San Jose has been the heart of Silicon Valley’s tech scene for some time now. So it comes as no surprise that Cushman & Wakefield just named San Jose the #1 “tech city” in the country. But what’s interesting about their “TechCities 1.0” report, the first of what will become an annual publication, is the methodology used to make this determination. Here’s what landlords, San Jose property managers and prospective investors need to know about the report.
Based on these metrics, San Jose performs incredibly well.
So, why does any of this matter to San Jose property managers, apartment owners or investors?Simply put: these metrics provide valuable insight as to the strength of San Jose’s economy. Since 2009, real estate markets in the “Tech 25” have outperformed markets across the U.S., and San Jose is leading the way. Employment growth, absorption rates, and rent growth are all higher in San Jose than in other metro areas, including the other tech cities – great news for landlords, San Jose property managers and prospective investors.Technology is present in all cities, “but certain cities stand out,” the report notes. “In these markets, tech plays a larger role in the city’s economic trajectory. It’s also a vibe. Certain cities have the tech feel in the air, on the signage, in the conversations at the bars, in its population’s habits and preoccupations. In certain cities, tech is more deeply woven into the fabric of the city itself, and it’s dramatically shaping those real estate markets.”Indeed, San Jose’s tech sector is driving the local economy (). Companies like Google, Apple, Cisco Systems and Intel have deep roots here in the community. As a result, San Jose property managers and apartment owners are able to command premium rents—something we don’t expect to change for quite some time. The TechCities 1.0 study is just the latest evidence to that effect.Landlords, San Jose property management companies, and prospective investors can find the entire Cushman & Wakefield “TechCities 1.0” report here.
Google is notoriously tight-lipped about its expansion plans, which is why it came as such a surprise this Thursday when the tech company confirmed it has been eyeing San Jose’s Diridon Station district as a possible location for new corporate offices.But even more surprising is the fact that these won’t be any average Google offices. No. Instead, the company has ambitious plans to build a 6 million sq. ft. campus that could accommodate upwards of 20,000 new jobs. When fully built out, this would be the largest Google office complex in the world—twice the size of its “Googleplex” corporate headquarters in Mountain View.“We’re excited to have the support of the San Jose city council as we evaluate our options at Diridon Station,” a Google spokesperson said yesterday.San Jose Mayor Sam Liccardo admitted that his office had been courting Google for years. The city realized there was a tremendous opportunity to add new mixed-use, transit-oriented development around the BART station.Apparently, after further consideration, Google agrees.While the plans are not set in stone, the city has offered to roll out the red carpet to make the deal happen. This includes selling land owned by the city in order to assist Google with the assembly of the entire 240-acre area that would be needed to build the mega-campus ().
To put the scale of this development in perspective, San Jose currently has only 10 million sq. ft. of office space. Adding another 6 million sq. ft. would be transformative for the city’s economy.And it will bring San Jose’s already strong housing market to new heights. The tens of thousands of people who work at Google’s San Jose offices will need somewhere to live. The promise of Google’s high-paying jobs is sure to spark new residential development.“I wouldn’t be surprised to see speculative real estate developers gobbling up San Jose rental property before the details have even been finalized with Google,” says Mynd co-founder Doug Brien. “Investors will be eager to scoop up San Jose rental property before they get priced out.”Investors who break into the market now, or San Jose property managers and landlords who already own local real estate, will benefit from elevated rents in the short-term as supply rushes to keep up with demand. “Since it is notoriously difficult to build in the Bay Area, it could take years for these new rental units to materialize,” Brien explains.Many San Jose officials have called the proposed campus “transformational” for the Diridon district. That’s true. But it will also be transformational for the city’s housing market -- for renters, San Jose, CA property managers, apartment owners and investors alike. We’ll continue to monitor the development as new details become available.
Class A. Class B. Single family. Multifamily. Turnkey properties. Value-add opportunities. Primary market. Secondary market. Tertiary market? Gut rehabs. Mixed-use. Student housing. Housing for young professionals. Rent controlled. Non-rent controlled.When it comes to investing in East Bay real estate, there are so many different types of properties you can buy. So how do you narrow it down and decide what to buy?In Part I of a multi-installment series on real estate investing, we shared the guiding principles that help us determine where to buy rental property. In Part II of this series, we explore a few key considerations that help guide us when evaluating what types of rental property to buy.
