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Equity Office Daily Brief: May 10, 2018

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Daily Brief

May 10, 2018

  EquilityOffice

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Fox reports weak third-quarter results as Comcast bid looms

Los Angeles Times

 

21st Century Fox reported weak overall financial results for the fiscal third quarter that ended in March, with earnings falling short of analyst estimates due to sharp declines in the company's film and broadcast television units. The New York-based Fox is currently...

 


WeWork Donating Space to Clean Energy, Smart Manufacturing Group

Los Angeles Business Journal

 

WeWork Cos. Inc. is donating space at its 10250 Constellation Blvd location in Century City to house the headquarters of Clean Energy Smart Manufacturing Innovation Institute (CESMII), a $140 million partnership between UCLA, the City of Los Angeles, the U.S. Department...

 



BLOG & ONLINE NEWS

 

DTLA Office Leasing Rents Temper

Globe Street

 

Office leasing in Downtown Los Angeles is slowing down. The dearth of tech tenants or interest from tech tenants in the market has been a major reason for the anemic leasing activity, especially as traditional office users have rightsized their office...

 


Big Expansion Planned for Bike Share

LA Downtown News

 

DTLA - It’s been nearly two years since the Metropolitan Transportation Authority and the Los Angeles Department of Transportation kicked off a long-awaited bike-share program in Downtown Los Angeles. The $11 million initiative, with 65 kiosks and a total of 700...

 


CRE Crowdfunding Firms Continue to Scale Up Platforms

National Real Estate Investor

 

Five years after crowdfunding burst onto the commercial real estate financing scene, firms are still riding a rocket of double- and even triple-digit annual growth. Along with that growth comes continued evolution in the sector as companies reinvest in platforms and...

 


How Cloud-Based Software Is Transforming the Commercial Real Estate Industry

Business.com

 

According to the McKinsey Global Institute, the world creates roughly 2.2 exabytes — that’s 2.2 billion gigabytes — of data every day. While this proliferation of data is spread across millions if not billions of individual devices, simply storing this much...

 


California Super-Commuters Are Transforming Sleepy Suburbs Into Busy Metros

Bisnow

 

When Michele Nissen first moved from Los Angeles to Eastvale, a city in Riverside County that borders Orange and Los Angeles counties, she remembers her car running out of gas twice because there wasn’t a gas station in what was then...

 

FULL TEXT


Fox reports weak third-quarter results as Comcast bid looms

Los Angeles Times

 

21st Century Fox reported weak overall financial results for the fiscal third quarter that ended in March, with earnings falling short of analyst estimates due to sharp declines in the company's film and broadcast television units.

The New York-based Fox is currently in the midst of what is shaping up to be a tug of war as Comcast moves to make a rival bid that could spoil Walt Disney Co.'s $52- billion deal for most of Fox's assets.

Though the cable operator has yet to formally make the rival bid, the Philadelphia-based Comcast is expected to put forth an all-cash offer this summer that would exceed the Disney deal.

On Wednesday's call with analysts, Fox Chairman Lachlan Murdoch said: "We are committed to our agreement with Disney." But when asked about Fox's fiduciary responsibility to weigh the Comcast bid, Chief Executive James Murdoch said: "The directors are very aware of their responsibilities."

For the quarter, Fox posted adjusted earnings of 49 cents per share, below the estimate of 53 cents per share from analysts polled by Factset. Revenue was $7.42 billion for the period, which was slightly better than analysts' prediction of $7.40 billion.

The quarterly results represent declines from the year-ago quarter, which saw earnings per share of 54 cents on revenue of $7.56 billion.

The main culprit was Fox's television group, which saw a nearly 60% drop-off in operating income for the quarter. Fox noted in Wednesday's earnings announcement that the decline was attributable to Super Bowl advertising revenue, as well as lower NFL post-season ratings and three fewer NFL broadcasts versus the year-ago quarter.

Fox also said it took a $60-million charge during the period from higher compensation expenses due to equity awards related to the Disney-Fox acquisition.

20th Century Fox Film saw hits such as "The Greatest Showman," Oscar-winning "The Shape of Water" and "Maze Runner: The Death Cure." But it wasn't enough to lift the overall filmed entertainment business, which was weighed down by the television production business. The segment saw higher deficits related to more new drama series, resulting in a nearly 23% drop in operating income to $286 million in the quarter.

