The California Economy in Five (More) Charts

Continuing Education continues, still challenging to pluck out useful data from the boiler plate Realtor propaganda ...


Even six years into the recovery, housing starts were at the lowest level in 40 years. It's no wonder there's a housing crunch across the state. And to answer the follow-on question: Yes, nationwide data prove out the same story.


Opposite side of the same coin, rental vacancy at a multi-decade low.


For handful of stories about retiring Baby Boomers ditching California's high cost of living and high taxes, most are hunkering down for their golden years.


Migration from abroad has maintained a positive net migration rate in California, which notably summers increased domestic out-migration during periods of economic booms (thanks primarily to rising housing costs).


It's no wonder Sacramento has one of the hottest rental markets in the country, after taking basically a decade off from new construction. Especially with payrolls above the pre-recession peak (bonus 6th chart!).


The California Economy in Five Charts

A downside of having a real estate license is the periodic continuing education requirements. To answer the quiz and test questions correctly, one must periodically unlearn basic economics, ignore laughably inaccurate statements about being able to time the real estate market and pity home buyers who get stuck with an agent who actually quotes anything out of the "educational material" taught to future licensees.

The upside is that for $60 you get access to some interesting visual economic data. Here is a sample from Day 1:


Even in the most optimistic scenarios, we are probably in the 7th or 8th inning of our current economic expansion.


Or, put another way: Since 1976, unemployment has never been below 6.0% for more than three years. California ticked below in 2015.


Seven years into an historic housing boom in California, that 5% of homes are still underwater speaks to hard the market crashed and how loony lending was during the housing bubble of 2002-2006.


Buy a house? Nah, I'd rather rent and buy another car.


Income inequality in the US gets a lot of press ... the same trend is mirrored in California.

The Remarkable Story of Moishe Mana

Real estate is a reminder that there can be big business in small things. That great ideas are not exciting by definition, and don’t have to involve technological breakthroughs. to create a lasting impact on the world around us.

Winding through a swampy, dirty maze of New Jersey back roads, vacant lots and decrepit warehouses just east of Manhattan, this lesson hit home. Epic delays approaching the Holland tunnel led my cab driver and me past Newark Avenue in Jersey City, as we tried in vain to squeeze through the fastest route to Manhattan.

Accelerator jammed down, I barely had time to snap a mental image of the address above the door to a towering box of concrete, glass and rusting metal mullions, a depression-era reminder of the immense physical infrastructure that supports a city like New York. But I’ve gotten good at such mental exercises, as has become my life of scouring cities for interesting property to buy.


A quick note on my phone, a reminder to check into it back at the office, and it was gone, likely the last time I’d ever lay eyes on The Topps Industrial Building. Not that massive warehouses in Jersey City are on our current shopping list, but the more our business rotates towards industrial property, the more fascinated I become with such structures, their history, who owns them and, increasingly, what do the people buying them have in store for these relics of our once-proud industrial past.

People like Moishe Mana.

According to public records, Mana purchased 930 Newark Avenue in 2013 for a $11 million, a mere $55 per foot for 200,000 square feet of building and an adjacent vacant lot five miles from the New York Stock Exchange. Nothing too noteworthy here, buildings like this trade hands every day for all kinds of not-that-interesting reasons. Storage, distribution, boring things like that.

Which is what makes the story of Moishe Mana all the more interesting.

A note online suggested that the buyer “plans on letting the tenants’ leases expire so he can change the building into a document storage facility.” Boring for boring. But it had me intrigued – not what I would have guessed with e-commerce lighting a fire under the formerly sleepy market for warehouses.


Born to in Israel to Iraqi-born real estate brokers, Moshi is a billionaire businessman whose professional interests spread from property to art to fashion to moving and document storage. It’s the latter two that earned him his early fortune, which enabled him to pursue his true passions for art and culture. Real estate was the common link, the fuel that enabled his empire and fortune to grow.

He owns millions of square feet of warehouses in the New York area and recently went on a buying spree in Miami with grand visions of transforming a once-blighted warehouse district into a glimmering neighborhood built on a foundation of the arts.

