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Era of Change

Author: Karen Hart
June, 2016 Issue

Supply and demand is the name of the game when it comes to real estate in the North Bay. Low interest rates make buying a home tempting, but inventory is at a historic low. “I’ve never seen it this low,” says Bill Facendini, president and co-owner of Terra Firma Global Partners of Santa Rosa, who’s worked in the industry for 28 years. What’s more, it’s impacting both the residential and commercial side of business and the competition is fierce, adds Steve Dickason, vice president and Marin County manager for Alain Pinel Realtors.

“The big challenge is, can the average Californian afford housing,” says Spence Hiatt, broker/owner of Re/Max Pros in Rohnert Park and Petaluma. The question, he says, is who can play the game. “Traditionally, more people can play by the standards, but that didn’t work in 2007. These are interesting times.”

“We know prices are overinflated—especially in the Bay Area, where homes are reported to have sold foras much as double the asking price,” says Dickason. “Competition-driven frenzy creates an artificial increase. That’s not real sustainable economic growth.” And the impact of overinflated prices has a ripple effect in the North Bay, extending to Marin, Napa and Sonoma counties.

The North Bay real estate bubble dramatically burst in 2007 and 2008, and prices have been making a comeback ever since. But are we headed for another ruptured bubble? That’s the question of the moment for financial experts. “There are several factors that contributed to the bubble burst of 2007 that don’t exist today,” says Dickason.
 

“During the run-up starting in 2001, loans were handed out like candy at a parade. Lending standards have come down a bit recently, but they remain tighter than they were before the early 2000s,” he continues. “Seemingly qualified buyers are complaining about getting shut out of the real estate market, which is an indicator of more responsible lending practices. Some analysts argue that housing prices are about 25 to 60 percent above what the fundamentals of the U.S. economy can justify. However, while prices have continued to increase, that increase has been decelerating. In January 2014, Marin County home prices increased 13.2 percent over the prior January, and by November the year-over-year increase was down to 4.3 percent; since then, it’s been relatively stable, rising to only 5.7 percent this January. Whether we’re in another housing bubble destined to burst is the subject of national debate, but while there are similarities to the mid-2000s burst, there are enough differences to have hope that we are experiencing a soft landing rather than another crash.”

These days, the state of real estate in the North Bay is a complicated subject. Inventory is low and new housing is mostly nonexistent. The commercial market is tight. Prices are artificially inflated. First time buyers are mostly shut out of the market, forcing them to stay in the rental arena and cope with skyrocketing rents (which is also causing heated debate). In the midst of it all, the real estate industry is rapidly changing through consolidation.

In addition, Zillow, (an online real estate database company founded in 2006) is also changing the industry. “Zillow has changed the game because it gets almost 100 million visitors to its website searching for homes each month,” says Don McDonald, director of marketing and business development for Re/Max Gold, serving 41 offices in 18 counties, including Napa, Marin and Sonoma. “With companies like Zillow providing so much data to consumers, agents need to focus on what we bring to the table: the legal guidance buyers and sellers need to stay protected throughout the transaction.”

“All the information is out there; that’s the wonder of the internet,” adds Hiatt. “Consumers know values as well as we do in the industry. If you price [property] under its value, there will be numerous offers. That’s technology.”

Industry consolidation

Over the last two decades, the real estate industry has been gradually consolidating and, for real estate consumers, the change has hardly been noticeable. But for those working in the industry, it’s created a dramatic impact.

The consolidation began during the 1990s when companies such as National Realty Trust (NRT) and Berkshire Hathaway began buying every brand they could, explains Dickason. NRT purchased well-known brands such as Coldwell Banker, Century 21 and ERA. In 2004, it even purchased Sotheby’s International from the famed auction house. Recently, Berkshire Hathaway purchased Prudential’s real estate unit. The consolidation is now in full swing. For a major company to be attracted to the real estate industry, the company is pressed to sell more than real estate. As a result, large companies such as Coldwell Banker are encouraging their agents to sell in-house products such as home warranties, zone disclosure reports, title services, loan services and more. Many companies are moving in that direction, and, in some cases, they’re making more money on ancillary sales.

