by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Everyone loves to point to California as the prime example of the excessive greed of the recent real estate boom. Media, bubble bloggers, and pundits predict that California will plummet to new lows and bring on a lengthy recession akin to the Great Depression. Even home-grown and respected PIMCO of Newport Beach predicts a heavy fog for the state’s real estate forecast.
Here are a few snippets about the “rising” real estate boom extracted from the Kiplinger California Newsletter:
Evanisko Realty and Investment plans an urban living project with 58 loft-style condominiums targeted at young professionals. The North Hollywood (NoHo) project will be called 4900 and is a conversion from an old theater and auto parts store.
OWR Development is planning 3000 The Plaza, a 200-unit condo tower project near the John Wayne Airport in Orange County. This is the first “urban living” high-rise project in Orange County.
Summerhill plans an urban living condo project at the site of the former Lou’s Village in San Jose. They plan 95 units with 10% of the units having a live-work capability. They expect the price point to be in the mid $600,000 range.
The Sheraton Palace Hotel in San Francisco plans to build a 60 story condo complex ON TOP OF the hotel. There will be over 250 units.
The Towers on Capitol Mall in Sacramento is a 53 story mixed use project with over 750 condos, a four star hotel, and retail space.
The Downtown San Diego condo boom may be over but don’t tell it’s little neighbor to the south, National City. The little municipality plans over 4000 units. Prices could be as low as under $200,000.
How can this development persist in a real estate market that all experts predict to plunge? The simple answer is that demographics are on California’s side:
1- Population still grows here statewide at a 1.5% annual clip. Now that may seem like anemic percentage growth compared to Nevada and Arizona but look at the astounding number of people moving to the Golden State. California enjoys a net gain of some 700,000 people each year.
2- There is a housing shortage in California. The affordability index may not be an applicable measure moving forward.
3- California employment is holding steady, in fact, a net gain of higher paying jobs are coming into the state. Why? California has high taxes and is hardly business friendly. Businesses want to be near the huge consumer base (the fifth largest economy in the world) that are California residents.
4- People would rather live in California than Buffalo.
NVmike says:
There is a housing shortage in California
There is? Just last month the LA Times was abuzz with stories of falling rental prices in LA.
Unsold inventory in all the large markets is pushing 9 months.
Where’s the shortage?
February 22, 2007 — 2:09 am
Sharon Simms says:
Much of the same can be said for Florida.
People also like urban living (highrise) because they don’t have a yard to maintain, there are wonderful views, they have lots of amenities there within the property, and if they’re truly urban, they walk out their door and the world awaits, without a car.
February 22, 2007 — 4:01 am
Kris Berg says:
Shhhh… Don’t tell anyone.
February 22, 2007 — 8:01 am
Phil Hoover says:
I see your point, but what about the fact that only 1 in 13 California residents can afford to buy a home?
And, that for $550k, you get a home with so-so quality and a $3,000+/month interest-only payment after putting $50k down?
Guess I should leave Boise and move back 🙂
February 22, 2007 — 8:15 am
Brian Brady says:
Mike:
Click the KipCal link; it disuutes the LA Times claim
Phil:
Click the link for point #2
Kris:
The cat’s out of the bag. I imagine this post will move the market. The tens of people who read me will be packing up and headed West
February 22, 2007 — 9:49 am
Jeff Brown says:
Brian – I’ve been wondering when someone was gonna aim their light on this subject.
What cracks me up is how there’s always that group, the ‘oh yeah?’ bunch, who lives so far in the valley of Denial they must insist it can’t be happening because of the current supply.
The underlying assumption is that all these developers woke up one day and like Mickey Rooney saying “Let’s do a play!”, said “Let’s build thousands of condos – if we build them they will come!” 🙂
How ’bout this alternate scenario? They did some very serious research, and came to the unavoidable conclusion that if they built them they’d make several piles of gold?
Conclusions based upon rational thought backed up by solid market and demographic research will always trump those who rely solely on their gut instincts and the media. It’s our industry’s version of comic relief.
Phil makes a salient point about the small percentage of folks who can actually buy homes or condos in California. It proves Life’s Truth #23:
You have the privilege to live anywhere you can afford – not the right to live anywhere you can’t afford.
Of course, that’s why I’m opening an office in Boise this year Phil. 🙂
A great post Brian.
February 22, 2007 — 10:54 am
Chris says:
This doesn’t surprise me, I live along the coast in CT and our market is very similer to CA’s. CA’s is slightly ahead of ours and we can look west to predict our future a few months out. But anyone a lot of people who I talk to keep saying oh the market is slow nothing is happening. I just shake my head, a lot is happening. The RE market is as hot as ever, maybe more so now because the light weights were scared off.
February 22, 2007 — 11:16 am
Chris says:
This doesn’t surprise me, I live along the coast in CT and our market is very similer to CA’s. CA’s is slightly ahead of ours and we can look west to predict our future a few months out. But anyway a lot of people who I talk to keep saying oh the market is slow nothing is happening. I just shake my head, a lot is happening. The RE market is as hot as ever, maybe more so now because the light weights were scared off.
