Why Chinese Investment Is Driving The Bay Area Residential And Commercial RE Markets

Our friend, Corey Weinberg, writes in this San Francisco Business Times article what we have been seeing over the past several years.  Specifically, Chinese investment has been driving the Bay Area real estate markets, and this is expected to be even more pronounced in 2015.

commercial“The $296 million sale of the First and Mission Streets mega-development to Beijing-based Oceanwide Holdings, which I reported Wednesday, is one of the boldest moves by a Chinese developer in the Bay Area. The region has also seen notable Chinese investment in luxurious San Francisco condos, massive Oakland mixed-use plots and San Jose office towers in the last couple years.

Chinese investors aren’t just interested in the region or the country because of our hot real estate market. They have spent more than $600 million on Bay Area real estate during the last two years, according to Real Capital Analytics, for reasons that are more complicated.

Here are six reasons why Chinese real estate companies want a piece of the action:

1) The Chinese real estate market is overheated

A report by Knight Frank says that Chinese investors have set their sights toward the western world mostly because their own residential market has cooled significantly. As a result, the value of Chinese investments in U.S. real estate grew from $600 million in 2009 to $12 billion in 2013.

That’s in part because the Chinese government has put cooling measures in place to weaken demand, while the amount of residential space that sits vacant has shot up 80 percent since 2010. Developers are now in “cutthroat competition” in China, forcing them to get creative for where they park their capital.

2) Chinese companies have more freedom lately

Chinese companies looking to invest in overseas real estate were handcuffed until recently. But starting in 2013, Chinese companies could invest $1 billion abroad instead of just $100 million. Insurance companies could double the amount of their assets they put in real estate, according to Knight Frank.

“Prior to 2011 there was virtually no outbound direct investment from China into commercial real estate. A few years ago the Chinese government started to relax numerous restrictions and actively encourage outbound investment via its ‘go out’ policy, so it really was a sea change,” said Robert Hielscher, managing director of JLL’s capital markets group.

3) U.S. and China got friendly and expanded visa limits last year

Don’t forget about President Barack Obama’s announcement last fall to extend visas for Chinese business people, students and tourists in order to spark investment. That’s helped open more doors for Chinese companies to open offices and for Chinese nationals to buy their own homes here.

“It’s made a tremendous difference in the flow of people being able to get in and out of the country,” said Skip Whitney, executive vice president at Kidder Mathews, who advises investors in China, Hong Kong and Southeast Asia on West Coast properties.

4) There’s been more matchmaking

Bay Area real estate developers have also received more help from city officials with finding Chinese capital partners. Former Oakland Mayor Jean Quan helped link East Bay-based Signature Development Group with Zarsion Holdings in 2013 to help pay for the massive Brooklyn Basin development.

China SF, a nonprofit that works with San Francisco’s Office of Economic and Workforce Development, also helped bring together the off-market sale of First and Mission to Oceanwide.

“We’ve been looking at real estate for last year and a half,” said Darlene Chiu Bryant, executive director of China SF. “We created a book of properties interested in inbound investment” to show Chinese companies.

5) Buying big U.S. commercial property makes headlines

There’s no better way for a Chinese company to get name recognition overseas than investing in a trophy property. That’s why more Bay Area business and political leaders know Vanke – not because of its $81.3 billion in total assets, but because it became the joint venture partner for Lumina. Even though Oceanwide has more than $5 billion in revenue, not many in the United States had heard of the developer until they paid $200 million for a downtown Los Angeles property in 2013.

“It’s also a way for these Chinese companies to become more visible international. If you’re the first (company) to buy a building in New York or London or San Francisco, that’s unbelievable PR in addition to the value of the specific deal,” Hielscher said.

6) San Francisco has started to look more like Shanghai, kind of

China has more than 70 towers taller than San Francisco’s tallest building, the Transamerica Tower. Yes, San Francisco hasn’t cared for height very much, but that’s starting to change as the Transbay district pops up. One of the buildings Oceanwide will build will be the second-tallest in the city at 910 feet.

“It’s fortuitous and not totally coincidental that this type of interest is coming as San Francisco seems finally to have understood that verticality makes for a better city and it’s finally setting itself up to be a denser city with a 24-hour lifestyle,” said Greg Flynn, CEO of Flynn Properties, which has retained a minority stake in 225 Bush St. after selling it to Chinese developer Kylli Inc. last year.”

