Expect housing in 2019 to be
flat. The recent decline in mortgage rates from 5% to 4% for the 30-year-fixed
provides some support for housing.
However, the tax-law change, which took away many of the tax benefits of
homeownership, weighs on demand. The impact of the new tax law is still
filtering through the housing market, particularly in more expensive markets
like California, and Florida, where those tax benefits are more important.
Affordability remains an issue. The
runup in house prices over the last six years makes housing less affordable for
many entry-level buyers, even with the lower mortgage rates.
A slight increase in new home
construction this year, particularly at lower price points, seems likely. In
terms of price growth for houses, 2019 will likely be weaker than recent years,
probably in the 3% range due to affordability issues and the tax-law change. Government dysfunction, geo-political risks,
possibilities of more government shutdowns relating to immigration and the debt
ceiling, trade wars and resulting stock market declines, further add to the
uncertainty and decreased demand of potential home buyers.
Again, in the 2018 “San Diego’s Best” Union Tribune Readers Poll, readers nominated and voted for their favorites in various business categories, selecting Regal Properties as their Favorite in 2 categories this time – Real Estate Brokerage and Commercial Real Estate Company. We are honored and appreciative to receive this recognition, from our clients, colleagues and business partners. 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 specific non-profit to receive half of that amount.
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.
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…
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.
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.
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.
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:
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.
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.
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.
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.
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.