February 22, 2007 — 11:16 am
Tom says:
“How can this development persist in a real estate market that all experts predict to plunge?”
That’s “flying monkeys” son, not “experts”
In other news, 1 in 5 homes on the market in Sacramento is a short sale.
http://www.usatoday.com/money/economy/housing/2007-02-19-close-sacramento_x.htm
Don’t click that link.
February 22, 2007 — 1:45 pm
NVmike says:
How ’bout this alternate scenario? They did some very serious research, and came to the unavoidable conclusion that if they built them they’d make several piles of gold?
How’s that several-piles-of-gold-strategy working out for Toll Brothers, Centex, Hovnanian, et al, these days?
February 22, 2007 — 8:26 pm
Chris says:
There is good money to be made in short sales.
February 22, 2007 — 8:37 pm
Brian Brady says:
Mike:
It’s not how that strategy is working out for them today. Builders lock in profit well in advance via options and forward contracts. The recent “boom” was gravy for them.
February 23, 2007 — 10:04 am
NYCJoe says:
Well, hang on a second. All the “development” that you’re talking about and providing links to is in the planning stage. That doesn’t mean that they will all be built.
Seems to me this is a little like counting chicks before they’ve hatched.
Miami had tons of development planned too, much of which is either now canceled, mothballed, or reverted to apartments. Did all of those builders do “solid planning and market research” too? Probably. Didn’t do ’em much good, did it?
February 23, 2007 — 3:27 pm
Brian Brady says:
Good point, Joe but…
the two biggest projects (Sac and OC) are already selling. The San Jose and NoHo deals have been bought; I doubt they fail to convert.
The IB deal (San Diego) and Sheraton San Fran deal are still “blue sky” right now
February 23, 2007 — 4:50 pm
NYCJoe says:
Sure, but even deals that are “selling” doesn’t necessarily guarantee anything. Many of the Miami “sales” were just deposits being taken. I’d be more convinced if the deals were fully executed and closed.
February 23, 2007 — 6:20 pm
Brian Brady says:
JOE: “were just deposits being taken. I’d be more convinced if the deals were fully executed and closed.”
BRIAN: I agree but what the heck would we have to dispute if that were happening?
I’m not saying it’s all hunky-dory in California. I’m saying that there IS intrinsic value to this state and, contrary to popular belief, it ain’t falling in the ocean!
February 24, 2007 — 12:54 am
NYCJoe says:
Agreed, California’s intrinsic value is why I lived there for 10 years and still miss it.
Heh… yeah, I suppose that’s true. 🙂
February 24, 2007 — 5:32 pm
OcNative says:
Interesting that you choose to point out the “highlights” of the Kiplinger letter and yet you choose employment and population growth numbers that are much higher.
Kiplinger’s predicts job growth to be .5% in 2007 and 1% in 2008. That isn’t good especially if you use your number of population growth of 1.5%. With that job growth and population growth in two years half of those people wouldn’t have jobs. Also California leads the nation with mass layoffs. http://www.ocregister.com/ocregister/money/article_1589665.php
Kiplinger’s predicts that population growth will be 1.1% for 2007 and 2008 not the 1.5% that you claim. In orange county we have had a net migration or you can the population is decreasing.
3000 the Plaza is not planning to be built it is built and it is two towers which adding the two at Marquee makes four. Did you read the Kiplinger letter? This is OWR’s third condo tower. Just FYI Marquee is over 60% non-owner occupied because they all tried to flip the property and failed. Trust me, try to get a loan on a place that is over 50% NOO and you can drive by at night and see how dark it is. 3000 the Plaza still has units to sell with some big incentives. Did I mention that there are 40 plus other condo towers planned or in the works. Makes a lot of sense with the negative population growth and for buyers who won’t live there. Sure they can rent it out but do you know what a negative cap rate is? Your complains about how the affordabity index is bad since it doesn’t factor “creative” financing. Guess what if you change it from CAR’s 10% down adjustable rate mortgage to interest only it goes from a 11% rate to 13% rate in OC. Wow!
#1 Don’t post Kiplinger’s information without their numbers. Even if you don’t agree with them post them.
#2 Actually read the letter since you would have known that 3000 Plaza is not the first tower in OC. Then actually research the other tower projects.
#3 When you speak of California’s job growth you should reralize the mass lay off info can be found on http://www.bls.gov and that since the state was the leader it will get press your evil enemy.
#4 Do yourself a favor take your 1.5% population growth and figure out how many building permits California has had in the last three years and see if that growth will match demand.
#5 Don’t forget to mention that Kiplinger’s also predicted a 3% drop in home prices and adjusted for inflation that is 5.7%. How many years and at what rate of appreciation over inflation would it take to recover from that loss?
