Maclennan Investment Group Blog – Real Estate Sales & Investment Advise

June 17, 2019 by Client Manager Leave a Comment

Commercial Real Estate Market Trends & Forecast

UCLA real estate experts recently published an analysis of the commercial real estate industry as part of the monthly UCLA Economic Letter, in which senior economist David Shulman dishes out “the good, the bad, and the ugly.”

While the commercial sector sees ups and downs just like the residential sector, commercial construction spending has grown steadily–and substantially–since 2010. However, spending has recently plateaued around $140 billion annually, as shown by the chart below.

Commercial Real Estate Market Spending 2010 Through 2021 Forecast — https://www.anderson.ucla.edu

Apartments & Industrial

Shulman points out the positive trends in two of the four largest commercial categories: apartments and industrial. A decline in homeownership from 64.8% to 64.2% means more people are renting (possibly due to delayed marriage and child-bearing among Millennials). This is why rental rates continue to rise by 3-4% per year and developers are building more apartments now than ever: 380,000 units annually over the last four years compared with 114,000 in 2010.

Median rent in Contra Costa County is well ahead of the rest of California, at nearly $1,766/mo across all housing types as of 2017 Q4. Respective state median rent is at $1,447 (Source: Department of Numbers).

Industrial rents rose at nearly double the rate according to the UCLA Economic Letter, between 6-8% annually. This is due in part to the rise in eCommerce business and the corresponding need for warehouse and distribution centers.

Office

Shulman identifies the threat that the coworking effect has on the office sector: declining square-footage per employee. The average employee has only 150 square feet of office space, down from the previous average of over 200 square feet. Office users’ decreasing space per employee results in higher office vacancy: now up to 16.6%.

Retail

The retail sector is what Shulman calls “the ugly” of the current commercial climate. The eCommerce boom has led nearly 6,000 retail locations to announce they’re closing in 2019. And although many online retailers are now opening physical locations, they maintain a fraction of the square footage of the retailers they are replacing. Shopping centers and malls are experiencing vacancy rates of 9-10%, comparable to recession-level rates.

As we can see, the commercial sector does not always ebb and flow as one, but each category is affected differently by shifts in the economy at large. As an investor, broker, or developer, it is important to keep a finger on the pulse of the market in order to make the best decisions for long-term success.

Effect on Commercial Real Estate Values

Trends in rental demand and usage will likely affect the value investors apply to individual real estate sectors. Those sectors with increasing vacancy will see declining values as investors weigh the greater risk and demand less of it for their portfolios or a greater return to offset the greater risk.

Those sectors with strong rent growth and lower vacancy (currently industrial and multi-family), will likely see strong demand from investors as the vacancy risk is lower and investors foresee rent growth. How soon investors start to make these adjustments is yet to be seen.

If you want to know how changes in the commercial market may affect the value of your commercial real estate, reach out to Maclennan Investment Group by email: peter@maclennaninvestments.com or phone: (925) 385-8798 and see how we can assist you.

May 29, 2019 by Client Manager Leave a Comment

Adaptive Reuse: Maximizing Property Value

Adaptive reuse is the repurposing of one type of building space into another to better suit the needs of the owner, tenant, or community. Today we will talk about the economic potential and success stories of adaptive reuse, as well as some of its inherent limitations.

How Adaptive Reuse Happens

In the 60s and 70s, U.S. industry was booming, leading to the construction of thousands of manufacturing and warehouse buildings. When industry began to slow and city population began to climb, many of these industrial buildings along the coast and in the Midwest were left vacant. Since then, these buildings have been repurposed into restaurants, apartments, and event centers with rustic charm.

Most buildings are built to serve a long-term purpose, but occasionally that purpose is met long before the building is due for demolition. For example, a large brick factory built in 1960 may still be structurally sound, but it has ceased operation and no longer serves the function of manufacturing. Rather than tearing it down, a developer may see the building as an opportunity for adaptive reuse and decide to renovate the existing structure for a new function.

