Real Estate Review and Commercial Lending Trends in California of 2015

We're looping towards the end of 2015. The year has been an eventful one for California's real estate industry.

These are the highlights as reported by the National Association of Realtors in the beginning of last month (November 2015):

  • Commercial vacancy rates declined for office, industrial and retail properties. Same trend is predicted to continue in 2016.
  • Demand for and supply of apartments have been constant. They are expected to rise in the coming year.
  • Commercial and residential rents rose across the board from 2.5 percent to 3.7 percent. Rents are going to rise still further particularly with the recent hike in interest rate.
  • Alternative lenders gained more profit as banks became more choosy. Government and consumer regulations are tightening their control over this industry, but technology and economic conditions are helping the industry thrive.

Background

2015 may have been the beginning to the end of the recession. Economic activity had advanced 2.4 percent by the end of 2014 inflating some air into the real estate market. Construction – largely commercial and higher-priced – was constantly in motion. Housing inventory was largely small. People sought housing. But unless you could afford it or grab a loan that you could repay, you were reluctant to move homes or invest.

Work prospects had picked up in 2014. By the beginning of 2015, business investment and spending rose 1.6 percent. The rest of the year saw the familiar bust and boom of spending that increased to an excess of 8.0 percent before it deflated and rose again. The last quarter of this year was the softest at 2.6 percent. Commercial investors were largely small business owners and wealthy expatriates. Residential investors were mostly from middle to upper-middle class families – largely baby boomers – who tended to look towards renting. Wealthy foreigners acquired homes in certain areas of California, too. For a time, the Chinese seemed to be most interested in property especially in Los Angeles and surrounding suburbs. Wealthy businessmen from New York plunked their spots.

Blips included rising property tax revenue, rocketing property prices (that are in the triple and 4 digit numbers in areas such as San Francisco, Los Angeles and suburbs), falling inventory that fails to meet demand, and, more recently, a 0.25% hike in interest rates.

Some experts speak of a 'housing bubble' crisis where space and housing prices become so rarefied that only the very rich would be able to buy homes. These experts call for government intervention and predict a housing scarcity that would supercede that of 2006. Statistics show that some are unable to pay rent. The Joint Center for Housing Studies (JCHS) of Harvard University stated that in prime areas such as San Francisco and Los Angeles almost 60 percent of renters consumed too much of their income for a roof over their heads. About 58.5 percent of the renters from Los Angeles / Orange County (LA / OC) metro areas are "burdened" which means that they are using more than 30 percent of their income for rent and losing out on other necessities such as food and healthcare. As much as 32.8 percent of renters are said to be "severely burdened" consuming over 50 percent of their income for rent's payment. Los Angeles, they reported, had become the 22nd least affordable metro in the country and too many renters have been evicted due to their failing to pay their rent.

On the flip side, inflation in California reached 0.5% through the 12 months up-to-date as published by the US government on December 15, 2015. Critics of the 'housing bubble' scenario brush concerns aside and point to California's fluctuations as representing the economic law of supply and demand. Prices are high because supply fails to meet demand. Expanded housing market, they argue, would lower price.

Commercial vacancy rates declined for office, industrial and retail properties

During the past year, commercial vacancy rates in California contracted for office, industrial and retail properties. Demand for commercial space rose in 2015 and is expected to continue to advance in the coming year. More offices were being built and snapped up by business professionals and expatriates or by foreigners who had the money. Commercial rents rose across the board from 2.5 percent in 2014 to 3.7 percent this past year. Prices are still rising albeit at a slightly slower rate.

In contrast to the large commercial transactions reported by Real Capital Analytics (RCA) that were mostly processed through local banks, it seems as though alternative lenders found more success with small business and entrepreneurs. Most banks in California tend to be reluctant to lend to such individuals even when credit history and trustworthiness justify loan application. Banks verify according to performance and experience. Most are reluctant to lend to newcomers in the business field and prefer dealing with corporate executives. Fifty eight percent of entrepreneurs and small business owners still approach local and regional banks as their first source of entry. Most are rejected. Alternative lenders – one of which is commercial hard money lenders – remains their followup choice.

Demand for and supply of apartments have been constant. They are expected to rise in the coming year.