The flip side??  If the Chinese government does anything to tighten the flow of money out of China, we’re going to see a transitional period as the markets shift back to a more traditional model.  No doubt that will cause some angst in the markets, and we’re likely to see some significant turmoil when that happens.

Realtors® Report Positive Outlook in Commercial Market with Increases in Sales Volume, Income

Realtors® who practice commercial real estate reported an increase in sales transaction volume and medium gross annual income last year, according to the 2014 National Association of Realtors® Commercial Member Profile.

NAR commercial members who were surveyed conduct all or part of their activity in commercial sales, leasing, brokerage and development for land, office and industrial space, multifamily, and retail buildings, as well as property management. The survey shows that even with challenges in the market, commercial members saw a rise in median sales transaction volume to $2,554,700, up nearly $50,000 from 2012.

“Despite a government shutdown, regulatory changes and a budget sequestration, ongoing job creation has helped the commercial market make continued progress,” said NAR President Steve Brown, co-owner of Irongate Inc. Realtors® in Dayton, Ohio. “Realtors® who practice commercial real estate help build our nation’s communities by helping their clients make informed business decisions and reliable commercial investments that support economic growth. A stronger commercial market is a good indicator of a recovering and growing economy.”

For more information visit www.realtor.org.

Commercial members completed a median of eight transactions in 2013, equal to the previous year. Nine percent of commercial members reported not having a transaction in 2013, also the same as 2012. Brokers typically had a greater sales transaction volume than sales agents.

Seventy-six percent of commercial members reported having a leasing transaction; their median transaction leasing volume in 2013 was $431,600. Twenty-nine percent of members cited investment sales as their primary business specialty, making it the most popular area of concentration. Land sales and office leasing were reported as the second and third most popular primary commercial specialties.

Realtors® reported an increase in annual gross income for the fourth year in a row. The study found median annual gross income for 2013 was $96,200, an increase from $90,200 in 2012; that is the highest reported level since 2008.

Commercial members who manage properties typically managed 60,000 total square feet, representing twenty total spaces. Those who manage offices typically managed 25,000 total office square feet, representing eight total offices.

Twenty-eight percent of commercial members were involved in international transactions in 2013. Sixteen percent of commercial members reported an increase in international transactions, while only 1 percent had a decrease. Nearly one-fourth of commercial members reported international business is important to their company.

The typical commercial NAR member has been in real estate for 25 years, in commercial real estate for 15 years and a member of NAR for 18 years. Eighty percent of members reported working at least 40 hours a week, with about half stating that they spend 75 to 100 percent of their time on commercial real estate activity.

Commercial members are predominately male with a median age of 59. However, women are slowly becoming a stronger presence in the industry; 35 percent of those with two or fewer years’ experience are female, up from 33 percent last year, and sales agents have the largest representation of female practitioners with 29 percent.

The 2014 NAR Commercial Member Profile was based on a survey of 2,213 members. Income and transaction data are for 2013, while other data represent member characteristics in 2014. Approximately 70,000 commercial real estate professionals are members of NAR, making it the largest commercial organization in the industry.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

New CRE Loans Hitting All Time Highs

The U.S. commercial real estate market continued to recover steadily in the 1st Quarter, according to most analysts. Both the office and retail vacancies declined by about 10 basis points, but what we wanted to report on here is increase in commercial and multifamily mortgage originations as reported by Mark Heschmeyer on costar.com.

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Loan Performance Improving, but Loan Maturities Coming Down the Pike

During the fourth quarter of 2013, commercial and multifamily mortgage originations were strong, boosting mortgage debt outstanding to a new all-time high.

In fact, the fourth quarter marked the highest volume of commercial and multifamily mortgage originations since 2007, with all investor groups increasing their activity, according to the Mortgage Bankers Association’s just-released 2013 Data Book.

The level of commercial/multifamily mortgage debt outstanding reached $41.2 billion, or 1.7%, over the previous quarter.