Another reason buildings end up being repurposed is if they are deemed historic by the city and therefore illegal to demolish. Owners or developers may turn to adaptive reuse to make use of the space without selling the building.

Below are three unique and innovative examples of successful adaptive reuse projects of different scopes.

Arcade Providence

Built in 1828, the Arcade Providence mall in Providence, RI is the oldest indoor shopping mall in the U.S. The building’s combination of historical significance with the beautiful granite columns made the Arcade mall the perfect candidate for adaptive reuse.

Cutaway showing the Arcade Providence microlofts (https://forbes.com)

The building was converted into first-floor retail and dining with 48 tiny one-bedroom apartments (“microlofts”) on the second story. Apartments range in size from 225 to 800 SF and monthly rent starts at $850. That sounds impossibly affordable given the city’s average rent for single bedroom apartments is over $1,600, but on a square-foot basis it is well above the rest of the market.

The Phoenixville Foundry

Northwest of Philadelphia lies the historic city of Phoenixville, PA. At its heart is an old foundry left behind by Phoenix Iron & Steel Company in the 1970s. The foundry’s rustic charm, in addition to its historical significance, made it the perfect building for the Hankin Group developers to renovate into a full-service wedding venue and event center.

The historic Phoenixville Iron & Steel Foundry is now a full-service wedding venue

Event rental is year-round, and rates range from $5,000 to $11,500, according to Here Comes the Guide.

Western Metal Supply Co.

In Petco Park, home of the San Diego Padres, lies one of the most creative adaptive reuse projects in the country. Nestled behind the left field foul pole is a large brick building bearing the words “Western Metal Supply Co.” The building was built in 1909 and was home to the supply company until it declared bankruptcy in 1975.

The building remained vacant for over two decades, and was eventually purchased by Petco Park for construction in 2001. Rather than demolish the 51,400 SF warehouse, developers incorporated it into the design of the park, refurbishing the inside to contain a team shop, restaurants, and private suites. The Western Metal Supply Co. building is now an iconic San Diego structure and remains a valued part of the city’s history.

Limitations of Adaptive Reuse

There are many stories of adapted buildings making successful transitions from one property type to another, but ensuring legal compliance and long-term feasibility can be an issue.

First of all, developers must ensure the property is zoned for the intended use, or that the renovation is compliant with governmental codes. Developers must verify the land use matches the actual property function or risk fines and litigation.

Second, a developer making a permanent change to an existing structure wants to ensure the new purpose is suitable to the location and the market. Take, for example, Miami’s Wynwood district: adaptive reuse projects are everywhere, and they are all thriving off of each other. Ultimately, for an adaptive reuse project make financial sense in the long-term, it has to be within a strong market to begin.

Be sure to consult a professional who knows the commercial market and zoning regulations before considering an adaptive reuse project. While it may not be for the faint of heart, adaptive reuse can prove an effective strategy to revitalize a property for long-term success.

You can reach Peter Maclennan at 925-385-8798 or by email at peter@maclennaninvestments.com.

For another helpful resource, read this Thought Co. article on adaptive reuse.

May 23, 2019 by Client Manager Leave a Comment

The Opportunity Zone

Qualified Opportunity Zones

Established by the IRS to incentivize investment in low-income areas, the Opportunity Zone program is relatively new, and many investors are still unfamiliar with the benefits it provides. As of April 2018, the IRS offers tax benefits on long-term real estate investments purchased within Qualified Opportunity Zones. So what does this mean for long-term investors? Today we dive into the basics of Opportunity Zones and their three major draws.

What’s an Opportunity Zone?

Qualified Opportunity Zones or QOZ are economically distressed areas in which the government has designated certain tax incentives for investors. Typically, this means a capital gains investment is tax-deferred and the deferred gain is eligible for a partial exemption after five years or more. As described on IRS.gov website:

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

See a map of Qualified Opportunity Zones

The preferential tax treatment described above only applies to purchases made with capital gains, and only for investment properties. In other words, homebuyers who plan on living in the house are ineligible for preferential tax treatment even if it is within an Opportunity Zone.