In 2015, the apartment sector in California remained the best performer, with national vacancies hovering around 4.0 percent. However, a significant new supply of apartment units entered the market during the year, leading to concerns about oversupply in some areas. At the same time, supply outpaced demand with working class families and lower middle class unable to meet prices. California's average monthly rent is about $ 1,240, 50 percent higher than the rest of the country ($ 840 per month). New apartment completions added 230,000 units on the market this year. The volume of new space in apartment vacancies increased from 4.1 percent in the first quarter to 4.3 percent by the fourth quarter 2015. Rent increased too.

Alternative lending in California of 2015:

Alternative lenders gained more profit as banks became more choosy. Government and consumer regulations are tightening their control over this industry, but technology and economic conditions are helping the industry thrive

The incidence of default reached a new low in 2015. This has largely been due to spiking property houses that made it increasingly more difficult for borrowers to repay their loans.

Redfin, a residential real estate company that provides web-based real estate database and brokerage services predicts that recent spike in interest rate will cause defaults to grow in the coming year. Some hard money lenders have become stricter about who they lend to. More tend to scrutinize credit history as well as value of collateral, but since many (particularly newer agents) focus on collateral, lenders may let a few penurious borrowers slide past and experience bad loans.

Also in this last year, federal government and local consumer protection agencies introduced new regulations, such as TRID that curbed the industry, controlled the process, monitored transactions, and slowed the alternative commercial lending system. REALTORS cite this as the most relevant cause of bank capital shortage for brokers and real estate advisors since it has been more difficult for inexperienced or emerging private lenders to find partners who are willing to help them fund investors.

On the other hand, loan-to-value (LTV) ratio has declined across the board which makes commercial hard money lending more attractive than ever. The growing market has caused private lenders to become more aggressive and competitive in their service. Some lower payment rates, many fiddle around with terms and schedules to make them more convenient and faster, others offer a variety of loans, and more more lender are adjusting LTV rates to hugely attractive heights.

The field has also grown to meet the Californian investor's increasing demand for funds and to service those who are rejected by the banks. For those who are resilient, technologically-minded, and savvy, Tom SEO of TechCrunch.com sees a promising future.

Second Homes – Condo Hotels Make Sense

The Compelling Facts …

What if … Just 5% of the Baby Boom Generation learned of a cost effectice way to own more than 1 home in retirement? 75 million boomers will retire over the next 15 years, 5% equals a demand of 250,000 condo hotel units per year, every year unitl 2020.

What if … you could buy a second home / condo, use it when you wanted, and a professional (hotel manager) optimized the rental income and minimized the expenses while you were not in residence? Would this be more desirable than the alternative of doing-it-yourself for at least 5% of the population?

What if … you could deduct several homes instead of just 1 or 2?

What if … you could say you have condos in Town & Country and on The Slopes & Shore? And all these condos cost you less than just one traditional second home?

What if … all these properties appreciated like your home has?

The Condo Hotel opportunity will be the choice of more than 5% of the Baby Boom Generation, and the trend is just beginning. The condo hotel industry will also breath new life and prosperity into the hotel industry, making quality and 'the best located' hotels more profitable than ever. Condo hotel will separate the real estate business from the hotel service business and create a win-win for condo hotel ownership and hotel guests. Lastly, retirees of the next decade will expect more and be able to afford a higher lifestyle through condo hotel. These are the premise of this paper.

THE POWER OF THE BOOMER GENERATION …

Why are Baby Boomers Important?

81 million US Baby Boomers * (born between 1946-64) began to reach retirement age (59 ½) in 2004. 28% of the US population is a Baby Boomer. 2016 is the peak year, with 4.3 million 59 year old birthdays. A Boomer turns 50 every 7.4 seconds this 2005!

* Many non-US Boomers will choose to retire in the USA to be closer to the world's best health care system.

per year: 4,000,000

per day (4.0 mil / 365): 10,958

per hour (10.6 k / 24): 456

per minute (456/60): 7.1

Boomers have just begun buying their second / retirement homes.

Michigan has 234,000 second homes, California has 237,000 and Florida has 483,000. 6.4 million people own a second home, up over 40% since 1995. By 2010, an estimated 10 million people are expected to own a second home, despite 9/11, this is a 56% increase in just 5 more years and could be considered a boom market by any measure. More people will buy in the next 5 years than have purchased in the last 10 years, competition for desirable retirement residences will only intensify, appreciate in values ​​will follow suit. Low rates have helped fuel this real estate market, but they are a smaller part of the equation than is commonly believed. Currency exchange rates have a much more dramatic inflationary effect on resort area real estate.

