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Regal Properties Closes $14,900,000 Retail Acquisition at 8.6% Cap

Regal Properties’ Senior VP, Maha Odeh, represented the buyer, Laguna Village Plaza LLC, in the $14,900,000 purchase of a 102,000+ retail shopping center at 5945 W. Ray Road in Chandler, Arizona, for an 8.6% cap rate, with a loan of $9,600,000.  The center is anchored by Walgreens, Natural Grocers, and CCV Church.  Escrow closed on on August 15, 2018.

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Unaffordability Means Fewer Homebuyers

Mortgage applications hit a near 4-year low in July, dropping for the third month in a row.  The causes include: (1) homes are overly expensive now due to tight inventory and rising interest rates, (2) wage growth has remained stagnant while the costs of living (including rent) have continued to climb, such that saving money to buy a home has become increasingly difficult.  Something has to give…

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Starbucks Feels the Heat of Competition

Amid slowing growth in an increasingly crowded market, Starbucks announced it will close 150 under-performing, company-operated U.S stores in 2019. Historically, the Seattle-based chain has closed about 50 stores per year. The upcoming store closings will occur primarily in urban markets saturated with Starbucks locations. However, Starbucks’ sales are also slowing, as the company expects just 1% growth in same-store sales for the third quarter of 2018—the worst performance in about nine years.  One reason is increasing competition from trendy, independent neighborhood coffee shops and artisan roast cafes that offer customers an experience.  In addition to the more upscale, independent coffee shops, competition is heating up from lower-priced fast-food chains, including Dunkin’ Donuts and McDonald’s.

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Expect Chinese Investor Sell-Off to Impact CRE Values

Chinese investors are dumping their commercial real estate investments, under pressure from the Chinese government as a result of the escalating trade war between the U.S. and China.  According to an article in the Wall Street Journal, Chinese investors sold $1.29 billion of U.S. CRE in the second quarter of 2018, while purchasing less than 1/10th of that amount. This is the first time the Chinese have been net sellers in 10 years.  Just as heavy Chinese investment activity previously boosted prices for U.S. commercial properties, a massive sell-off will likely put downward pressure on them.

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San Diego Economy Shows Signs of Slowing

The University of San Diego‘s latest economic forecast showed the second monthly decline in a row, raising concerns about a slowdown in the local economy.  The Burnham-Moores Center for Real Estate’s Index of Leading Economic Indicators for San Diego County, released last week, fell 0.2 percent in May following a decline of equal magnitude in April.  A decrease in help-wanted advertising, higher initial claims for unemployment insurance and a decline in residential building permits pushed the index down.  “Economists usually look for three moves in the same direction for a leading index to indicate a turning point in the economy,” wrote Professor Alan Gin in his report Thursday. “This hasn’t happened yet, so the outlook for the local economy remains positive for now,” he noted. However, he added, any number of things could adversely affect San Diego’s economy, “including rising gas prices, rising interest rates, high housing prices making it difficult for companies to attract and retain workers, a trade war leading to barriers against San Diego companies, local government budget problems, increased taxes on some San Diegans due to the 2017 tax reforms, and turmoil in the health care markets as elements of the Affordable Care Act are eliminated.”  The San Diego Regional Chamber of Commerce earlier reported that business optimism in the region had declined to a five-month low.

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Tax Free Real Estate Investments in Opportunity Zones

Under new tax laws, investors can defer tax on any prior real estate gains until December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones.  In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for a step up in basis equal to the fair market value of the investment on the date it is sold.

The Opportunity Zones program offers three tax benefits for investing in low-income communities:

  1. A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund, until the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
  2. A step up in basis for capital gains reinvested in an Opportunity Fund, in the amount of 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years — thereby excluding up to 15% of the original gain from taxation.
  3. A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. (This exclusion applies to gains accrued after an investment in an Opportunity Fund.)

Treasury and the IRS still plan to address the certification of Opportunity Funds, which are required to have at least 90 percent of fund assets invested in Opportunity Zones.  For more information or a map of Qualified Opportunity Zones, contact Regal Properties and consult your tax adviser.

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Marijuana Law Update

Of the 29 states having approved medical marijuana sales, only 3 have approved sales for recreational use.  State and federal laws still clash, because all marijuana sales are still illegal under federal law.  Hence, marijuana is still an all-cash business because credit cards and bank accounts are federally controlled.  Given cash caps on real estate transactions, commercial property owners and managers risk running afoul of federal money-laundering laws by accepting cash rents. Although Trump and Congress have shown support for relaxation of laws, and federal legalization seems inevitable, Attorney General Jeff Sessions remains vehemently opposed to legalization; so property owners and managers should understand the risks involved in the interim.