“Right now, most real estate brokerages are providing services to agents as independent contractors,” says Dickason. “There’s no direct supervision, no employee benefits and, in most cases, no salaries. But as the industry continues to consolidate, mammoth companies will have the leverage to change the industry and could conceivably turn agents into employees. Some agents would rather have a salary than survive on commissions; some have even sued their companies for past employee-type benefits. But for agents who bring in high incomes, it would be a disaster. Right now, we attract business-savvy people who are willing to create their own small businesses within the service umbrella of a brokerage. Turn them into employees, and you won’t attract the same dynamic, entrepreneurial people.”

How are independent brokerages handling the changes? “We’re adapting to it,” says Dickason. “There’s a mix of small-and medium-sized brokers all competing. Massive brokers, such as Coldwell Banker, have to compete with local firms, so the consumer is probably not dramatically affected in the short run. In the long run, consolidation is bound to stifle competition as we’ve seen with the massive financial institutions on Wall Street.”

“Napa remains a place where many real estate agents feel being small or boutique is important, because they know the area better,” adds McDonald. “But we live in the information age, and agents no longer bring information to the deal. All of that is out there. The consumer gets it way before they talk with an agent, but that doesn’t resonate with an agent who’s lived here forever. I think consolidation brings a stronger global presence and reach.”

As for Re/Max Gold, he says, “we’re able to get that information and better serve the community and get a home exposed worldwide with a few clicks. We have 40 offices in Northern and central California. We bring more service, more resources and more opportunities to the public, that’s what’s driving the industry. I’d say the reason big companies like Re/Max are so successful is because brand matters to consumers. Re/Max is in more than 100-plus countries, with more than 100,000 agents worldwide. We’re all connected and this lets us bring global exposure to the marketplace. This matters in California, where nearly 38 percent of all transactions are from buyers and sellers moving to and away from the community. A small boutique brokerage can’t provide that level of exposure.”

Is there a downside to this kind of impact on the marketplace? Says Dickason, “I was managing for Pacific Union when it was purchased by GMAC. The affect was dramatic; we suddenly had less local control and more standardized policies that, in some cases, made it difficult to compete with local independents. It became a struggle to maintain the local brand identity. Now that the firm is once again owned and operated by local practitioners, it’s thriving.” What’s more, he says, the large corporate operations also led a trend to commoditize real estate agents, pushing for conformity in their operations and pressuring them to sell ancillary products such as home warranties, zone disclosure reports and title insurance.

GMAC eventually sold Pacific Union to Brookfield Asset Management, which sold it back to a local investment group. Under local management once again, the company is thriving, adds Dickason. “My decision to manage the expansion of Alain Pinel [a Silicon Valley-based firm] into Marin County was largely because it’s an independent, family-owned business that’s refused to sell when the large corporations come calling,” he says.

“There are pros and cons to any type of consolidation,” says Facendini, who worked for a large company for about 20 years before striking out on his own. “One advantage is you can offer consumers an umbrella of services, such as title and lending services. But my experience is that it wasn’t always a benefit to the consumer in regard to service or cost.

“On the downside, when one company owns six or seven brands, and choices are controlled or limited by the company and not the consumer, it may not be positive for the consumer monetarily—directing or limiting consumer choices, no matter the service or product, is never good for the client in the long run.”

How does this impact buyers? “Too much consolidation in any industry endangers competition and increases the potential for a monopoly,” says Dickason. When ten small agencies are all competing for business and those agencies get purchased by one mammoth company, there’s less need for that mammoth company to meet consumer needs.

Marin County

It continues to be a seller’s market in Marin. Low inventory and high demand, fueled by low interest rates frequently result in bidding wars and drive up prices. The average price of a single-family home in Marin skyrocketed from $878, 883 in 2012 to more than $1.2 million in 2015. “That’s 43 percent in just three years, or an average of 14.4 percent per year,” says Dickason. “We’ve been in an inventory- and interest rate driven-market since the economic recovery began [in 2011],” says Dickason. “Buyers typically make offers on several properties before finally making the winning bid.”