The trend began in 2001, and intensified as interest rates fell in 2002-03, causing some boomers to "buy early". Real estate further became the investment "du jour" as it became clear in 2001-02 that the stock market was 'not returning the level of investment returns' that many boomers had built retirement savings expectations around.

This lack of security and control in the stock market, and its positive effect on real estate investment, will be discussed further in this report.
In addition, tax ramifications for second home ownership has helped encouraged second home ownership says the Wall Street Journal "In addition to low interest rates and demographics, the second-home market has been helped by the Taxpayer Relief Act of 1997, which established new rules for the treatment of a capital gain on a principal residence. Under the old law, taxes on gains were deferred if the seller bought a new home of equal or greater value up to two years before or after the sale of the primary home. , sellers over age 55 could claim a one-time exclusion of $ 125,000. "

New rules repealed the mandatory gain-deferral and increased the exclusion to $ 500,000, as long as a taxpayer owned and used the principal residence for two of the five years preceding the sale date of the home. Plus, the exclusion now can be claimed every other year.

These tax changes "liberated" sellers from the pressure to trade up to avoid a tax hit. Instead, says an NAR spokesman, it has encouraged many sellers to trade down to more modest digs, while using the remaining proceeds to purchase second and third homes. Tax changes have created a whole new form of property 'trading', where there is a tax advantage to buy a new home every 24 months, allowing a capital gain profit with zero tax cost. For many savvy investors, this has created a true 'cottage industry' in home flipping.

"The second-home market can accommodate 100,000 to 150,000 new housing starts a year over the next 10 years", estimates David Hehman, CEO of EscapeHomes.

But why second homes? As many professional people have discovered, as technology allows us to 'work from anywhere'; why not work from someplace beautiful, someplace 'vacation-like', from the cottage? The evolution of the home office has turned to the cottage office.
The typical vacation-home buyer is 55 years old and earned $ 71,000 in 2003, while investment-property buyers had a median age of 47 and earned $ 85,700.

For properties purchased between mid-2003 and mid-2004, the median price of a vacation home was $ 190,000 compared with $ 148,000 for investment homes. In contrast with the last available full-year price data in 2001, vacation homes have appreciated 12.8 percent from $ 168,500, and investment homes have risen 25.4 percent from $ 118,000.

Nearly one out of five second homes will become primary residences after retirement – 27 percent of vacation homes and 14 percent of investment property. "In addition, buyers were looking to diversify portfolio investments," Mansell said. "This is now the most frequently cited motivation for purchasing a second home." In listing the reasons why they bought second homes, respondents said there were some differences depending on the type of home. Overall, 30 percent of buyers wanted to diversify investments, 28 percent sought rental income (37 percent investment vs. 7 percent vacation homes), 14 percent wanted a personal or family retreat (29 percent vacation vs. 8 percent investment), 6 percent planned to use for vacations (16 percent vacation vs. 2 percent investment), and 5 percent had extra money to spend.

"Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain historically high," Lereah said. "The boomers are still in their peak earning years and have both the wherewithal and the desire to purchase vacation homes and investment properties." Ninety-two percent of all second-home buyers see their property as a good investment. In addition, 38 percent said it was very likely they'd purchase another home within two years, breaking down to 47 percent of investment buyers and 16 percent of vacation-home buyers.
The 9/11 effect, and family values ​​is another unpredicted phenomenon that many experts sight when discussing the second home market. The theory says that as Americans were shocked by the events of 9/11, they wanted to create more 'family together time' and come together in vacation destinations where far-flung family members could rejoin as a whole unit. Drive-to destinations were first to experience the effects on family-tourism from 9/11, these resort locations within a 2-5 hour drive from metro areas actually saw increases in occupancy immediately following 9/11. The theory is still evolving, but through my own surveys of boomers, this effect has merit on cottage demand. Drive-to vacation cottages is still the fastest growing market.