In order to establish an investment in an Opportunity Zone, investors must establish a Qualified Opportunity Fund (QOF) as a vehicle for investment property funds.

EIG.org provides a great resource for understanding Opportunity Zones.

Why invest in an Opportunity Zone?

1. Deferred tax

Okay, this one is obvious. After all, deferred tax is the primary incentive to investors, and is effective immediately upon investing.

Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

This means that the investor has seven full years to defer on the reinvested gains before tax is owed. An investor may be able to defer taxes further with a 1031 exchange before the 2026 deadline.

2. Tax exemptions

In addition to deferring taxes, Opportunity Zones incentivize long-term investments by adjusting the basis on which tax is owed:

If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.”
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

This is where things get good. The tax-deferred gains you invested are eligible for 15% exclusion after seven years, meaning you only owe tax on 85%. Additionally, if the investment is held for ten years, it is eligible for a step-up in basis to the fair market value. If the property was sold shortly after the ten-year mark, the investor would be paying no capital gains tax on appreciation. This is a huge incentive for someone already interested in long-term investment.

3. Economically growing areas

Opportunity Zones were designed to help boost economically distressed areas by incentivizing long-term investors with tax benefits. The first zones were designated on April 9, 2018, so we must wait to see if they will offer the long-term economic development expected.

However, what is expected through the program is that the influx of new investments will drive an increase in property value throughout the zone. Investors realize the greatest gain if they establish funds early and stay invested long-term while the property values continue to increase. It is almost a self-fulfilling prediction, but one that benefits the early investors most.

Find a Real Estate Expert

Now that you know more about Opportunity Zones and the advantages they can provide, you are well on your way to making an informed and financially successful investment. Having a knowledgeable agent to assist you will make your process smooth and your returns as high as possible.

To reach Peter Maclennan please call 925.385.8798 or email at peter@maclennaninvestments.com.

This post is for informational purposes only. Contact a tax professional prior to making investment decisions.

May 20, 2019 by Client Manager Leave a Comment

Versatile Space in Antioch

Near Wilbur Avenue in Antioch lies a large warehouse lot with several usable spaces for lease. Two warehouse/industrial spaces have recently been listed, each with potential for a variety of uses.

The spaces are 2,700 SF each with large roll-up doors, bathrooms and office space. These units may be easily converted to accommodate your business or personal use. Contact Maclennan Investments with inquiries at (925) 385-8798.

511 Wilbur Ave, Suite A3

At 511 Wilbur Ave. Suite A3, you’ll find an updated office space, along with a secondary office/meeting room and mezzanine above. View the listing for Suite A3 here.

511 Wilbur Ave, Suite A7

Suite A7 has easy access to the mezzanine above the office and skylights for bright daytime lighting. View the listing for Suite A7 here.

main_floor_office — 511 Wilbur Avenue A7

For more details and pricing, check out the site listings for Suite A3 and Suite A7, or view them both here on LoopNet.

January 23, 2018 by Peter Maclennan Leave a Comment

Industrial Real Estate Hottest Sector in 2017 and Hot in 2018

Industrial Real Estate Hot in 2017

According to a report, the hottest commercial real estate class is industrial property.

The industrial sector has emerged as the growth leader in commercial real estate, according to a new report by Morningstar, a notion that’s in agreement with the wider consensus about industrial now leading income-generating real estate. As a darling among owners and investors, apartments may still be strong, but the industrial sector is the rising star.

That’s thanks to Amazon and e-commerce as a whole. Industrial logistics space outperformed office, retail, apartment and even light industrial space in terms of supply, demand, occupancy and rent growth in the first half of 2017, noted the report. Read More… on Commercial Property Executive.

The article details that much of the growth is due to Amazon and other e-commerce companies.

As recent sales of industrial properties indicate, the availability of industrial land in core Bay Area markets is not growing.

Industrial Real Estate Stays Hot in 2018

According to research by NREI, industrial real estate and industrial properties should stay hot in 2018. A majority of survey respondents indicated that they expect the industrial market to continue expanding for at least a year. Almost 23% of respondents believe that the growth will last 2 years.