You can read more about Moshe here, here and here. It’s quite a story, and arguably what people outside the US mean when they speak longingly of the American Dream.

Closer to home, Moshe’s story is a lesson not just in the power of real estate to create generational wealth, but of how powerful the combination of a great business and the control of real estate can be.

We in the business too often think only of property as a series of cash flows. We easily forget that tenants are more than just leases and rent payments to keep tabs on, but that the creation and events that go on inside our buildings are what create true, lasting value – not just to our bottom line, but to the neighborhoods and communities in which we own.

Remember When Apartments in Stockton Were More Expensive Than San Francisco? (neither did we)

Each real estate investor has his or her favorite metric for evaluating what a piece of property is worth. Or perhaps more relevant, at what price it’s an interesting buy. Some look at cap rate, others gross rent multiplier. Others look at price per square foot or price per unit. And some trust the most reliable metric of all: The Gut.

There is no single perfect metric, as each one tells a slightly different story and is more (or less) applicable to certain types of property.

For large multifamily properties, two of the favorite evaluation metrics used are average rent per unit and sale price per unit. So we asked, what if you used them together to evaluate pricing trends relative to rent, then looked at the results for different markets – wouldn’t that allow you to compare markets not simply by rent per unit, or price per unit, but price per dollar of rent? And since ultimately real estate should be valued by the discounted value of projected future cash flow, isn't that the only metric that should matter?

Meanwhile, recent data showing that the fastest rent growth is happening in tertiary, rather than core markets, led us to choose markets that have had vastly performance in the past couple decades.

The graph below shows rent and pricing data, courtesy of CoStar, for San Francisco, Sacramento and Stockton. It may not be a surprise that our price / rent metric shows San Francisco to be roughly twice as expensive as either Sacramento or Stockton, but it surprised us to see that in 2006 at the peak of the housing boom, these two Central Valley cities were roughly in-line with San Francisco. Stockton even ticked higher than San Francisco at the peek of the frenzy.


In other words, things got so out of hand in 2006 that investors were paying more for a dollar of rent in Stockton than they were in San Francisco.

Looking at the data another way, the graph below shows the same data set normalized to 100. Normalization allows us to evaluate relative market performance, stripping out nominal differences (ie, that monthly rent in San Francisco is roughly triples the other two) for a purely apples-to-apples comparison.


Not only did San Francisco recover more quickly after the recession, but since 2001, price relative to rent has doubled in San Francisco. Sacramento is up almost 50% during the same period, but Stockton is hovering just above 2001 levels, having only recently covered past where pricing was more than 15 years ago.

The takeaway here should be more than simply San Francisco is expensive and the other cities are cheap. Price is the great arbiter, and price alone (even a metric like this) must be considered over risks and other factors.

The question becomes: given the dramatic run-up in rents and prices, is San Francisco now too expensive? Or do the inherent supply constraints and fundamental demand drivers warrant this level of pricing?

Conversely, is Stockton too cheap? Or do the city's fiscal troubles, crime problems and high unemployment (7.7% vs 4.8 for the state) warrant the depressed pricing?

A peak at recent migration data leads us to believe that the latter is the more interesting of these two questions.

Expanded Panama Canal Boon for Eastern Ports, Oakland Lags

To little fanfare outside the world of international shipping and logistics, this summer marked the one-year anniversary of a third lane of traffic being open at the Panama Canal. Importantly, this expanded capacity was built to handle vessels three times the size than could previously use the canal. The completion of this $5 billion project means that 80% of the global tanker fleet can now use Panama, up from just 5%.

The key impact for US ports and domestic supply chains is that larger ships traveling from Asia to the Eastern US carrying cost-sensitive goods can now cut transport expenses by choosing the Panama Canal over the Suez Canal. See diagram below for a quick geography refresher:


The importance of this new option is not lost on the major western ports, Los Angeles-Long Beach, Oakland and Seattle-Tacoma, since most goods from Asia destined for the eastern US offload on the west coast then travel by rail or truck. This is still the quickest option, but larger ships with goods more sensitive to cost than time are opting to sail through Panama.