Fox's best performing segment for the quarter was its cable network business, which saw revenue rise nearly 10% year-over-year to $4.42 billion. The company attributed the growth to gains in domestic affiliate revenues.

On Wednesday, Fox also announced that it will acquire seven television stations from Sinclair Broadcasting Group for about $910 million. The deal would increase Fox Television Stations' national footprint to nearly half of all U.S. households, according to the company.

Shares of Rupert Murdoch's media conglomerate were unchanged in after-hours trading Wednesday.

Shares of Fox closed down slightly on Wednesday to $37.70.

-David Ng

WeWork Donating Space to Clean Energy, Smart Manufacturing Group

Los Angeles Business Journal

 

WeWork Cos. Inc. is donating space at its 10250 Constellation Blvd location in Century City to house the headquarters of Clean Energy Smart Manufacturing Innovation Institute (CESMII), a $140 million partnership between UCLA, the City of Los Angeles, the U.S. Department of Energy and the private sector.

The New York-based co-working space company is giving CESMII enough space to house 30 people, according to a WeWork representative.

CESMII will become a member of WeWork, which will lease out other parts of the Century City property to other tenants. The institute’s previous headquarters were at UCLA.

The institute’s stated goal is to improve U.S. competitiveness by enabling smart manufacturing technology to make the manufacturing process cleaner and more efficient.

WeWork’s partnership with CESMII was announced May 9 at an event with WeWork Chief Executive Officer Adam Neumann and Los Angeles Mayor Eric Garcetti.

-Ciaran McEvoy 

DTLA Office Leasing Rents Temper

Globe Street

 

Office leasing in Downtown Los Angeles is slowing down. The dearth of tech tenants or interest from tech tenants in the market has been a major reason for the anemic leasing activity, especially as traditional office users have rightsized their office square footage. The slowed leasing activity will almost certainly put downward pressure on rents, but for now, effective rents have continued to increase to $30 per square foot, according to research from Savills Studley. We sat down with Andy Lustgarten, senior managing director in Savills Studley Downtown Los Angeles office, and Jeff Cowan, senior managing director in Savills Studley’s West Los Angeles office, to talk about office leasing in Downtown Los Angeles and how it will impact rents.

GlobeSt.com: Why has DTLA leasing activity been impaired because the market is a hub for professional services firms?

Andy Lustgarten: Overall, professional services firms are taking a conservative approach to office occupancy. Firms are not expanding their square footage and are choosing to either renew and occupy the same amount of space or relocate to a more efficient footprint and take, on average, 10% less space. As professional services firms comprise approximately 80% of the DTLA office market, leasing activity remains flat.

GlobeSt.com: In today’s office market, is a presence from tech and creative firm’s essential to a market’s success?

Jeff Cowan: Tech and creative firms are dominant tenant sectors in specific submarkets such as Santa Monica, Playa Vista, Culver City and, to some degree, Hollywood. Although these areas are garnering significant leasing activity and some of the highest rents in the LA region, the submarkets existed prior to this sector’s explosive growth and will continue to do so if and when activity flattens. There is also a dichotomy within each submarket, with the open-plan, creative-type buildings attracting considerable interest, while traditional high-rise offices are not benefitting to nearly the same level. Finally, there are very successful submarkets that do not rely on tech or media tenants at all. Beverly Hills is one such example.

GlobeSt.com: Despite anemic leasing activity, effective rents continue to increase. While they are below West L.A rents, do increase rents paired with ample availability of space serve to harm leasing activity even more?

Lustgarten: I wouldn’t necessarily characterize DTLA’s leasing activity as anemic, but rather as maintaining its same, historically moderate pace. Additionally, over the last 10 years, the Tenant Effective Rent has increased by approximately 15% or 1.5% year-over-year, below the cost of inflation. Landlords may have upped asking rents, but the increase in concessions necessary to attract tenants has more than compensated for that.

GlobeSt.com: Where is rent growth heading in DTLA, and why?

Lustgarten: Incremental growth will continue, but there won’t be a spike anytime soon as the market is still significantly oversupplied. There are 125 full floors of space available for direct lease and nine for sublease across 28 institutional high-rise buildings. And, that does not include the smaller blocks of availability. This means there are a lot of choices for tenants. Until a significant transaction from outside the downtown market is signed in the downtown core, it is unlikely that there will be any meaningful increase in rents.