How much renovation work are you willing to take on? This differs for every investor. Some investors have construction and rehab experience, or are willing to manage the multiple contractors that are needed when taking on a major renovation project. Buying an older, outdated or otherwise “rough” property can make a lot of sense for those with a lot of experience or access to capital. As successful flippers know, one can realize a lot of financial upside by purchasing an underutilized asset, renovating it and then holding onto it for a period of time.But renovating a property isn’t for everyone. If you have less experience, less capital, or are less interested in being a hands-on investor, buying a newer property makes a lot of sense. Newer properties – or properties that are older but have been newly-renovated () – require less frequent repair and maintenance. You might pay more for these properties on the front end, but new properties also tend to command higher rents. For these reasons, we believe buying a fully renovated asset is still a great investment; you just won’t get the additional juice from adding value through renovation.Fortunately, the East Bay is a mixed-bag when it comes to age and condition of properties. Many of the homes were built in the early 1900s. The craftsmanship on these properties is usually fantastic: the properties are structurally sound, and tend to feature unique details that you don’t find with new construction. Some of these properties have been scooped up by investors who renovated and flipped them, a welcome addition to the brand new units popping up throughout the East Bay.
This may sound counter-intuitive, but hear me out: in my experience, you don’t want to buy the nicest property in an up-and-coming neighborhood. Instead, my investment approach is to look for the worst building in a great, stable community. People are always willing to pay up to live in an awesome neighborhood (). It’s easier to improve a single property than to improve an entire neighborhood, so we prefer to invest in value-add opportunities in high-demand areas instead of vice versa.
There are certainly advantages to both types of real estate. Single family homes can be a great investment because when it’s time to sell, you have a broad range of buyers, from institutional investors looking to add to their portfolios to owner-occupants willing to spend more for their “dream home” than would be justified on a cap rate basis alone. The price point of a single family can also be an advantage, for investors with a limited amount of capital. Single family homes are usually easier to finance, and if it’s someone’s first purchase they might be able to qualify for as little as 3.5% down. Multifamily properties are usually more expensive, and lenders usually want buyers to put down at least 30% if the property won’t be owner-occupied. Investing in a single family is a great option for those who don’t have a huge chunk of money to put down at the outset.That said, I’m biased towards multifamily properties. Although they require a larger upfront investment, they tend to be less risky. If one tenant moves out or stops paying rent, you still have the cash flow coming in from the other units to balance expenses. The repair and maintenance costs tend to be more predictable, and when large capital expenditures do arise (), the costs are lower on a per unit basis.
Most buildings in America are not rent controlled. Investing in non-rent controlled buildings has generally proven to be great investment strategy. The ability to raise rents with the market allows for substantial increase in cash flow and appreciation during periods of increasing rents.That said, investing in rent controlled buildings is a strategy that we like a lot. The cash flow is more reliable due to lower vacancy rates, along with less sensitivity to declines in market rents. If a resident in a rent controlled unit is paying 30% below market rent, and market rents go down by 10%, they are unlikely to move out or ask for a lower rent. Furthermore, there is upside for the owner when residents move out and units reset to market rates, which is guaranteed to happen eventually ().What to look for specifically in rent controlled buildings is a big topic, which I’ll cover in a future article.
Buying rental property is an investment, so you want to be sure this investment is generating meaningful cash flow. There are a few instances where investors might be willing to forego cash flow in the short term, such as buying a rent-controlled property with dramatically sub-market rents, or buying a fixer-upper that will need substantial investment. Otherwise, investors should look to buy properties at a reasonably high cap rate. In other words, you want to be taking some money off the table each month. At a minimum, you should be covering the cost of your debt (). In the current tight market, we target East Bay properties that have at least a 5-7% cap rate. In a down market, I’d look for properties with a 7-10% cap rate ().So many investors focus on where to buy rental property that they often forget to put thought into what types of rental property to buy. We hope that Part I and Part II of this investors’ series has left you feeling well-equipped to make smart, informed decisions as you look to purchase your next East Bay rental property.