Port data prove out this shift, as billions in infrastructure projects from New York to Miami to Savannah to prepare for the Panama Canal expansion begin to pay off. Combined volume at the Georgia ports of Savannah and Brunswick is up 10.8% thus far in 2017 compared to 2016. Meanwhile across the bay in Oakland, volume is up a mere 2% during the same time period.

This tepid growth in Oakland underscores a larger trend. Since 2003, volume at those same Georgia ports is up almost 140%, whereas Oakland has pushed merely 23% more tonnage through its port.

To appreciate the full impact of these emerging shipping trends, its important to examine the entire regional logistics infrastructure, not just ships, cranes and containers. As Walter Kemmsies, the Managing Director and Chief Strategist for Ports, Airports and Global Infrastructure at JLL, a global real estate brokerage, explained in a story this month,


We view a port not just as a place for a ship to unload cargo, but as a gateway. The water, the labor force, rail connections, intermodal centers, warehouses … it’s all one big package.

A tour of Oakland’s waterfront and surrounding area – or San Francisco’s for that matter – yields acres upon acres of barely or unused land. Prevented from being developed by jurisdictional bureaucracy, high land prices and environmental concerns, what could be a source of tremendous job growth for middle-income workers is instead a wasteland of unused piers, vacant lots and abandoned industrial facilities.

The best San Francisco has been able to muster recently was the delivery of a few hundred shrink-wrapped Tesla Model 3s to Pier 80, a 60-acre terminal between DogPatch and Bayview which has been collecting dust for decades. More automobile shipments are supposed to be on their way, but with the recent closure of the Pier 70 shipyard, industrial activity across San Francisco’s waterfront continues to flounder and miss out on opportunities.

Meanwhile the rest of the country is capitalizing on the changing landscape of international logistics. Miami recently spent $1 billion dredging its harbor to accommodate larger ships. The Port Authority of New York and New Jersey spent $1.3 billion raising the Bayonne Bridge and another $2.7 billion to improve aging equipment and facilities.

And with warehouses close to urban centers being snatched up for redevelopment and repurposing for higher paying tenants, the space in which urban industrial activity can take place is getting scarcer by the day. 

Amazon’s $13.7 Billion Real Estate Bet


At a cost of roughly $30 million per store, the smart money is on Amazon’s surprise takeover of Whole Foods being about more than just food.

On Friday, the online retailing giant shocked just about everyone by announcing by buying upscale grocery chain Whole Foods for $13.7 billion in cash. Shopping center REITs slipped, grocery stocks tumbled and the retail complex at large struggled to understand what just happened. The term “seminal moment” was bandied about more than once.

Immediately and unsurprisingly, the pundit class rushed to criticize the deal, characterizing it as Amazon’s acknowledgement that its foray into the grocery business had failed. Academics questioned how Amazon’s culture of ruthless efficiency and cost-cutting would mesh with Whole Food’s jovial, team-centric corporate culture and upscale, frill-laden shopping experience. Others remarked how acquisitions of unrelated businesses rarely proved profitable for the buyer.

As the day wore on and the myriad of industries impacted by the deal considered its impact, cooler and more insightful minds prevailed. The Wall Street Journal, citing logistics experts, noted that Whole Foods’ more than 430 locations would increase Amazon’s neighborhood network by more than five times. Given Whole Foods’ ubiquity in upscale urban and suburban markets, Amazon captured irreplaceable distribution infrastructure in close proximity to America’s wealthiest consumers.

As one supply chain consultant put it:

“Setting aside food, the larger opportunity to build out what many refer to as the final mile to the consumer is now insight. Will these locations become mini-fulfillment centers to help execute local deliveries of not only food but other items? Will these locations become hubs for customer pickup, decreasing some traditional transportation last mile costs? Or will they simply remain as they are today? Which is very hard to believe.”

The most exciting part of this acquisition isn’t the idea it getting easier for wealthy people to get overpriced food delivered to their doorsteps. Rather, one of the top innovative companies on the planet is making a multi-billion dollar bet that controlling large warehouses close to population centers is the future of retail.