While more tech and media companies are considering DTLA than ever before, most of that activity is concentrated in the Arts District. If Spotify makes its deal to relocate to the Arts District and when Warner Music occupies the Ford Motor Factory project, that could bring 1,500-2,000 new employees to the Arts District and likely spur a cascading effect in terms of attracting ancillary businesses.

-Kelsi Maree Borland

Big Expansion Planned for Bike Share

LA Downtown News

 

DTLA - It’s been nearly two years since the Metropolitan Transportation Authority and the Los Angeles Department of Transportation kicked off a long-awaited bike-share program in Downtown Los Angeles. The $11 million initiative, with 65 kiosks and a total of 700 bicycles in the Central City, was intended to function as a pilot project for a regional system.

Metro has since spread bike share to other communities, launching in Venice, Pasadena and the Port of Los Angeles last year. Now another rollout is being readied, and with its proximity to Downtown, it could prove to be a significant step in the effort to have people leave their car in the garage and instead take a two-wheeler to work.

On April 24, the City Council’s Transportation Committee approved an LADOT recommendation to expand bike share into the neighborhoods of Silver Lake, Echo Park, Westlake, Koreatown and Pico-Union. A total of 700 bikes would arrive in an effort to boost connectivity between those neighborhoods and Downtown, according to LADOT Chief Sustainability Officer Marcel Porras.

There would also be a southern expansion, with 22 stations in the vicinity of the University of Southern California and the Expo Line. The section would have an additional 300 bikes.

The Downtown system has 65 kiosks and 700 bikes. An expansion to nearby communities such as Silver Lake and Koreatown could prompt people to leave their car at home and take bike share to their job.

“The contiguous expansion is important to increasing ridership,” Porras said. He also pointed to the system’s integration into concurrent street improvements, adding, “The expansion to USC is going to be further supported by the opening of the MyFigueroa project, which creates protected bike lines and other facilities.”

The system would also expand in Venice and Culver City.

The wider rollout comes as system operators have analyzed usage data, and tried several different programs to boost activity. Since launching in Downtown and Venice in July 2016, there have been 395,865 total bike rides, 12,962 passes sold and more than 1.1 million miles traveled, according to Metro. The agency also reports that 1,086,539 pounds of carbon dioxide emissions have been offset thanks to bike share riders.

In Downtown, each bike has been used .74 times per day, below the goal of one ride per day, according to Metro. In Venice the average is 1.2 rides per day. Metro attributes the higher rate in Venice to the community’s infrastructure and beachside location.

Metro and LADOT are working not only to expand the program, but to update the business model. A proposal to revise current fares will head to the Metro board this month, according to agency Transportation Planning Manager Jenny Cristales-Cevallos. The plan calls for lowering fares for some users.

The expansion, which requires the approval of the full City Council, will take place in the 2018-2019 fiscal year, which begins July 1. Overall, the operators classify bike share’s launch as a success, but with plenty of room to grow.

“As a region, it’s meeting the expectations we have placed, but we want to increase ridership,” Cristelas-Cevallos said.

Changing System

The proposed expansions are based in part on user feedback, Porras said. He added that a number of people have said they are looking for alternatives for commuting in and out of Downtown.

“We have one station in Echo Park right now that’s well utilized despite being an outlier,” Porras said.

Bike Share was launched not with the goal of letting people rent bikes for long, casual rides, but rather as part of the effort to solve the so-called “first mile, last mile” problem. It seeks to help mass transit users get from their final stop — say, Union Station or a subway stop — to their job or other destination. Putting bicycles in busy transit areas could prompt people to leave their car at home and combine a bus or train ride with a quick trip on a two-wheeler. They also envisioned Bike Share as an option for trips within neighborhoods such as Downtown. Users can check a bike out at one location and return it to any kiosk.

Angelenos are using the system for their commutes, but ridership in Downtown is not limited to weekday rush hours, according to Metro’s data. People are also on the bikes during the weekend, Cristales-Cevallos said.

Bike share has drawn some complaints for its pricing structure. A ride is $3.50 for 30 minutes or less, with another $3.50 tacked on for every additional half hour. Metro offers a $20 monthly pass where the first 30 minutes are free and each additional half hour is $1.75. A $40 annual flex pass has rides costing $1.75 per 30 minutes.

That could change for some users. Specific proposed rates have not been disclosed, but Metro is looking at discounted monthly fees for students, seniors and low-income individuals.