The situation is good for homeowners. Buyers are making offers above list price, and homes are selling quickly. Says Dickason, “It’s like an auction, and well-priced homes often sell above the apparent market value. It won’t stop until supply increases or demand decreases.” Meanwhile, the key to success in the current market is cash. “Buyers with cash will almost always win out against those who require a loan. This makes it especially hard on first-time buyers with minimal down payments,” he says. What’s more, buyers often pay more than the apparent market value and feel pressured to give up certain protections such as inspections and appraisal contingencies. And to be the winning bid, they sometimes offer major concessions, such as free seller rent-back for up to 60 days.

Commercial real estate is equally tight. “The recovery has brought a tremendous amount of commercial leasing activity to the North Bay with occupancy hitting the highest level it’s been in the past eight years,” says Dickason. “In Marin, the vacancy rate for industrial buildings is less than 4 percent. This lack of supply has caused an increase in space rent, much like what has happened to residential home prices and rents.”

Napa County

The real estate market continues to be tight for both residential and commercial property in Napa. Compared to most of California, Napa isn’t affordable to most buyers. As a Wine Country vacation destination, it’s become an appealing place for tourists to buy a second home. What’s more, land is a scarce commodity, so there’s little new construction. In fact, many buyers in the county purchase properties with homes that they tear down before rebuilding.

“Demand is always great and drives inventory because people don’t move away and we have next to zero new homes being built. We’ve always faced low inventory,” says McDonald. “Napa has the second highest rate of vacation home or second home ownership interest, next to Florida, which drives demand.”

Potential buyers from Silicon Valley, out-of-state or outside the country often come looking for second homes. “People from Asia, Canada and other countries are buying 28 percent of the investment market in the United States, which is significant in places like California, Arizona and Florida,” says McDonald. “A good 35 to 40 percent of our business is second home ownership.”

What does it take to be successful in the market? “Global exposure is key,” he says. “We’re able to connect buyer and seller. We have a worldwide presence to create better exposure. It’s easy for someone in Belize to find a second home in Napa.”

As for commercial real estate, it’s difficult to come by and all about the wine business (wine growing, processing, manufacturing, labeling). As a result, some businesses are relocating to American Canyon and Fairfield where real estate costs are lower and availability is higher.

Sonoma County

Low inventory is also a problem in Sonoma County, but the difference between it and the other North Bay counties, is that lack of inventory is segmented by price, according to Facendini

There’s a lot of demand for homes below $1 million, says Facendini, but inventory is limited. “If you look at properties above $1 million that’s different. Above $1.5 million, there’s a tremendous amount of property and people have choices.”

“There are three markets out there,” adds Hiatt. “First, there’s the entry-level market, which is crazy and everyone’s competing because it’s what they can afford. Second, there’s a market that’s more expensive and not moving as quickly. Third, there are the properties that aren’t priced properly and miss the boat.”

Home prices are skyrocketing because of lack of inventory and high job growth in the area, according to Facendini. “Today’s professional is completely different from five to 10 years ago,” he says. “People may work from home two to three days a week, so it makes commuting doable. That market is driving north from other Bay Area locations such as San Francisco to Marin, then to Sonoma.” What’s more, some companies are offering financial assistance to help their employees get into homes.

The commercial real estate market is tightening up in terms of industrial space versus other types for commercial space such as retail and office, but Facendini expects more demand in the next year or two. “There’s going to be a shortage as companies migrate north and can’t find space. And there will be demand on all fronts in commercial space.”

As for the price of housing, Sonoma County is in good shape when compared to other parts of the North Bay. “We’re less than $1.25 million [to get in a house],” says Hiatt. “We attract a lot of folks who can’t play in Marin or Napa, and that will be improved with the SMART train and with people telecommuting.” (SMART is the Sonoma-Marin Area Rail Transit, a passenger service scheduled to begin in late 2016.)