Can the demand for second home, resort properties and retirement residences be truly measured or is it just another version of real estate investment hype? A new study by NAR, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes. In addition, there was a record of 2.82 million second home sales in 2004, up 16.3 percent from 2.42 million 2003. The investment-home component rose 14.4 percent to 1.80 million sales in 2004 from 1.57 million in 2003, while vacation-home sales rose 19.8 percent to 1.02 million in 2004 from 850,000 in 2003.

The figures have merit and factual measurement. Real estate values ​​in nearly all 'vacation, resort, and retirement' areas have out paced the overall market by double digit (alarming) rates. The working communities of America are not only lagging, but in many cases falling in real value (when adjusted for CPI inflation).

(A note about inflation & currency: All too often we read reports about the increasing value of assets like real estate without any discussion of the cost of inflation in these increases or the exchange value of the currency being used to value the asset. If the dollar falls in purchasing value by 30% against other currencies, the value of real fixed assets should correspondingly rise by 30% (if they are desirable for purchase by foreigners). Real estate markets that have a high level of foreign investment will appreciate quickly as the dollar falls, and fall if the dollar strengthens (Hawaii circa 1990s). If the Consumer Price Index (CPI) rises by 3%, then the value of a home that rises by 5% has truly only increased by 2%. It is disturbing to this author that this is not more openly discussed by our mainstream press, who by profession are journalists with liberal arts degrees, not MBAs. Watch the true inflation-adjusted appreciation rate, no the media hype.)

Can these high rates of appreciation in second home markets really continue? Many experts believe, "Yes!", It can sustain for a long run (not months, but years). The fundamentals of rapid appreciation equate to supply growing slower than demand. Supply in areas such as South Florida have been rapid (78,000 new or planned condo units entering the Broward / Dade county market by 2007), but material shortages and hurricanes have slowed the ramp-up and created a large amount of pent up demand chasing reduced supply. Also, the foreign buyer demand in the Miami area is extremely high, this means these buyers are using currency that is 20-30% strong than last year. A 30% rise in property values ​​is easily absorbed in this environment.)

In areas such as Arizona and Las Vegas, water concerns and lack of infrastructure and skilled laborers have slowed the rapid pace, but the grow rate is still staggering. Other scenic second home destinations, like the mountain states, Pacific Northwest and Florida Keys have environmental hurdles which raise the barriers to entry for developers and restrict supply. A restricted supply in the face of demographically empowered demand is always a formula for rapid price appreciation (CA in 1970's).
What goes up must come down? Yes. But a 20% per annuim rise for 5 years, followed by 5 years of stagnation or a 10% loss, is still 5% + annual growth rate (worse case). If leveraged at 90%, the return on initial investment is still 44% per year. The hard part is making sure the best years are in the beginning … even hard is selling at a peak. It is estimated that there are between 40-90,000 new condo hotel units coming to market by 2008.

The demand for these units will exceed 1 million buyers, so the price of condo hotel units could be much higher than presently expected.

Understanding The Gig Economy

Hearing the term Gig Economy recently caught my attention. I hadn't given much thought to it but it is a big part of what we do as consultants in the employment agency industry. Where did this word gig originate? Musicians refer to their paid performances as gigs and really cool people refer to their temporary jobs as gigs. Put another way, the term "gigging" means having paid work or being employed.

Today a gig could be a temporary job in terms of length of employment. In the employment industry, we often refer to these assignments as either temporary or contract as it is usually for a defined period of time. Gigs can be full-time work hours and other times they are part-time hours.

Well, with our robust economy sitting at 4.0% unemployment it appears that all is well as it pertains to finding work? Many economists believe these numbers to be misleading. The feeling of prosperity is not being felt by many and this leads to the need to take on an extra job [or two] by millions of Americans just to make ends meet. We know by looking at the data that people tend to change jobs several times throughout their working lives and the gig economy can be seen as an evolution of that trend.

In the employment industry, we know that 1 in 5 workers in the workforce is contingent or flexible hourly labor. Many professionals are choosing contract employment because of the flexible work hours, work-life balance or a way to stay engaged in the workforce while keeping their technical and people skills sharp. While employment numbers count W-2 statements these employees could be working part-time or working this assignment until a better opportunity comes along. There are approximately 6 million people [4% of labor force] that make up the US contingent workforce as these numbers have not been tracked in past years.

