower Threshold Was a 1990s Relic
Financial industry analysts who commented on the rule change said that the previous commercial transaction threshold had not kept pace with the price appreciation of commercial property.

For example, the average price of a property valued at $250,000 when regulators set the previous minimum threshold 24 years ago in 1994 has now more than tripled to $760,000. Raising the threshold to $500,000 provides a recession-resistant buffer, Bakst said.

Under the new $500,000 threshold, 31.9 percent of property sales in the CoStar database would be exempt from the appraisal requirement. In terms of dollar volume, however, the properties now exempt from appraisals comprise just 1.8% of the overall dollar volume of loans in the CoStar database.

Before the final rule was approved, there were 13 different categories of loan transactions that qualified for exemption from the appraisal requirement, including a general exemption for all real estate-related transactions with a value of $250,000 or less. The new rule adds a 14th exemption for “commercial real estate transactions” not secured by a single 1-to-4 family residential property.

“For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices,” the new rule states.

Are Small Loans Risky for Small Banks?
Some critics, namely appraisers, take issue with the agency findings. James L. Murrett, president of the Chicago-based Appraisal Institute trade association representing nearly 19,000 appraisal professionals in about 60 countries, said raising the threshold is “confounding” given concerns expressed by the same agencies about commercial property pricing and loan risk management.

The OCC and Fed have warned that rapidly appreciating property prices in some commercial property segments and rising concentrations of commercial property loans, particularly among smaller banks with $1 billion to $10 billion in assets, could heighten risk to the nation’s banking system.

“Without a doubt, the final rule increases risk to the commercial real estate lending system,” Murrett said. “Seen through the lens of loosening regulations, the final rule may make sense. But from a safety and soundness perspective, the final rule raises significant concerns.”

Murrett said that an increase in property evaluations without appraisers will likely cause a return to the conditions during the run-up to the financial crisis, when “appraisal and risk management were thrust aside to make more, not better, loans.”

Smaller institutions, which are less likely to maintain appraisal departments, are more likely to be susceptible to breakdowns in appraisal independence with fewer controls in place, he added.

Murrett said the decision increases the importance of modernizing the regulatory structure governing appraisals, including positioning appraisers to better offer evaluation services.

“Appraisers need to be nimbler in today’s marketplace – not only to compete, but to help maintain safety and soundness of the real estate financial system.”

Big Shops Don’t Play in Small Loan Pools
Appraisal operations in the largest commercial real estate services companies likely won’t be affected by the rule change since , their main business is more sophisticated and generally involves providing so-called broker opinions of value for complex property assets priced above $500,000, said John Busi, president of the valuation and advisory group at Newmark Knight Frank.

The appraisal world is getting faster and cheaper and this change creates efficiency for the banking regulators to be a little more nimble and relax some of the standards put in place after the financial crisis,” Busi said.

“Of course appraisers are going to be upset by it because many have had business on commercial property under $500,000,” said Busi. But he added that smaller appraisal shops should be nimble enough to adapt and bring in work without suffering a large decline in fees.

“We view the recent increases in thresholds for appraisal requirements as an opportunity for lenders, borrowers, and appraisers,” added Chris Roach, CEO with BBG, one of the nation’s largest pure-play valuation and appraisal companies with 27 U.S. offices.

Roach said BBG’s valuation specialists have evolved from a traditional appraisal practice to a more diverse valuation practice for a variety of clients.

“We stand by our high-quality valuation products, no matter the size of the loan,” Roach said. “But with these revised loan amount guidelines, we are well-positioned for growth in our evaluation product.”

Calco Commercial Real Estate has recently leased the following warehouses and offices in the San Francisco marketplace:

540 Barnveld Avenue. This clearspan warehouse space has one (1) drive-in loading door and is 3,950+/- square feet of commercial space and is part of the Valhalla Real Estate Industrial Complex in San Francisco.

455 Barneveld. This 5,830+/- square foot clear span warehouse includes one (1) drive-in loading door and is located within the Valhalla Real Estate Industrial Complex in San Francisco.

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3130 20th Street #175. This 3,326+/- square foot Central Mission creative space included private and open areas, ground floor location and on-site parking availability.

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75 Industrial. This 22,000+/- square foot clearspan warehouse includes a real yard, two (2) drive-in loading doors, and a high identity corner location in the Bayshore Area of San Francisco.

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360 Bayshore Boulevard. This 5,720+/- square foot clearspan warehouse includes one (1) large roll-up door, a small office and a central Bayshore Corridor location. Zoned PDR-1G with the Bayshore Home Improvement Designation, 360 Bayshore Boulevard also allows for retail uses.

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2170 Cesar Chavez. This 12,500+/- square foot clearspan warehouse includes four (4) docks, one (1) drive-in loading door, a small office and a large exterior loading and parking area.

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If you have any questions about our available properties, or the San Francisco or Peninsula commercial real estate markets, call our office at 415.970.0000.

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