Fewer respondents were concerned about oversupply in the industrial real estate market. Over 80% of respondents indicated that the supply was just right or that there was too little supply. (Too little supply seems to be the trend in the San Francisco Bay Area.)

The experts that responded ranked the West as the top region, followed closely by industrial properties in the South.

Bottom Line:

All signs indicate that industrial leasing and sales will maintain a strong pace in 2018.

Maclennan Investment Group, Inc. offers leasing, investment, and property management services to clients in Contra Costa, Alameda, & Solano Counties. Our primary markets are along the I-680 Corridor from Pleasanton north to Martinez, including Danville, Alamo, Walnut Creek, Pleasant Hill, Concord, Pacheco, and Clayton. And also along Highway 4 from Concord east to Bay Point, Pittsburg, Antioch, Brentwood, Oakley, and surrounding Delta towns.

Please call today to see how we can help you find space for your business or fill up your building with high quality tenants. You can reach us at 925.385.8798.

November 4, 2016 by Peter Maclennan Leave a Comment

Water-Efficient Fixtures & California SB-407

In 2009, then California governor, Arnold Schwarzenegger signed SB-407 into law. The law requires that water-efficient fixtures be installed in homes and commercial properties.

The law defines non-compliant water fixtures as:

Any toilet manufactured to use more than 1.6 gallons of water per flush.
Any urinal manufactured to use more than one gallon of water per flush.
Any showerhead manufactured to have a flow capacity of more than 2.5 gallons of water per minute.
Any interior faucet that emits more than 2.2 gallons of water per minute.

Residential Property Owners

One of the main features of this law is that as of January 1, 2017 all water fixtures in a single-family home are to be replaced with water-efficient fixtures. Most homes that have undergone a major, permitted remodel after 2014 were required to update plumbing fixtures to water-efficient fixtures to obtain a building permit.

b) On or before January 1, 2017, noncompliant plumbing fixtures in any single-family residential real property shall be replaced by the property owner with water-conserving plumbing fixtures.

and

(c) On and after January 1, 2017, a seller or transferor of single-family residential real property shall disclose in writing to the prospective purchaser or transferee the requirements of subdivision (b) and whether the real property includes any noncompliant plumbing fixtures.

Disclosure on Transfer (Sale)

This law requires that the seller must disclose to buyers if the fixtures in their home are in compliance with this law.

Do you know if all of your fixtures are in compliance? I certainly don’t. This will likely require you to either update all the fixtures to low flow, or have an inspection certifying that they are low flow.

Commercial Real Estate and Multifamily Properties

Commercial properties and multifamily real estate have to be in compliance by January 1, 2019. For purposes of the law, the authors defined commercial real estate and multifamily real estate:

(a) “Commercial real property” means any real property that is improved with, or consisting of, a building that is intended for commercial use, including hotels and motels, that is not a single-family residential real property or a multifamily residential real property.

(b) “Multifamily residential real property” means any real property that is improved with, or consisting of, a building containing more than one unit that is intended for human habitation, or any mixed residential-commercial buildings or portions thereof that are intended for human habitation. Multifamily residential real property includes residential hotels but does not include hotels and motels that are not residential hotels.

Duplexes, Triplexes, and Fourplexes

Based on the definition of multifamily residential real estate as containing more than one unit intended for human habitation, most duplexes, triplexes, and fourplexes should fit into this category.

Disclosure on Sale or Transfer

Again the law requires that the seller of commercial real estate or multifamily property disclose to the buyer if the property is in compliance.

Plumbing Police?

Does this mean that the state is going to create the plumbing police? Beats me. The law does allow for local communities and water retailers to enact ordinances to enforce compliance. Check with your local municipalities and water district to see if they have an enforcement mechanism.

If you are considering selling residential real estate in the near future you will need to work with your real estate professional to comply with this law. Hiring a property inspector can go a long ways towards this.

It looks like the plumbers, handymen, and handywomen of California are going to have a lot of faucets to fix.

925.385.8798