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10/23/15
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By Steve Bloom
RENTV was up in Oakland on September 25th for our State of the Market Conference and we experienced first hand the vibrancy, optimism and general buzz that has so many industry people excited about this East Bay city. Oakland is currently undergoing a renaissance, with the $123 mil Uber HQ purchase of the 380k sf Uptown Station building (below in this article) the most recent and most dramatic example of the high level of activity here.
With all of the positive vibes in the city, it’s no surprise that our first of many planned events in the Bay Area was a success, with an incredible mix of speakers presenting to a full room at the top of the Marriot City Center on Broadway.
Leading off the festivities was a surprise appearance by Councilmember Noel Gallo from District 5. He gave a wonderful, enthusiastic description of how the neighborhoods are changing for the better and how the city is trying to embrace business while walking that tightrope of keeping long-time residents and employees from being priced out. As a resident of Oakland with kids that attend the nearby academic icons of Berkeley and Stanford, Gallo was able to describe the challenges of the past and the prospects for the future, and promised that Oakland will be a very different city in five years.
Next up at the conference was an informative, insightful and impassioned presentation by James Kilpatrick. Called “The good, the bad and the ugly,” Kilpatrick’s presentation included metaphors for the market highlighted by embedded video excerpts from the classic Clint Eastwood flick of the same name.
Highlights of Kilpatrick’s speech included the good, which he described as the regional economy and its positive effect on Oakland real estate. Not surprisingly, he said the question he gets asked most these days is "how long until the next downturn?" And, while he said he didn't think that is such an important question, he did agree we were probably in the 7th inning, to pull out that overused metaphor.
While there are signs of a slowing economy, expecially with China, he thought the probability of a real estate slide soon are low. He said a metric he likes to look at is the risk premium he sees when he compares cap rates of C properties to those of A properties, and he believes those figures still have room to grow.
The bad, Kilpatrick said, is the lack of housing affordability, especially in the Bay Area, and how that is raising displacement issues.
And then the ugly is the national debt, which is over $18 tril. The cost of servicing our debt is enormous, even with interest rates so low. And with the debt now at almost 100% of GDP, it is a huge strain on growth with potentially very harmful consequences.
But then Kilpatrick shifted back to some more good, namely interest rates, which have been held down by that huge debt. As to where interest rates are going, he does not see rates going up so soon, also good. While lending LTVs are creeping up and underwriting is getting looser and looser, Kilpatrick does not think we are seeing the scary type of risky deals that we did last crash.
However, back to the bad side, the loan volume is reaching scary heights again and there is a huge amount of CMBS debt coming due in the next year. In addition, the increased competition is leading to aggressive underwriting where he sees some of the same tactics and lack of transparency we saw before the last crash.
Kilpatrick then touched on the subject of planning for new developments, stressing how important it is to plan better for the inevitable real estate cycles. This led into comments about which office project will be next out of the ground and when that will occur, now that rents are rising and vacancy for prime space is in the 5-6% range. Interestingly, only a few days later the correct answer was revealed when Shorenstein announced it is moving forward with its long dormant tower plans at 601 City Center.
"Oakland has a good shot of not screwing it up this time" Kilpatrick stated, “which would be different then in the last tech boom and crash. The city is more business friendly and there is more depth to the demand than just Pandora.”
However, what does have Kilpatrick concerned is the impulse to pass more rent control, more regulations, or housing moratoriums, as -- in his opinion -- history has shown these things do not raise the quality of life for anyone. The key is to not only try and build enough units, but to also build enough units that are affordable.
And since we were in the tech industry region of the world, Kilpatrick threw out some references to high-tech companies like Factum and Bitcoin, and also included a mention about Blockchain’s real estate transaction tool. He wrapped up by commenting on how driverless cars and Uber could impact real estate thinking and future transit-oriented developments.
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