On the horizon

What can we expect in the year ahead? “The days of low interest rates are probably behind us,” says Dickason. The federal government kept interest rates down to stimulate the economy and the housing industry is a good way to do that, he says, but the government will most likely not continue propping up the industry.

“Prices remain strong in Northern California,” says McDonald. “Places like Marin and Napa counties where it’s not affordable, thrive on the secondary home ownership market. This, coupled with very little new home development and our proximity to Silicon Valley, the land of extreme wealth, makes our destination pricey. I don’t believe this will create a bubble, unless the tech industry collapses and/or California continues to become unfriendly to business and drive our economy away. We don’t see prices going up at a rapid pace in other areas of California. Technology is key to the real estate market and leads the way to change.”

As for the consolidation of the real estate industry, how the broker responds is important. “With great certainty, the only thing we can expect is the unexpected,” says Hiatt. “I’ve been doing this for more than 30 years and markets change. The key is the broker’s adaptability to change.”

“We’re not sure what it will look like in 10 years, but we’re here to help guide buyers and sellers,” adds McDonald. “That’s the value we bring to the table: How to negotiate, how to protect you and how to do it right. That’s the value of an agent.”

Did you know?

Nationally, housing inventories are at a historic low. In late 2015, the National Association of Realtors reported 5.2 months of unsold inventory. “A healthy inventory of homes would be six to eight months of unsold inventory,” says Steve Dickason, vice president and Marin County manager of Alain Pinel Realtors. These figures reflect the number of months it would take to sell the entire current inventory, given the current rate of sale with no additional homes listed.

What is a real estate bubble?

A real estate bubble is a type of economic expansion that occurs periodically in local and global real estate markets, typically following a land boom, according to an online search. A land boom is the rapid increase in valuations of real property such as housing, until they reach unsustainable levels and then decline in a bubble. Generally, financial experts agree that the financial crisis of 2007 to 2008 led to the bursting of real estate bubbles around the world throughout the 2000s.

The Rent Control Debate

If you’ve been following the headlines, then you know rental prices in the North Bay continue to skyrocket and there’s much debate about imposing rent control.

During the recession, many homeowners were forced to sell their homes (or lost them to foreclosure) and became tenants. Nationally, the demand for rental properties since the end of 2007 led to a 30 percent increase in rents. Mortgage interest rates dropped 36 percent during the recession, making it easier for first-time buyers, says Steve Dickason, vice president and Marin County manager of Alain Pinel in Marin. “During this same time period, the average rent increased 30 percent. The disparity in trends makes home ownership the most desirable alternative,” he says.

However, a lack of inventory makes this difficult for the first-time buyer, particularly those living on limited or fixed incomes. According to the Pew Research Center, 30 percent of America’s workforce (almost 21 million people) earns a near-minimum wage salary. Pay remains static for many, while housing costs continue to soar. In the nine-county bay area, rents of 50+ unit market rate apartments have increased an average of 37.9 percent annually over the last four years, according to RealFacts in Novato. What’s more, a report by the National Low Income Housing Coalition shows that Californians need to earn $26.65 per hour to pay average rent on a two-bedroom apartment.

As a result, the rent control debate continues. In Santa Rosa, city officials recently met to discuss the possibility of imposing rent controls and to hear from developers about what needs to happen so they can build more rapidly, according to Mayor John Sawyer. Though city officials are strongly divided on the issue, says Sawyer, everyone is concerned about the housing crisis. On May 3, Santa Rosa City Council voted to pursue the development of a rent control ordinance as well as a just-cause eviction ordinance. In addition, a moratorium has been placed to protect those citizens currently receiving rent increases. The council’s intent is to keep rents from increasing more than 3 percent annually. Meanwhile, increasing Santa Rosa’s housing options is the long-term goal. “Lack of housing is the real problem,” says Sawyer. “I feel we should be primarily focused on encouraging more residential development.”

 

 

 

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