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California  + Bay Area  + Office  | 

RCA’s Jim Costello Tracks Bay Area Capital Flows

By Dennis Kaiser

Commercial real estate economist Jim Costello of Real Capital Analytics is one of the featured speakers at Connect Bay Area. The conference is coming up May 17th at Galvanize San Francisco (get more information and register.)

We asked Costello to share why commercial property prices are cooling in San Francisco. In our latest 3 CRE Q&A, he points out that except for a few segments of the market, there are not outright declines in prices as of yet, but clearly the point of strong double-digit growth in prices is in the past.

Q: What are the biggest trends you see emerging across the Bay Area investment markets?
A: Looking at the RCA CPPI to measure price trends in San Francisco, prices for income-producing properties of all types were up 0.7% in Q1 2018 from the previous quarter, and up 5% year over year. There is a great divide though between commercial properties versus apartments. Prices for commercial properties were up 2.6% from the previous quarter, and still up 14% year over year. The weakness though comes from the apartment sector. Prices there fell 2.1% for the quarter in Q1 2018, and were down 6% YOY.

Given the way deal volume has been falling in San Francisco, a number of investors I talk with have been fearful for some time that price declines would follow. That is the pattern seen in the last market downturn after the Global Financial Crisis, after all. Volume fell and prices plummeted. Owners could not refinance assets, and had to sell them at fire sale prices. In the current market though, the debt markets are still quite liquid with a large number of active participants.

If you do not need to sell an asset to access capital, but can refinance, why sell? This behavior can be seen in San Francisco in the combination of falling deal volume and rising prices.

Deal volume for commercial properties was down 74% YOY in Q1 2018, which helps to explain that 14% year over year price increase. Sellers were sitting on their hands waiting to see if prices would be pushed higher once again. Why bring an asset to market if you do not have to? Those buyers who felt that they had to be in the market simply had to pay up.

Q: How are other property categories faring?
A: By contrast though, deal volume for apartment properties spiked up to a 127% year over year pace of growth in Q1 2018. Prices have been on a downward trend for apartment properties starting in Q4 2017. Deal volume was down even as prices declined, but once it was clear that prices had retreated from their highs and that it was not a temporary blip, it became clear that there was little value in waiting for higher prices before bringing an asset to market.

Q: Who are the buyers of Bay Area properties today?
A: The composition of buyers in 2018 so far is starkly different than that seen in the last three years. As prices rose to new highs, it was the Cross-Border buyers who were becoming more exposed to San Francisco. These buyers acquired a total of $6.7 billion more than they sold in the market from 2014 to 2017. Into 2018, their pace of acquisition has dropped off sharply with only $51 million of acquisitions.

The market in 2018 has depended on private capital sources and, for the first time since 2014, REITs are net buyers of properties.


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For comments, questions or concerns, please contact Dennis Kaiser

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About Dennis Kaiser

Dennis Kaiser is Vice President of Content and Public Relations for Connect Commercial Real Estate. Dennis is a communications leader with more than 30 years of experience including as a journalist and in corporate and agency marketing communications roles. He is responsible for Connect’s client content operations and is involved in a range of initiatives ranging from content strategy, message development, copywriting, media relations, social media and content marketing services. In his most recent corporate communications roles, he led a regional public relations effort across Southern California for CBRE, played a key marketing role on JLL’s national retail team, and was responsible for directing the global public relations effort at ValleyCrest, the nation’s largest commercial landscape services company. In addition to his vast commercial real estate experience, Dennis has worked on communications and launch strategies for a number of residential projects such as Disney’s Celebration in Florida, Ritter Ranch in Palmdale California (7,200 homes, 22,000 acres), WaterColor in Florida and PremierGarage in Phoenix. Dennis’s agency background included firms such as Idea Hall and Macy + Associates. He has earned an outstanding reputation with organization leaders as a trusted advisor, strategic program implementer, consensus builder and exceptional collaborator. Dennis has developed and managed national communications programs for Fortune 500 companies to start-ups, both public and private. He’s successfully worked with journalists across the globe representing clients involved in major-breaking news stories, product launches, media tours, and company news announcements. Dennis has been involved in a host of charitable and community organizations including the American Cancer Society, Easter Seals, BoyScouts, Chrysalis Foundation, Freedom For Life, HOLA, L.A.’s BEST, Reach Out and Read, Super Bowl Host Committee, and Thunderbirds Charities.

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