For disclosure I am an owner of the place I live in and it is just that a place to live in. Yes I pay a premium to live in CA and a little more for OC but things have gotten out of hand. I also own an investment property and if you bought it today with all the tax breaks and factoring inflation it would take you over twenty years to get an annual profit over 5%. Does that really make sense? I don’t see a crash but it does have to return to normal and if there are any kinks in the economy you better watch out. By the way the Governator just got news that the money loss from the slow down in real estate could result in a $2 billion deficit compared to a surplus. Of course he blew it off as denial is the first stage.
February 25, 2007 — 1:25 am
Brian Brady says:
Nice work, OC Native You have proven that statistics can be bent to your own personal opinion.
I did read the Kiplinger California Letter and actualy called those developments to verify their status. I received source information which delved into the communities beyond KipCal’s topical reporting.
The growth figure was obtained from the State of California’s Report 2000.
Why do you own an investment property in Southern Cal? You seem like the perfect case study for Jeff Brown. Have you read Jeff Brown’s post?
https://www.bloodhoundrealty.com/BloodhoundBlog/?p=1010
February 25, 2007 — 1:23 pm
OcNative says:
Brian – I wasn’t just saying that statistics can be bent to your own opinion. What I was trying to point out is that if you are going to use Kiplinger’s news you should also post their numbers. Personally I think Kiplinger is the best out there and thanks to them I made a killing on oil calls last year. To show your support of their belief the ethical thing to do would be to post the numbers since they have one of the best records.
Who did you call on those developments? In the Kiplinger letter there is no mention of OWR’s 3000 The Plaza being the “first” tower in OC and that is why I questioned you on it. So where did you get that information? How about Bosa’s next development did you call them and did you tell them that OWR claims to be the first? How many units do they have planned? Did you see how Urban West is trying to get approval so they can double the units they have planned for Platinum Triangle? I know you haven’t been in SoCal for very long but this is all too familar to me. More units in the same space equals the ability to make profit for shareholders. How is the condo market in downtown SD?
I think what you are saying is that you use the Census data from 2000. Please post a link next time it helps make sure we are on the same page. That info is outdated especially since it is 2007 and that data came from a very unique time with the tech bubble. If people are coming to CA why does it cost $2110 for a UHaul 17′ truck from Orange CA to Austin TX but from Austin TX to Orange CA it only costs $413? http://www.uhaul.com I will help you out here it’s because people are leaving and UHaul needs more trucks here in CA. Check out the rates for SD they are not as bad as OC but pretty close.
I checked out the post on rental property and he did say get f%$k out of dodge. That may be the case for the “investors” who bought in the last four years who couldn’t figure out what cap rate is let alone the tip amount. I own an investment property because it provides a residual income. Something that will soon come back once all the “investors” take your buddy’s advice and sell.
Your response is good but not great. It is as if you thought that you half answer the questions thinking that I would just go away. So here are the quetions I have for you.
1. Why do you use data from 2000 when it is 2007 and so much of the data can be found on http://www.bls.gov ?
2. Why do you use building data from OC when it is incorrect and is much greater than what you post? Honestly you do seem like a very intelligent person so I would assume you would have an idea of the market you speak about.
3. Why don’t you post some of the negatives of CA like the mass layoffs? You worked for Merrill so you understand that it is your fiduciary duty to disclose the risks positive and negative.
Like I said before I don’t see a crash but even small a drop in nominal terms takes years to recover from in real terms. It’s when a rosy picture is painted when the risks need to be disclosed that disturbs me. Especially when the data is outdated and the facts are wrong. How about this you have your “contest” for the best economic post on activerain let’s change it up. Since it is economic you should do something with the numbers that are coming out. If it is about GDP, jobless claims, ISM, CPI, PPI, resale housing, new homes, housing starts etc. I will join but the prise should be a Kiplinger subscription.
February 26, 2007 — 4:04 am
Brian Brady says:
“If it is about GDP, jobless claims, ISM, CPI, PPI, resale housing, new homes, housing starts etc. I will join but the prise (sic) should be a Kiplinger subscription.”
I think that’s fair; I offer that as a substitute should you win (I’m not the judge so you’ll get an unbiased opinion)
February 26, 2007 — 8:31 am
OcNative says:
Sorry about any misspelling as it was late and should be expected at that hour. However I am curious as to why you did not answer my questions?
Who did you call on the tower developments in OC and why didn’t you look into the http://www.ocregister.com for the information?
How is the downtown SD condo market?
Why are you using data from 2000 when data for 2006 and 2007 is available?
Why is it always rosy? Shouldn’t some of the negative news such as the mass layoffs be worth mentioning? RE’s strength is about the jobs right?
Why does it cost five times as much for a UHaul truck from OC to Austin than Austin to OC and four times for SD?
Durable goods -3.4%, consumer confidence 106 and existing homes 6.18mil. I still may post something. I just don’t want to sound too bearish.
February 27, 2007 — 12:13 am
Brian Brady says:
1- Source info is stronger
2- Crowded
3- Consistency; the bls numbers are short-sighted
4- I’m a happy guy
5- How would I know?
6- I hope you do post an entry; you are a gifted researcher.
February 27, 2007 — 8:25 am