Metro has also experimented with new options and tweaks. In September, it launched an online deal for a $7 day pass.

Additionally, Metro is working to better integrate the bike share program with Metro’s TAP card system, said Cristales-Cevallos, so users can have a single account for both bikes and rail.

Another aim is to expand beyond individual use and work with businesses. Metro’s “Bike Share for Business” deal has three rate structures; in each case there’s a $12 cost per person (with a minimum of five employees), and the business either pays the entire price, 75% or 50%, with workers making up the rest. Memberships include unlimited 30-minute rides. After that period users pay $1.75 for each 30 minutes. 

Downtown businesses that have signed on include Anschutz Entertainment Group, McConnell’s Ice Cream and the Los Angeles Homeless Services Authority, according to Cristelas-Cevallos.

Bike share’s busiest areas in Downtown are the Financial District, Union Station and the Arts District. Cristales-Cevallos said in the latter case, the bikes have caught on in part because of the otherwise limited public transit options.

The busiest Downtown bike hub is at Seventh and Flower streets, according to Porras, with 15,000 total rides. That’s followed by Seventh Street and Grand Avenue, and Union Station, both of which have recorded 12,000 rides.

Of the nearly 400,000 system-wide rides so far, there have been only five accidents, with no serious injuries, said Porras. Still, Cristales-Cevallos noted that safety is a top concern in a car-chocked community, and there are calls for more bike lanes and better turn signals.

“One of the key challenges that we’re trying to work hard to address with our partner cities is to make sure they’re moving forward with plans to build bike infrastructure,” Cristales-Cevallos said.

Bike share accessibility is a major issue for the nonprofit advocacy group the Los Angeles County Bicycle Coalition. Organization Executive Director Erik Jansen welcomed the planned expansion, but said that bike share must remain equitable and costs should stay low. Community engagement and partnerships are particularly needed, Jansen said in a statement to Los Angeles Downtown News.

“In addition, the city and county need to robustly invest in the physical infrastructure to make streets safer for all road users, especially those walking and biking,” Jansen said. “This is particularly important as bike share expands into communities of color that have faced historic disinvestment in transportation infrastructure, particularly active transportation infrastructure.”

Metro and LADOT plan to try out new GPS technology with the bikes being purchased for the expansion. Currently the only data the organizations track is from the bike kiosks. Porras said the new bikes will provide LADOT with information on peak usage times, the busiest routes and other topics.

-Nicholas Slayton

CRE Crowdfunding Firms Continue to Scale Up Platforms

National Real Estate Investor

 

Five years after crowdfunding burst onto the commercial real estate financing scene, firms are still riding a rocket of double- and even triple-digit annual growth. Along with that growth comes continued evolution in the sector as companies reinvest in platforms and continue to hone business models.

“Early on, it was hard to differentiate who was doing what in our space, and it was hard to see which businesses were going to work and which weren’t,” says Brett Crosby, co-founder and COO at PeerStreet. The guys that really built and invested in a good tech platform and infrastructure are seeing the fruits of their labor pay off, adds Crosby. There is more separation between the strong and growing platforms and the smaller players. “I do think you are starting to see a separation in the pack, and it will be interesting to see how that continues over time,” he says.

Since it was founded in 2015, PeerStreet has funded more than $900 million in loans, mostly providing short-term bridge loans for one- to four-unit residential properties. Earlier this year, the company made a strategic move into the commercial mortgage business. Initially, PeerStreet will offer small-balance recourse loans valued at less than $5 million for multifamily properties and mixed-use properties with residential components. The company also announced in April that it had raised $29.5 million in a Series B funding that will help the company to expand.

“We have seen some fallout where people don’t have the technology or the funding to back up what they are doing,” agrees Amy Kirsch, vice president of investor services at RealtyShares. Since it was founded in 2013, RealtyShares has raised over $750 million on its platform across 1,100 different projects with investors in all 50 states.

However, RealtyShares is another firm tweaking its business model to focus on the commercial middle market space. Initially, the firm had done some residential debt and equity offerings, but has since cut that part of the business completely. “We really wanted to have laser focus on the commercial middle market space, which is our expertise,” says Kirsch. The firm provides both debt and equity for commercial property transactions with offerings that typically average about $2 million.