Capturing the gig economy is important when working to understand the employment numbers. Many employers are choosing a contingent labor force as they look for ways to remain competitive while controlling employment costs and expenses. When marketing or seasonal fluctuations impact sales companies know that a contingent workforce allows them to remain flexible and profitable.

"The gig economy is not new-people have always worked gigs..but today when most people refer to the" gig economy "they're specifically talking about new technology-enabled kinds of work" Ie Uber, Pinot's Palette, Airbnb, etc

Companies should know that the growth of the gig economy is a global trend and this trend does not show signs of slowing. People are looking for ways to find balance in their lives while providing for their families. Sometimes that requires a second job. As we look at these gig workers companies should know that these numbers are expected to increase from 4 million to over 9 million in 2021.

Smart companies know that a flexible workforce makes good business sense.

Small Hardware Devices for Medical Diagnostic and Treatment

The wearable devices are quickly becoming a real possibility as technology is getting much more miniaturized and mobile. This truth has become more pervasive in the medical field as diagnostic devices are departing the lab and leaping into the purses, cars, or perhaps residences people who need them. This implies that the technology will continuously rely on stronger, smaller, and lightweight components.

A majority of the portable healthcare devices out there today concentrate on patient monitoring or diagnosing making use of self-application sensors (heart rate, blood sugar levels, temperature, and so forth). As semiconductor technology remains miniaturized, more could be packed in the available space, like higher multi-core processors, enhanced RAM and storage, HD displays, or various connectivity IC options. For devices to decline in size and become more useful, the components must greatly improve.

The product needs to be as reliable as possible or include a failsafe mechanism to eliminate any destructive consequences. To accomplish this, most companies are supplying extra shielding to protect from external noise. This noise consists of mainly electromagnetic interference (EMI) and radio frequency interference (RFI).

Wireless technology is ready to play off these latest devices because more companies are introducing more effective connectivity options such as Bluetooth, which could use low powered devices by means of their 4.0 iteration, featuring the preceding version's protocols integrated within a Wi-Fi platform (referred to as Bluetooth Smart and Bluetooth Smart Ready).

Near Field Communication (NFC) and Zigbee also are preferred selections for mobile healthcare devices, as they simply can create a swift stable connection, despite in short proximity. They offer the standardized RFID and personal area network protocols having support for ISO / IEC contactless IC cards.

Manufacturing companies regularly require developers to design the recent microcontroller semiconductors, solid state dynamic storage methods and AMOLED HD displays, yet give little thought to the wiring connections that bind these collectively.

To achieve an incredibly accurate reading from those medical devices, developers really need to decrease or annihilate the electronic noise that forms caused by the entire technology that's packed together in a small space. The healthcare device industry is one where the requirement of more compact components is essential. There are lots of factors why the medical device industry is calling for smaller devices.

First of all, with a very aging population, the traditional devices seen in hospitals are changing to home care, to permit a more comfortable experience. Thus, equipment ought to be miniaturized and simplified to enable simplicity.

Medical devices nowadays are increasingly being built to not only be smaller but more complex in order to decrease the entire noise in hospitals. As medical device development proceeds, overall device size is becoming smaller and consumer medical devices easily fit in the palm of the hand.

This size reduction is usually called miniaturization and is a trend that could be picking up steam in medical applications. Miniaturization enables reduced space requirements in setting up, transport as well as storage. Using smaller health care devices improves efficiency in diagnostic functions and sensitivity, because the power requirements and distance to the subject are greatly reduced. Smaller healthcare devices can be less vulnerable to noise from outside places like building wiring or other nearby devices.

Acknowledgment a medical device and carrying the device to market is an intricate and often times complicated project. Manufacturers that produce these devices always encounter unforeseeable challenges, delays and cost overruns when testing it for the first time. Finding the right vendor affiliates can help to minimize these challenges and bring a project back to green a lot quicker.

Small micro devices equipped for with video and fiber optic cameras, give surgeons an unparalleled view of internal organs, resulting in minimally invasive repairs which provide better success rates and reduced recovery times.

Remote surgery has also been developed, whereby doctors are able to do operations from a different location than the patient using high definition cameras and robotic surgeons operated by their human counterparts with surgical tool inputs over a protected internet connection. With this rapid healthcare technology development, it makes one ponder what functions the technology of the future will offer.