Location, location, location! This is probably the real estate industry’s most overused adage, and as much as we hate to repeat it time and again, we can’t ignore a longtime truth: where investors buy matters as much as — if not more than —what they buy.OK. So, location matters. You get that. But what exactly does that mean? How should real estate investors evaluate locations throughout the East Bay area?In Part I of a multi-installment series on real estate investing, we explore a number of factors that influence where to buy income property. Our advice is grounded in decades of experience buying and managing rental properties, both at the height of the market and when it was at record-lows.So, without further ado, we offer a few guiding principles:
The latter half of the 20th century favored the suburbs. A number of factors, most notably persistently high crime, meant that anyone who could afford to leave the city fled for the suburbs’ greener pastures. Over the last decade, the pendulum has shifted back and people are moving back to cities in droves. Why? Well, in addition to the jobs, cultural amenities, bars and restaurants that cities have to offer, they also tend to be highly walkable.Residents today place a premium on being able to run errands, grab lunch, or get to work with little or no need for an automobile. This is especially true now that Zipcar, Uber, Lyft and other ride-sharing services have created on-demand access to vehicles as needed. Millennials and Baby Boomers alike want to live in these “20-minute neighborhoods,” where a bulk of their daily activities can easily be reached within a 20-minute walk. While these areas tend to be located in the urban core, they’re also starting to pop up in inner-ring suburbs.To evaluate a neighborhood’s walkability, check its Walk Score. Most people assume that San Francisco is the Bay Area’s most walkable community – but as it turns out, Downtown Berkeley takes the top spot with a walk score of 96. All told, the East Bay offers a range of highly walkable neighborhoods. Oakland’s Lakeshore, Temescal and Upper Dimond neighborhoods all rank in the mid- to high-80s.
Related to walkability is proximity to public transit. Not everyone can live in a 20-minute neighborhood, but that doesn’t mean that they want to jump in their car and sit in traffic, either. Demographic shifts and concerns over quality of life have made living near public transit more desirable. Studies have shown that consumers are willing to pay more for housing located in areas located near public transit.The gold standard is buying property near one of the Bay Area’s BART stations. East Bay is home to several BART stations, and during rush hour trains come every 2 to 3 minutes. Depending on which neighborhood you’re coming from, this means you can get to downtown San Francisco in less than 20 minutes. Riders can catch up on social media, respond to emails, play games or read the news – sure beats a stressful bumper-to-bumper commute each day! Residents are willing to pay a premium for the convenience of living near public transit.What’s more, a recent analysis finds that residential properties located in proximity to fixed-guideway () transit maintained their value better than those without transit access between 2006 and 2011. The study concluded that San Francisco-area properties located within a transit shed outperformed the region by 37% during that time. This confirms our on-the-ground experience: buying rentals near public transit helps to preserve value despite the market’s ebbs and flows.
It can take years () for neighborhoods to transition. But for investors with a long term buy-and-hold strategy, owning in a transition neighborhood can pay big dividends in the long run.Look at who’s investing and where. In an upcycle like we’re in today, investment starts percolating into neighborhoods on the fringe. We’ve seen this happen right here in our own backyards. For years, investors would think long and hard before buying rental property in Oakland. It was considered one of the most dangerous cities in the U.S. Fast-forward a few years: real estate investors priced out of San Francisco started scooping up properties in Oakland at bargain prices. Rents in Oakland have subsequently experienced year-over-year double-digit gains. Today, Oakland is considered one of the nation’s hottest rental markets.Identifying East Bay’s next trendy neighborhood can be tricky. One strategy is to use the Starbucks test: where is Starbucks opening its newest locations? In their own words, Starbucks calls its real estate decisions “as much an art as a science.” Indeed, Starbucks and other upscale retailers do extensive research before making their location decisions.In a perfect world, you’d buy real estate in these areas just before Starbucks, Trader Joe’s, Whole Foods and the others start to put down roots. Gentrification moves through neighborhoods in wavelike patterns; buying right in front of the wave helps to maximize value. Investing in rental property near a new Starbucks is a good strategy nonetheless; research shows that homes located near a Starbucks appreciate faster than average. The East Bay area is peppered with opportunities like these.