Growing the investor pool

Crowdfunding firms have put a lot of effort into educating accredited investors on real estate crowdfunding and real estate investing in general. Those efforts are starting to pay for firms such as CrowdStreet. The firm hit a major milestone in March with more than 99,000 registered investors on its platform. CrowdStreet also is generating a high volume of repeat investors that are using crowdfunding to create diversified real estate portfolios with different sponsors, property types, geographic markets and risk profiles, notes Tore Steen, CEO, CrowdStreet.

The average investor on CrowdStreet has five investments in their portfolio, and over 20 percent of investors on CrowdStreet have invested more than $1 million across 12 unique investments.

Some crowdfunding platforms, such as Fundrise, Realty Mogul and Rich Uncles, have introduced e-REITs as a way to reach non-accredited investors and expand their potential customer base. But for the most part, crowdfunding firms are firmly focused on raising capital from accredited investors. Marketing direct real estate debt and equity offerings to non-accredited investors is a lot more complicated and expensive—from a regulatory perspective.

Groundfloor is one of the few crowdfunding platforms that is providing direct investment opportunities to non-accredited investors. The company specializes in providing investment capital to “fix-and-flip” residential home investors, and is now working to expand its investment opportunities to include small multifamily and small commercial property loans. 

“Except for Groundfloor, it is still an early stage game for the non-accredited investor to participate directly in these real estate loans,” says Brian Dally, co-founder and CEO of Groundfloor. Last year, Groundfloor originated $30 million in loans last year and is on pace to grow between 50 and 200 percent this year. One of the factors that will determine that growth is its own crowdfunded equity offering to raise capital that will help the company put additional infrastructure and people in place to accelerate growth.

A NREI study of on high-net worth investors' (HNWIs) commercial real estate strategies found that 11.3 percent of respondents expected HNWI allocations to include crowdfunding.

Attracting institutional interest

Another sign of the evolution occurring within real estate crowdfunding is that firms are succeeding in raising larger chunks of capital. Last month, RealtyShares completed its highest equity raise to date at $5.5 million. “We’re definitely seeing an increase in the raise sizes since our inception,” says Kirsch.

CrowdStreet also recorded its highest capital raise earlier this year with an offering that raised $12 million. “That is a good example of someone who could have gone to the institutional capital market, but instead went to the retail investor,” says Steen. In addition to being able to compete at an institutional level in delivering bigger financing commitments, CrowdStreet also is attracting institutions as both sponsors and customers.

The company recently worked with KBS Realty to raise capital for its KBS Growth & Income Real Estate Investment, a non-traded REIT that has a $1 billion equity goal. In October, KBS introduced its own online portal, KBS Direct that uses CrowdStreet software. And in October, the firm also put an offering on the CrowdStreet Marketplace online platform to reach additional accredited investors. That is another signal that major players are buying into the omni-channel approach of going after both institutional and retail sources of capital, adds Steen.

-Beth Mattson-Teig

How Cloud-Based Software Is Transforming the Commercial Real Estate Industry

Business.com

 

According to the McKinsey Global Institute, the world creates roughly 2.2 exabytes — that’s 2.2 billion gigabytes — of data every day. While this proliferation of data is spread across millions if not billions of individual devices, simply storing this much information is becoming increasingly difficult, to say nothing of organizing it.

This challenge is particularly pronounced in industries like commercial real estate (CRE), where data is the driving force behind every transaction. As industry sage and blogger Duke Long points out, “It’s one thing to acquire terabytes of data, it’s quite another to cleanse and mobilize that data in service of real-time insights into the commercial real estate market.” 

What’s more, any potential solution to the CRE industry’s data conundrum must be flexible enough to accommodate brokers’ dynamic, always-on-the-go workflows. Locking market data away on an inaccessible server isn’t going to do anyone any good. Fortunately, the relatively rapid emergence of cloud computing over the past decade has provided CRE professionals with everything they need to move into a big data-driven future — both in and out of the office. 

Anytime, Anywhere Access 

Ask any person what the first rule of real estate is and you’re likely to hear, “Location, location, location.” And while location is certainly a critical consideration in any CRE valuation, it’s also the defining characteristic of every broker’s job. Whether they’re meeting clients, assessing a property, or networking with prospects, a broker is just as likely to be found out and about as in their office. 