The implications of this notion, especially when layered on top of dynamics already in place in that market segment, are remarkable. Will competitors like Google follow suit? Is Trader Joes next? What other national brands occupy underutilized warehouse space in key strategic locations? Will developers start down-zoning sites to build industrial instead of multifamily or office?

Retail brands are shuttering stores and shedding real estate at a historic pace. Malls are dying in droves. Experts have already decided that brick-and-mortar is dead and online is the future of retail. Which of course it is. But it’s telling that hip new retail brands like Bonobos and Warby Parker, are opening physical locations. And now Amazon buys Whole Foods.

The easy trade is betting that tomorrow’s consumers will want everything delivered the same day. The real money will be made figuring out how to serve those that think same day isn’t fast enough.

Cannabis, Last Mile Driving Industrial Prices Higher

Mention the notion that industrial property may be an interesting way to play the ongoing process of marijuana becoming legal for recreational use and the conversation quickly shifts away from much of anything else. There are of course other factors making the space compelling, but even the squarish among us are intrigued by being part of what could be a modern-day gold rush.

Fortunately for Californians, we have other states which are further along the legalization trail to look to for guidance on how the trend here may play out. What's more difficult is parsing out pot's true impact, since so many factors are positively impacting supply/demand fundamentals for the shrinking supply of urban warehouses.

The graph below shows the value of industrial real estate, as measured by price per square foot, in Portland where recreational pot was legalized in late 2014. Sale prices are up almost 50% in a little over two years. It's no wonder why: with cannabis tenants able to pay much higher rent than traditional tenants, landlords are looking to cash in.

portland cannabis price graph.PNG

But there may be more to the story, since cannabis legalization didn't happen in a vacuum. In mid-2015, Amazon quietly announced same-day delivery in Portland. Since then, industrial property values are up more than 33%.

portland amazon price graph.PNG

The lesson here isn't that cannabis is having a larger, or smaller, impact on the market for industrial space than the race to control the "Last Mile" of the distribution chain. With so many factors impacting this type of real estate, it's important not to under or overstate the role of any one driver. But what's clear is that in Portland, as in Seattle, San Francisco and other urban areas, owning warehouses is a good way to benefit from these industry-changing trends.

Bye Bye Big Box?

Continuing its effort to rewrite consumer buying trends, Amazon is making a push for big American brands to skip stores and sell to customers direct.

Bloomberg is reporting that the Seattle-based company is holding a meeting with major consumer products firms to discuss cutting out retailers. Amazon, with its massive and growing logistics infrastructure, would of course volunteer to handle fulfillment.

This, and other firms pushing for more and more home delivery of what Americans consume, is further evidence of the importance of the dwindling supply of industrial real estate near densely populated urban centers. Supply is down, demand is up, and prices are following suit.

Chinese Investors Forced to Borrow

While less of a driver here in San Francisco than in New York, London and other global major cities, all-cash Chinese investors have been an important of driving up property values during our most recent up-cycle.

Demand from these well-funded buyers remains strong, ut with the Chinese government continuing to impose capital controls on its citizens, all-cash offers are becoming increasingly rare. And with an estimated 100,000 millionaires minted each year in China, any hiccups in this source of demand are worth noting.

As noted in this piece out of New York, lenders catering to Asian investors have been a surge in demand for purchase money loans. This shows that despite high prices and a cooling market, our US real estate remains an attractive place to park money.

Only in San Francisco

In an "only in San Francisco" moment, an affordable housing development in the Mission is being opposed by neighborhood groups.

Typically the ones fighting development in their back yard, the Mission Economic Development Association (MEDA), is finding itself on the other side of the fence. Neighbors oppose the group's project at Shotwell and Cesar Chavez, arguing that not only will the building cast shadows on a park, but it doesn't do enough to create jobs in the area. 

If even the Mission can't get behind an affordable housing development, what hope does the city have at making a meaningful impact on sky-high rents by building subsidized units?