All investment decisions are personal. As you evaluate where to buy rental property, consider how much risk you are willing to take. Your risk profile () will influence where to buy.For instance, if you have a high risk tolerance, you might consider investing in rougher transitional neighborhoods. With high risk comes the opportunity for high reward. But keep in mind: these are usually the first neighborhoods to lose value during an economic downturn. Let’s compare San Francisco and Antioch as illustration. San Francisco real estate values dropped by about 20% during the 2008-2010 recession, and quickly recovered. Meanwhile, property values in Antioch plummeted by about 70%, and have yet to fully recover. The longer your investment time horizon, the easier it will be to weather the market’s ebbs and flows.Conversely, if you have a low risk tolerance or shorter time horizon, it makes sense to buy income property in more established locations. More desirable core areas maintain their value well even in a down market, and recover quickly on the upswing. It comes as no surprise that these areas tend to be located near the jobs and amenities downtowns have to offer—including walkability, public transit, and of course….a Starbucks.
Whether you’re a first time investor or seasoned vet, finding a well-located property is essential for maximizing value. As you set out in search of your next East Bay rental property, keep these guiding principles in mind.Part II of this series will look at the types of real estate and property features you may want to consider if you’re contemplating investing in the East Bay area.Stay tuned for more!
October 10, 2017--Oakland, CA-- For at least the past year, the San Leandro City Council has been weighing whether or not landlords should be required to pay tenant relocation costs. When presented with a draft ordinance in July, the City Council backed off, sending the proposal back to the drawing board for further revision.“I have really not heard anybody say, ‘I like this,’ not from the renters and not from the landlords, and that should say something,” Councilwoman Corina Lopez said at the time. The City Council’s apprehension led some to believe that relocation assistance would be put on the backburner for the foreseeable future.But that wasn’t the case.Earlier this month, the City Council heard a revised proposal concerning tenant relocation costs. Under the terms of the proposal, the “Tenant Relocation Assistance Program” would require landlords to pay tenants up to $7,000 in relocation costs. The City Council voted in favor of the ordinance by a 4 to 2 margin.“I realize that one size doesn’t fit all, but what we’re trying to do is give our renters some assurance here,” explains San Leandro Mayor Pauline Cutter.The new program stipulates that landlords must pay relocation assistance when a tenant decides to move as a result of “landlord-caused” actions. Examples include capital improvements, demolition, owner move-in and rent increases of greater than 12 percent.
San Leandro’s new tenant relocation assistance ordinance applies to all rental properties with two or more tenant-occupied housing units. Rental houses with recorded affordability restrictions are exempt, as are single family homes or individual condos offered for rent.
San Leandro landlords will be obligated to pay relocation assistance equal to three times the tenants’ current monthly rent, OR three times the current federal Fair Market Rent for the region – whichever is higher. Households with children under the age of 18, residents over 65 years old, or residents with disabilities may qualify for an additional $1,000 per rental unit.However, as mentioned above, tenant relocation assistance may not exceed $7,000.For example, if a unit is rented for $3,000 per month, the formula would indicate the landlord is obligated to pay $9,000 (). Because of the cap, the landlord will only have to pay the $7,000 maximum. This provision is somewhat unique among tenant relocation programs within the Bay Area, which often stipulate the landlord pay the equivalent of three months’ rent, regardless of what that total amount may be.Landlords will be expected to pay relocation assistance in two payments: 50% within five days of serving tenants with notice to vacate; and the remaining 50% within five days of the last day of tenancy.A few additional provisions have been added to protect San Leandro landlords. For instance, if there are damages to the rental unit that exceed the amount of the security deposit being held, the landlord may withhold that amount from the final relocation payment. And if the tenant decides to return to the unit after renovations or capital improvements are complete, the tenant will be required to reimburse the landlord for any tenant relocation payment received.Finally, the ordinance allows landlords and tenants to reach a mutually agreeable solution in lieu of tenant relocation payments as long as both parties are acting in good faith.