That’s why the cloud’s flexibility and mobility is of massive value to CRE professionals. The data contained within traditional CRE tools (namely, spreadsheets) is only accessible via the devices to which it has been downloaded. This means a broker must be able to predict exactly which datasets they need before they leave the office for a series of meetings — if they forget to copy, transfer or upload the right data while they’re still at the office, they’ll be stranded without it in the field. Even if they do remember to upload various documents to, say, a Google Drive or Dropbox App, they’ll still be sifting through applications to open PDFs, spreadsheets and documents that may be incompatible with their devices to begin with. 

That’s where a new generation of cloud-based CRE technologies comes in: dedicated CRE data platforms accessible from any device and updated in real time. With constant access to centralized, up-to-date property information, brokers can not only reference data they’ve saved, but immediately uncover new data points as the need arises — on calls, during client meetings, or from the road. Brokers can identify comparables, pull up property details, and search nationally by property type, size, number of units, sale date, mortgage maturity date — all without returning to the office.

-Richard Sarkis

California Super-Commuters Are Transforming Sleepy Suburbs Into Busy Metros

Bisnow

 

When Michele Nissen first moved from Los Angeles to Eastvale, a city in Riverside County that borders Orange and Los Angeles counties, she remembers her car running out of gas twice because there wasn’t a gas station in what was then an unincorporated part of the county.

In the morning, she would wake up to the clanking of cows at the feed gate.

“There were cows everywhere,” said Nissen, who moved to the area from Palos Verdes in the early 2000s. “There were thousands of cows. They were on every lot. There was a lot of dirt and flies. It was a very rural community.”

She remembers her parents visiting.

“They asked me, ‘What have you done?’” she recalls, laughing.

But times have changed in this farm town that sits about an hour drive away from downtown Los Angeles.

Many dairy farmers sold their land to residential and commercial developers. People from nearby Los Angeles, Orange and other parts of Riverside County began to flock to Eastvale. Its population grew by 20% from 2011 to 2018.

Retail and restaurant businesses followed, opening around 2002 or 2003. First, a shopping center, then a Vons and a Home Depot.

“Affordability continues to be either the No. 1 or No. 2 driver of why people are coming here,” said Nissen, who is now Eastvale’s city manager. “We are very strategically located. There are a lot of transplants that are commuting — keeping their higher-paying jobs in Orange or Los Angeles County and coming home here.”

As more people move farther away from expensive California metros, suburban communities like Eastvale are evolving to accommodate the additional growth. But this growth comes with a price. Residents are commuting longer to their jobs and cities are struggling to keep up with housing demand and job growth. These outlying cities are starting to transform, offering an opportunity outside California’s expensive cities as places to live, shop and, to a growing extent, work. This shift is reshaping California’s suburbs.

More Affordability Draws Residents

Northern California is experiencing a similar migration. For people who try to remain in more-expensive Bay Area cities, multiple families are crowding into a single-family home and younger people are sharing two-bedroom units with four or five other people, Bay Area Council Senior Vice President of Government Relations Matt Regan said. 

San Francisco rents averaged $3,558 as of March. Although rents have declined about 12% since a peak of $4,040 in April 2016, rents are 45% higher than January 2011, according to data from Rent Jungle. San Francisco home prices continue to break records and reached $1.6M during the first quarter.

Many Bay Area residents are heading east into Sacramento, Stockton, Tracy and Lathrop, areas that have posted growth in housing and population in the last decade. In San Joaquin County, which includes Tracy, Stockton and Lathrop, the number of housing units increased 4% to 243,420 as of January compared to 233,755 in 2010, according to the State of California Department of Finance. During this time, the number of multifamily units in complexes with five or more units increased by about 3% in the county.Rents in Stockton, Tracy and Sacramento are half as much as San Francisco, averaging $1,209, $1,781 and $1,412, respectively. Average home prices are under $500K in these cities.In Eastvale, the average rent is $1,581, according to RentCafé. Meanwhile, Los Angeles' average rent is nearly $2,300. A median home price is $779K in LA. In Eastvale, homes are being listed for $569K. The number of housing units increased 15% in Eastvale from 2011 to 2018.

Sometimes it is the lure of homeownership that draws residents out of cities where they would never be able to afford to buy. In Ontario in San Bernardino County, millennials are bucking the perception that they wish to remain apartment renters to purchase homes in Brookfield Residential’s New Haven 1,000-home, mixed-use master-planned community, Brookfield’s Vice President of Southern California Housing John O’Brien said“We’ve found the under-40 demographic makes up more than 80% of our homebuyers,” O’Brien said, adding that the homes range in price from $300K to $600K. “We were initially surprised, but it just goes to show that if you offer people a home at an affordable price, they’ll buy.” Longer commutes are the price of homeownership in expensive Southern California, according to the Realtors Property Resource, a database from the National Association of Realtors.