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Green Street Researchers Warn of Declining CRE Values

Commercial real estate investors can expect property prices to trend downward soon, according to Green Street Advisors, a real estate research firm headquartered in Newport Beach, California. “Value appreciation has practically stopped in aggregate,” said Joi Mar, senior analyst at Green Street.   However, sectors vary. Industrial—especially last-mile industrial—has seen rising values, and malls have seen big losses, she noted. Prices on industrial assets recorded an 11% gain year-over-year, while mall valuations have dropped by 15%, resulting in a 25% spread between them over the past 12 months. “That’s pretty unprecedented,” Mar said.

Cap rates have been inching up over the past year for all sectors except industrial, according to Mar. The bid-ask spread has widened, investors in general have been more cautious and hesitant, operating fundamentals have softened a bit, and there is a fear of rising interest rates. Transaction volume is also down, but would be even lower if debt capital was not so widely available.

Today, investors can expect returns of around 6%, on average, for assets in most core sectors, and a little bit higher returns for niche sectors, said Andy McCulloch, managing director at Green Street, noting that the firm’s return forecasts focus on un-levered returns for long-term holds.

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3-D Printed Sustainable Homes for $4,000

An Austin-based company plans to change the home buying market by making houses more universally accessible and sustainable. According to its website, ICON debuted the first permitted 3-D printed home in Austin on March 12, 2018, built using a prototype of a mobile printer that will have the ability to produce “a single-story, 600 to 800 square foot home in under 24 hours for less than $4,000.” The founders of the company partnered with New Story, a non-profit charity that works to transform slums into functional, sustainable communities, to address housing shortages around the world. The prototype model has a living room, bedroom, bathroom and a porch. The company’s plan is to finish tweaking and testing the design to get a community of up to 100 homes built in El Salvador in 2019.

 

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Driverless Cars Just Around the Corner

Driverless cars will be testing on California streets next month. Companies working on driverless vehicles include Google, Apple and Uber, as well as traditional automakers like Audi, BMW, Ford, GM, Volkswagen and Volvo. How will these cars affect real estate? Public transportation, and the value of real estate built around transit hubs, could be diminished. Additionally, the need for parking lots will decrease, thereby creating new development opportunities for property currently used for parking. No doubt there will be other consequences and opportunities as well.
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Trump Tariffs Hurt Real Estate and Cost 146,000 Jobs

Trump’s imposition of steep tariffs on steel and aluminum imports has sparked dire warnings from architects, contractors, REITs and real estate associations, who say the tariffs will put more pressure on already rising building costs — causing developers and investors to postpone or cancel new developments.  Despite a carve-out for North American trading partners Canada and Mexico, Trump’s signed proclamations formalize 25% and 10% tariffs on imported steel and aluminum that will take effect in 15 days.  “The bottom line is that any short-term gains for the domestic steel and aluminum industries will likely be offset by the lower demand that will come for their products as our economy suffers the impacts of these new tariffs and the trade war they encourage,” AGC chief executive Stephen Sandherr said.

U.S. Chamber President and CEO Thomas J. Donohue also issued a statement Wednesday saying “We urge the administration to take this risk seriously and specifically to refrain from imposing new worldwide tariffs, which would harm American manufacturers, provoke widespread retaliation from U.S. trading partners, and leave the true problem of Chinese steel and aluminum overcapacity virtually untouched.”

According to an estimate this week by Trade Partnership Worldwide, an international trade and economic consulting firm, while the plan will increase U.S. iron and steel, aluminum and other non-ferrous metals employment by about 33,450 jobs, the tariffs will eliminate 179,334 jobs throughout the rest of the economy for a net loss of nearly 146,000 jobs, including more than 28,000 construction positions.

White House Chief Economic Adviser, Gary Cohn, who opposed the tariffs, resigned this week.

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Feds See Warning Signs of Correction Reminiscent of 2007

New data and commentary from federal financial regulators are pointing to signs of increased risks in CRE lending. Notably, the amount of delinquent multifamily and owner-occupied property loans on the books of U.S. banks increased in the 4th quarter of 2017, according to statistics released this week by the Federal Deposit Insurance Corp. The FDIC data follows the Federal Reserve’s latest Monetary Policy Report that noted growing vulnerability in the commercial real estate sector. “By many measures, stocks, bonds, and real estate are richly priced. Stock price-to-earnings ratios are at high levels, traditionally a cautionary sign to investors of a potential market correction,” Gruenberg noted in the FDIC’s recent 2017 annual report. “Bond maturities have lengthened, making their values more sensitive to a change in interest rates. As measured by capitalization rates, prices for commercial real estate are at high levels relative to the revenues the properties generate, again suggesting greater vulnerability to a correction.”

Meanwhile, the total amount of commercial real estate loans held by U.S. banks and savings and loans has continued to swell. The $2.13 trillion year-end 2017 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.

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Cap Rate Survey for 2nd Half of 2017

In CBRE’s Second Half 2017 Cap Rate Survey, key U.S. takeaways include:

  • Commercial real estate pricing was broadly unchanged, with the exception of some retail segments.
  • Industrial cap rates fell by 13 basis points to 6.52%.
  • Multifamily infill cap rates fell to 5.23% on average from 5.27%. Stabilized suburban assets also declined to 5.59% from 5.66%.
  • Office and hotel sector cap rates were generally stable.
  • Retail cap rates increased, with power centers moving to 7.98% from 7.54%. Neighborhood and high-street retail cap rates increased slightly by 7 and 9 bps, respectively.