Under the new program, San Leandro landlords will be expected to give tenants notice of their relocation benefits. There are two types of notice landlords should be aware of:
The ordinance requires notices to be delivered in English, Spanish and Mandarin.
With the 4-2 vote, the San Leandro City Council authorized the City to go back and formalize the language in the ordinance. It remains to be seen when the ordinance will be formally adopted and submitted to the Municipal Code, but the final language is unlikely to differ much from what has been approved to date. San Leandro landlords should brace themselves for these impending changes and plan accordingly.
Earlier this year, the State of California passed first-of-its-kind legislation in an attempt to increase housing supply. The law requires cities and towns to allow homeowners to build in-law apartments as of right, without having to go through a cumbersome permitting process.
The Bay Area economy is booming. From 2012 through mid-2015, employers in Santa Clara, San Mateo and San Francisco counties were collectively adding 100,000 new jobs each year. The economy has slowed a bit, with employers adding just 40,000 new jobs year over year since then. Economists suggest that the slowdown could be due to unemployment rates hovering around record lows ().Nonetheless, wage growth has been impressive—up 14% between 2012 and the end of 2016. The typical Silicon Valley income, well over $100,000 annually, is now double the national average.Double-digit wage growth would typically be cause for celebration. Yet the excitement is tempered by another stark reality: Bay Area housing prices have skyrocketed during this time.According to a new report from the Silicon Valley Institute for Regional Studies, landlords and Bay Area property managers are now commanding 45% more for their apartments than just five years ago. It’s a trend echoed at the state-level, where the median wage gain was 5.9% but rents have increased nearly 40%.Simply put: housing prices are rising so much faster than wages that it has become increasingly difficult for Bay Area residents to afford owning or renting their home.“We have a two-income family – we both make good money – but it seems like every month, the expenses keep rising,” says Nicole Tembrevilla, a recruiter for an East Bay tech company. Tembrevilla and her husband, who have two children and own a home in San Ramon, collectively earn more than $200,000 a year.One of the biggest issues, the report contends, is that not enough housing units are being built. In Silicon Valley, just over 80,000 new units have been added to the housing stock between 2007 and 2017. Roughly 138,000 units would be needed to keep up with Silicon Valley’s population growth. And thus, the imbalance – people are moving to the Bay Area for job opportunities, but there isn’t enough housing to accommodate them when they arrive, therefore driving up housing prices at a rate faster than wage growth.“The one constant trend and continuing threat is insufficient housing construction and high housing costs,” explains Stephen Levy, the economist who prepared the report for the Silicon Valley Institute.The report notes this imbalance could become even more pronounced given recent news that Google plans to add upwards of 20,000 jobs in San Jose.Landlords, investors and Bay Area property managers continue to follow these trends closely. As Silicon Valley’s economy continues its upward spiral, the question remains—how long can it continue? That upward spiral is driving the costs of housing, and just about all other costs of living, higher. But is it sustainable? And for how long?