“ the cost of affordable new housing comes at the expense of one of the longest commutes to work, over 30 minutes average, including a disproportionate number (34.5%) commuting across county lines,” according to the Realtors Property Resource recent Commercial Trade Area Report.

Rise of the Super-Commuters

With residents moving out of major cities but keeping their jobs in those cities, there has been a growth in the number of super-commuters in California. (Super-commuters are those who travel 90 minutes or more to get to work.) Nationwide, the number of super-commuters grew 30% to 4 million from 2005 to 2016.

The bulk of super-commuters into the Bay Area come from Stockton. As of 2016, about 10% of Stockton’s commuters were super-commuters, according to the East Bay Times. Over 28,000 people commute up to 80 miles or more from Stockton into the Bay Area. One Stockton woman wakes up at 2:15 a.m. to catch two trains that will get her to her job at the U.S. Department of Health and Human Services in San Francisco by 7 a.m. In Southern California, over 127,000 super-commuters drive from Riverside into Los Angeles for work and make up 7.3% of Riverside’s commuters.

Traffic into job centers has gotten worse. About 625,000 vehicles commute into the inner Bay Area every day, Regan said. Most of these vehicles enter from the Interstate 80 and 580 corridors from the North Central Valley and Sacramento areas. “People drive from all points east to get to jobs in San Francisco, Palo Alto and Cupertino, clogging up freeways and roads,” Regan said. 

As of June 2017, there has been one housing unit built for every 4.3 jobs in the Bay Area created since 2011, according to the Building Industry Association. Building homes near jobs would reduce traffic and take cars off the road, but many communities have opposed new developments, believing more housing would increase traffic in their neighborhoods, Regan said. 

The Urbanizing Suburbs

As more residents head to the suburbs, so have developers. In Concord, 854 housing units worth about $150M are in the works and a major retail project is nearing completion. The city is in the midst of planning a 25- to 30-year build-out of the 5,000-acre Concord Naval Weapons Station. The redevelopment, at an estimated total cost of $6B, would add 12,000 housing units, 6.5M SF of office and 28,000 jobs. 

City of Concord Business Development Manager Brian Nunnally said Concord’s urban core is appealing to young professionals and millennials because of its accessibility to BART, live music venue at the Concord Pavilion and various fitness and recreation opportunities. 

“There are the same opportunities out here without the hassle, without the parking problems and without the daily grind of larger cities,” Nunnally said. “There is no reason they have to go to Oakland and San Francisco.” 

Large employers have added or renewed long-term leases in Concord. Nunnally said one out of eight jobs in Contra Costa County is in Concord, and employees benefit from a reverse commute as well as mass-transit options. Wells Fargo opened an office in Downtown Concord in 2017. The 185K SF office accommodates 2,200 employees. Cerus, a blood transfusion safety company, and Homebridge Financial Services leased a total of 70K SF in March at 1200 Concord, owned by Sierra Pacific Properties. Cerus signed an 11-year lease for about 65K SF, while Homebridge signed a 3,600 SF lease. 

Concord benefits from access to all levels of housing. The city has some of the most affordable single-family homes in East Contra Costa County as well as access to luxury housing in Danville/Alamo and LaMorinda, said Newmark Knight Frank Executive Managing Director Breck Lutz, who along with Senior Managing Director Alex Grell represent the landlords at 1200 Concord. 

The entire East Bay has benefited from increased investor interest that has followed growth. Office investment volume for the East Bay was about $1.4B in 2017, according to data from Cushman & Wakefield. Volume peaked at $2.2B in 2016, but was about $1.4B in 2014 and 2015. Comparatively, sales volume was over $306M in 2011. Multifamily sales volume has fluctuated throughout the current cycle, but typically been above $1B for most of the cycle. In 2017, investors traded about $1B in multifamily assets compared to $1.3B in 2016. 

In Contra Costa County, recent notable transactions include Harbert Management Corp. buying Corporate Center at 1320 and 1390 Willow Pass Road in Concord for over $63M ($184/SF) from PGIM Real Estate. Rockwood Capital bought the 195K SF Growers Square in Walnut Creek for $98M ($501/SF) during the first quarter. DivcoWest has put its nearly 600K SF two-building complex at 2000 and 2001 Clayton Road in Concord on the market, according to Cushman & Wakefield. DivcoWest originally bought the property in 2012 for $94M. “The Concord office market really is a market that can satisfy all needs of every different type of tenant from every different type of industry,” Lutz said. 