Originations for commercial bank portfolios increased by 54% from last year’s fourth quarter. There was a 40% increase for life insurance companies, a 15% increase for CMBS and a 43% decrease in dollar volume of loans originated for the two big Government Sponsored Enterprises (Fannie Mae and Freddie Mac) loans.

Multifamily mortgage debt outstanding separate from CRE lending also rose to $895 billion, an increase of $11.5 billion, or 1.3%, from the third quarter and $36.6 billion, or 4.3%, from the fourth quarter of 2012. Rising property incomes and values continue to boost the performance of commercial and multifamily mortgage loans, the MBA noted.

Commercial and multifamily mortgages performed relatively well during the downturn, and for most investor groups, delinquency rates are now back in the lower end of their historical range.

Loan Maturities Hit Nadir, but Expected to Increase Dramatically

Although 2014 will mark the fourth straight year of declining commercial/multifamily mortgage maturities, volumes are expected to spike – by 72% in 2015 and an additional 34% in 2016, as 10-year loans made in 2005, 2006 and 2007 begin to come due.

The loan maturities vary significantly by investor group. Just 3% ($12.7 billion) of the outstanding balance of multifamily and health care mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA and Ginnie Mae will mature in 2014.

Life insurance companies will see 5% ($18 billion) of their outstanding mortgage balances mature in 2014. Among loans held in CMBS, 7% ($41.8 billion) will come due in 2014. About 15% ($19.2 billion) of commercial mortgages held by credit companies and other investors will mature in 2014.

Top Lenders

Wells Fargo was the top commercial/multifamily mortgage originator in 2013, according to MBA. Other top originators include J.P. Morgan Chase, Bank of America Merrill Lynch, Eastdil Secured, KeyBank, PNC Real Estate, HFF LP, Meridian Capital Group, CBRE Capital Markets and Prudential Mortgage Capital Co.

Investing In Commercial Real Estate

Industrial and commercial properties constantly come to market, but don’t get the highlighted attention or preferential treatment that residential homes do. You have to successfully find them by hunting, and working with JMA Commercial Services can assist you in doing so.

buildingLocation is the most important factor in choosing a commercial property to buy. Pay attention to the property’s surrounding area. The neighborhood’s demographics, including socioeconomic status and age of residents, influence the success of your investment. Look at the growth in similar areas. This research will help you figure out how the neighborhood you’re considering buying commercial property in is likely to grow and change over the next several years. If you aren’t comfortable with the potential growth rate or the atmosphere of the neighborhood, purchase property elsewhere.

Buying commercial property takes more time, and the process is far more labyrinthine, than buying a house. The added time and effort are crucial, however, to getting the return that you want on your investment.

You may find that you spend a large amount of time at first on your investment. It will take time to find an opportunity that is profitable, and afterwards, you may have to wait for repairs and remodeling before you can start monetizing your investment. Don’t abandon your investments because they are eating into your personal time. It will pay off in the long run.

Strive to keep your commercial properties occupied at all times if you choose to rent them to tenants. If no one is paying you rent, you’ll be the one footing the bills. If several of your properties are vacant, reexamine your management style and look for ways to fix issues that are keeping tenants away.

If you are negotiating a commercial lease, make sure nothing can be considered as events of default. Your tenant will be less likely to default on the lease if you do this. This is something that you don’t want to happen under any circumstance.

Take tours of any properties that you’re considering. As you tour each property, you should bring along an experienced contractor who can offer helpful input. Begin negotiating and the process of offers and counter offers. Before you choose, make sure you look over your offers a few times.

Before making a real estate purchase, sit down and talk with your tax adviser. A tax adviser can let you know how much money the buildings will cost you, and the amount of your income that will be taxable. Consult your adviser for areas where taxes are lower.

Properties, like people, have finite life spans. It’s important to be aware of this. Don’t make the mistake of overlooking the fact that you will need to put a substantial amount of money into the property to keep it well-maintained. It may need a more updated electrical system, or a new roof. Every piece of commercial property needs maintenance sometimes; however, some buildings require more extensive or frequent repairs than others. Be prepared for when these necessities come up.

Finding the appropriate commercial real estate property for your needs is one half of the battle. The other is actually obtaining it. Just a little information can go a long way.  Trust in the professionals at JMA Commercial Services to guide you through the entire process – Our Clients always come first!