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Bitcoin Payments For Real Estate

Bitcoin payments for real estate have become increasingly accepted in cities across the US, as well as in the United Arab Emirates, Indonesia, Ireland, and other parts of the world.  Acceptance of this new channel reflects a willingness by many real estate owners and developers to respond to the market.  Of course, Bitcoin payment has its challenges due to the current volatility in the crypto markets (with Bitcoin’s price going from $20,000 to $7,000 in the span of just a few months), but buyers and sellers are finding creative ways to deal with these challenges.  Blockchain technologies have also seen a rising use in real estate, with the City of South Burlington, Vermont implementing a new pilot Blockchain program to record real estate transactions.

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New Tax Law Impacts on Real Estate Owners & Investors

  • 1031 Exchanges for real estate remain the same.
  • Capital Gains Rates remain the same (ordinary income rates changed).
  • Mortgage Interest Deduction for a primary residence or a second home is now limited to interest on debt of up to $750,000 (rather than $1 million). Interest on home equity loans will not be deductible unless the proceeds are used to substantially improve the residence.
  • Exclusion of $250,000 Gain ($500,000 for married couple) Upon Sale of Primary Residence remains the same.
  • State and Local Property Tax Deduction is now limited to $10,000.
  • Estate Taxes will apply to transferred property over $11.2 million per person (increased from $5.6 million), with no changes to the step up in basis which gives an heir a basis in inherited property equal to its fair market value at the time of the decedent’s death.
  • Carried Interest, starting next year, to get capital gains treatment, will require a 3-year holding period.
  • Pass-Through Entity Income has a basic deduction of 20% of qualifying income, with limits on the deduction depending on factors such as income thresholds, wages and the capital of the business.

Consult your tax adviser for the details.

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GOP Tax Plan Favors Rental Housing

The increased standard deduction, $10,000 cap on the property tax deduction, and change in the mortgage interest deduction included the GOP tax plans for 2018 will minimize tax incentives of home ownership and increase the demand for apartments, particularly in states with high home prices and tax rates, like California.

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Reverse and Construction Exchanges

Most exchanges are conducted as “deferred exchanges,” where the relinquished property is sold to one party and the replacement property is subsequently purchased from another party.  However, in a reverse exchange, the taxpayer, through an intermediary and an Exchange Accommodation Titleholder (“EAT”), acquires the replacement property BEFORE selling the relinquished property.  Therefore, the taxpayer must have the financial resources available to fund the purchase of the replacement property prior to the sale of the relinquished property.  In a “build to suit” or “construction” exchange, the taxpayer sells property and, again using an EAT, acquires replacement property on which he will construct improvements.  This type of exchange allows the taxpayer to use the exchange funds to not only buy the property but also to construct improvements.  The exchange still must be completed with a 180-day period.  In both reverse exchanges and construction exchanges, the intermediary, using an EAT, takes title to the replacement property and eventually conveys it to the taxpayer (as opposed to a deferred exchange, where the intermediary does not need to take title to either the relinquished or replacement property).

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Regal Properties Closes $14,900,000 Retail Acquisition

Regal Properties’ Senior Vice President, Maha Odeh,  represented the buyers in the purchase of the 138,639 square foot Sahuarita Plaza shopping center in Sahuarita, Arizona for $14,900,000.  Escrow closed on October 31, 2017. National creditworthy tenants in the center include Jo-Ann Fabrics, Ross, Big Lots, Petco, Ace Hardware, and Dollar Tree.

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4 Impacts of Autonomous Vehicles on Real Estate

Four impacts on real estate we can expect with the arrival of autonomous vehicles (“AV”):

  1. The cost of construction will be substantially reduced (20%-25% by some estimates) if structural parking is eliminated — greatly improving feasibility.
  1. Because AV can travel faster and closer together, and substantially reduce the need for street parking, the vehicle, bicycle and pedestrian carrying capacity of existing streets will increase.
  1. AV will change public transportation, causing rendering light rail systems less useful as buses become more efficient and popular, especially during peak demands.
  1. Longer commute times will be acceptable because AV riders can work, compute, talk on the phone, text and nap — allowing households to access less expensive housing in the outer reaches of metropolitan areas.

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Regal Properties Voted “San Diego’s Best” Real Estate Company

In the 2017 “San Diego’s Best” Union Tribune Readers Poll, readers nominated and voted for their favorites in various business categories, selecting Regal Properties as the Best in the Commercial Real Estate Section. We are honored and appreciative to receive this recognition — this time by our clients — as a leader in the real estate industry. Regal Properties proudly “Invests in People and Property” by donating 10% of all fees and commissions to charitable causes, allowing the client to choose a charity to receive half of that amount.

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