Multifamily developers have been flocking to Concord’s downtown area, and vacant lots around the downtown Concord BART station are a hot commodity, Nunnally said. Many retailers are expanding into the Bay Area through Concord. The Bay Area’s first Whole Foods 365 opened in Concord in 2017 and the region’s first Dunkin’ concept store is headed to the city. Korean barbecue chain Mom’s Touch opened its first U.S. location in downtown Concord in January. 

In Alameda County, Livermore has several projects in the works, including a new 115K SF retail center. JEMCOR Development Partners broke ground in March on a 171-unit project with 35 permanently affordable units for low-income families earning up to 50% of the area median income. Demand for housing in Livermore has been strong and rents are nearly as much as nearby Pleasanton or Dublin, two areas also experiencing growth in housing. “People keep getting priced out of the main ... Bay Area locations and, as a result, are forced to move farther out,” JEMCOR President Jonathan Emami said. “The lack of new supply for all income levels is moving people where they can afford.” 

Even with opportunities in many outlying Bay Area cities, development is becoming more difficult due to rising construction costs and increased opposition to new development from existing communities. 

“There is a lot of red tape and hurdles that prevent more housing from being built or coming online faster to meet the demand,” Emami said. “The demand is so strong for housing that the new construction supply cannot keep up the pace.” He said one area not being served is workforce housing. Many of the projects getting built are luxury and affordable housing. The affordable housing targets extremely low income or specific populations in need of specialized services. “There is a lot more catching up to be done for low- and moderate income populations,” he said. 

'Cow Town' Transformation Continues

Known as an industrial hub, Riverside County has benefited not only from the surge of e-commerce but the influx of new residents. In the city of Riverside, developers have been filing more single-family and multifamily construction. In the first half of 2017, there were 383 new residential permits issued in the city of Riverside, of which 287 permits were for multifamily units and 96 permits were for single-family homes. By comparison, only 108 new permits were issued in the first half of 2016, all of which were for single-family homes,  according to the January 2018 Riverside Regional Intelligence Report by UC Riverside School of Business.

Office space is also in demand, where the average rent has increased by 0.5% to $23.19 per square foot. In the first three quarters of 2017, office building permit values reached over $7.1M, compared to just $20K in the first three quarters of 2016.

“The growth in office space has benefited the growing local professional employment base and provided a boost to local construction employment,” stated the report. Because of its proximity to Orange and Los Angeles counties, Eastvale in Riverside County has quickly blossomed.

For years, Nissen, Eastvale’s city manager, and other officials lobbied Costco to open in the city. But they were always rebuffed by company officials, she said. Now Costco, seeing the growth of Eastvale and other surrounding cities, is slated to open a 150K SF store in the city later this year. The Costco will anchor the $366M, 205-acre mixed-use Goodman Commerce Center that includes a hotel, a modern logistics space, restaurants and more commercial retail developments, Nissen said.

The sales from Costco are expected to generate $1M in sales tax that go straight to the city’s general fund. More commercial projects are lined up, including an In-N-Out, she said.

Leonard Mercado, 45, has lived in Eastvale for about seven years. A partner at real estate agency and mortgage firm McLeod & Associates, Mercado said he and his wife, Mia McLeod, 35, chose Eastvale because of the city’s growth potential.

“When we first moved here, our friends were asking us ‘why you are moving to a cow town?’” Mercado said. “But we started placing a lot of clients here because of its affordability and huge lot sizes and my wife and I just said, ‘Why not?’ It’s a great place to invest and live in. We truly love it here because of the small community feel. It's like everyone pretty much knows each other.”     

He, his wife and many of the families that he helped find homes in Eastvale are commuters. Many are driving two hours or more a day round trip for work, usually somewhere in Los Angeles or Orange counties, he said. Mercado and his wife drive about 35 minutes to Walnut, where McLeod & Associates is headquartered.

Despite the long drive, Mercado loves the community and with all of the new development coming in, is bullish on the area. Nissen said residents are aiming for one thing. “They want the American dream,” she said.

-Julie Littman

Daily Brief May 10, 2018 unsubscribe

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