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Industrial Real Estate Hottest Sector in 2017 and Hot in 2018

Antioch Industrial Property

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.

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Water-Efficient Fixtures & California SB-407

Spraying Water

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:

  1. Any toilet manufactured to use more than 1.6 gallons of water per flush.
  2. Any urinal manufactured to use more than one gallon of water per flush.
  3. Any showerhead manufactured to have a flow capacity of more than 2.5 gallons of water per minute.
  4. 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.

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Residential Landlords and Mold – Senate Bill 655

Moldy Wall

A Moldy Wall – by Matti Mattila*

Senate Bill 655 Housing Standards Mold

Senate Bill 655 was signed into law on October 9, 2015 and went into effect on January 1, 2016. This law adds mold to the list of habitability issues that a tenant can use in defense of an eviction case.

How is mold defined under SB 655? “Mold” means a microscopic organism or fungi that can grow in damp conditions in the interior of a building.
The California Apartment Association boasts that this law protects both the landlord and the tenant. The tenant is protected from the harmful effects of exposure to mold over an extended period of time.

The landlord is protected from eviction defense attorneys using “mold” as a last minute defense in an unlawful detainer proceedings. To qualify as a habitability issue, the mold must be visible, the landlord must have been notified of its presence, and it must NOT be attributable to the tenants misuse or neglect.

Dealing with Mold in a Rental

From the California Association of Realtors­­® (CAR) Q&A on the law:
QUESTION: “If the landlord suspects that the tenant’s failure to keep the property clean and sanitary has contributed substantially to the mold problem, should the landlord nonetheless repair the mold problem?”

ANSWER: “Yes. Even where it’s clear that the tenant’s own negligent actions have led to the mold problem, the conservative course of action from a risk management perspective, is to act quickly to repair the problem. Afterwards, if it’s clear that the tenant had caused the problem, the landlord may bill the tenant for the cost.

Recall that a landlord has a duty to maintain the habitability of the property. This obligation is found under common law, by statute, and often in the terms of the lease agreement. Failure of the landlord to maintain the property in a habitable condition may allow the tenant various legal remedies such as rent withholding, termination of the rental agreement, discounted rent and other rights and damages. Because the risk of liability is high, it’s prudent to take a cautious approach by remediating first, and assessing costs afterwards.”

CAR® Form on Mold

The California Association of Realtors® provides a standard form, “Lease/Rental Mold and Ventilation Addendum”, for dealing with mold issues when you are leasing a unit. You can use it to address some of these issues when a new tenant takes occupancy.

You should always address tenant issues with your legal counsel to get their advice on matters pertaining to law.

Further Reading on SB 655:

*Photo Credit: Moldy Wall by Matti Mattila Used with Creative Commons License 2.0

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How Much Are California Investors Spending?

California Real Estate Investor Profile

Some interesting takeaways from the graphic above.

  • The final sales price grew by a whopping 17.2% from 2014 to 2015. “Good deals” are getting harder to find.
  • Costs are going up.

I think the costs of rehab are rising because contractors are busier. They are having to pay their employees more to retain them. Some contractors are experiencing a shortage of labor.

As equity in housing increases, expect to see more owners renovate their homes. This will keep upward pressure on construction costs.

If you have questions about investing in real estate, please feel free to reach out to me via phone or email.

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Using a 1031 Exchange to Upgrade Properties

Using a Section 1031 Exchange to trade from one property to another is a common event. Most of the time owners are seeking higher returns. In the case below, my clients were looking to go from a tired property to a much nicer property.

A Tired Duplex in Concord

Duplex in Concord

Rear Unit of a Duplex in Concord, CA

I was contacted to list a property in Concord for a client. The property was a 2 unit property with great access to Concord BART. The property was not in the best of shape. It had been a rental for 30+ years and some of the tenants had beaten the property up. While listing the property we learned that one of the tenants was going to be an issue and had to process an eviction in the midst of trying to sell the property.

To complicate the matter, the owners had performed a 1031 exchange in the 1980’s when they bought the property. I advised them to consult with their CPA regarding their potential tax liability if the property was sold and not exchanged. After forwarding the estimated sales price to their CPA, she determined that the owners would likely have to pay nearly 50% of the sales proceeds in taxes. It immediately became clear that we should perform a 1031 exchange to preserve that equity to pass on to their heirs.

When we listed the property we got a significant amount of interest. We parlayed that interest into multiple offers and almost $30,000 above asking price sale.

Since a 1031 exchange has strict timing guidelines, I recommended to my clients that we include a provision that extended the amount of time we had to close the “down-leg” of their transaction.

A Nicer Single-Family Home

Investment Property in Concord, CA

Rental House in Concord, CA

My clients determined that they wanted an easy-to-own rental property that was going to attract a high caliber of renters. Their plan was to pass this asset along to their heirs. Consequently, they don’t want something that is going to be high maintenance.

Thankfully, we negotiated for more time in the contract as the market was thin on investment properties. The first property we pursued was snapped up from under our noses.

Finally, after submitting offers on a couple of places my clients got into contract on a home in Concord. Using the 1031 Exchange funds and additional capital we were able to secure a purchase with an all cash 14-day closing. This appealed to the sellers as they were in contract on another home to buy. This property is a nice 3-bedroom 2-bath home with granite countertops and a killer kitchen. My clients were more than pleased with the purchase.

Transaction Recap

My clients were able to accomplish their goal of selling a property that was causing headaches and transferring the equity into another more attractive property. This transaction allowed them to accomplish their goal of deferring capital gains tax and to provide their heirs with a more attractive investment property.

It is important to have an agent that can help you navigate the 1031 Exchange Process. If you or someone you know is thinking of selling an investment property, have them give me a call for a no obligation consultation at 925.385.8798.

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Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets. Learn More about us.

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Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
Licensed Broker in the State of California, DRE#01871809
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