Economists have been warning that the Bay Area has reached “full employment,” a signal that the good times may be nearing an end. Just last month, Beacon Economics cautioned that the Bay Area’s economy could be disrupted by a lack of skilled labor and record high home prices.While these fears are certainly real, it’s not all gloom and doom just yet.After shedding 2,000 jobs in May, a new report finds the Bay Area posted strong job gains in June. Collectively, the 9-county Bay Area added 11,100 jobs last month, according to the state’s Employment Development Department. Santa Clara, East Bay, and San Francisco-San Mateo lead the way.Santa Clara added 2,600 jobs, 800 of which were health care positions. East Bay gained 1,900 jobs, the bulk of which were in administrative services such as clerical and building support jobs. San Francisco-San Mateo added another 4,900 jobs, with the hotel and restaurant industries posting the largest gains. Solano County was the only to post job losses last month.In total, Bay Area employers have added just over 15,000 jobs this year. The excitement over this job growth is tempered by the reality that this is just a fraction of the 54,400 jobs the Bay Area added during the same period last year.“The Bay Area is growing significantly more slowly now than it was last year, which was slower than the prior years,” says Christopher Thornberg, an economist and partner at Beacon Economics. “It’s not that companies don’t want workers; they want to hire,” says Thornberg. “The complaints that I’m hearing about is that companies just can’t find workers.”Job seekers, meanwhile, say employers are being too picky.Recent college graduate and Fremont resident Mark Phan has a degree in computer sciences but is still struggling to find a job. “I’m surprised that it’s been this difficult to find something," he says. Even though he has more than a decade of experience, San Jose resident Robert Wood got so fed up working on a contract basis that he decided to up and leave the tech industry altogether. Now, he’s an apprentice plumber.Some lower-wage workers are being pushed out of the area altogether. “ simply cannot afford to live here, adding more strain to an already tight labor market,” the Beacon report states.So, is it time to panic? Not quite.Yes, the labor market has softened, “but the usual things that cause a recession are sustained shocks to the economy, and they are not in the picture right now,” says Robert Kleinhenz, Beacon’s director of research. “Sudden increases in the price of oil, spikes in interest rates aren’t happening. Inflation is low, oil prices are low. Yes the Federal Reserve is raising interest rates, but as Janet Yellen has said, the pace of increases is so slow that it’s like watching paint dry. There is nothing that presages some sort of recession.”There’s also reason to believe the local economy will pick up steam moving forward. Several companies—Google being the most notable—have recently announced plans to expand in the Bay Area. Google’s planned “mega campus” would add upwards of 20,000 jobs in San Jose alone.“This is slow. It’s real, but it doesn’t mean a downturn,” says Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. “Growth will be slower than before, but the Bay Area will still outpace the nation.”
Google is on the move again. Just a few weeks ago the tech titan announced its plans to build upwards of 8 million square feet of office and R&D space in downtown San Jose, a move that real estate experts call a “game changer” for the city.
But it seems Google isn’t going to put all of its eggs in that basket.52 Parcels in SunnyvaleLast week, news broke that Google has been silently buying up parcel after parcel in Sunnyvale. Google has locked down 52 Sunnyvale properties, to be exact, for a grand total of $820 million. The properties are located on more than a dozen streets, but all are clustered close together in an area known as Moffett Park. Moffett Park is just four miles south of Google’s corporate headquarters in Mountain View.In total, the Sunnyvale properties consist of at least 2.3 million square feet of space and are spread across a number of property types from office to R&D and industrial buildings.“This is a huge land grab,” says Chad Leiker, a first vice president with Kidder Mathews, a commercial real estate brokerage firm. “It’s a major repositioning of what’s going on in Sunnyvale.”
According to the Silicon Valley Business Journal, acquiring these properties allows Google to fill the gaps between its other Sunnyvale offices—some of which Google leases, some of which it owns.Google was able to fly under the radar in Sunnyvale by purchasing the properties through its real estate brokerage partner, CB Richard Ellis. CBRE began acquiring the parcels through multiple transactions as far back as 2014, according to county records. Google used a similar method to acquire properties in San Jose, in which it partnered with real estate giant Trammell Crow as a conduit to avoid attention being drawn to the deals.Earlier in the week, during an interview with CNBC, an industry insider revealed that Google already has 72,000 employees but needs additional space to grow into. It is estimated that Google could house upwards of 11,000 additional employees at the Sunnyvale properties it has under agreement.Once the sales are finalized, Google will have offices scattered between San Francisco and San Jose, a disaggregated approach that stands in stark contrast to rivals like Apple and Facebook, whose Silicon Valley employees tend to be concentrated closer together.Google has stayed mum about the transactions, suffice to say that it has indeed purchased the properties in question. “That is all the information we have to share at this time,” said Katherine Williams, a Google spokesperson.Although it remains to be seen what Google has in mind for its new Sunnyvale real estate, one thing is evident: Google has no plans of slowing down its expansion efforts in Silicon Valley—another positive signal for multifamily investors that demand for Sunnyvale apartments will only continue to grow.
At Mynd, we want you to think of us as more than just an Oakland property management company. We want you to view us as your investment partner.