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Making a Comeback

Author: Karen Hart
August, 2015 Issue

After several stagnant years, development in the North Bay is bouncing back.

 
Oh, the real estate bubble. It floats along like a liquid, iridescent sphere you blow with a wand dipped from a jar of soapy water on a summer day. You know it will eventually burst, but you try to capture it—ever so gently—with the palm of your hand, and marvel at its beauty for as long as you can. Then pop!it’s gone. A real estate bubble is a type of economic expansion that occurs periodically in local and global real estate markets. It can be identified by rapid increases in valuations of real property, such as housing, until they reach unsustainable levels and then rapidly decline. And, like the bubbles you blew as a child, trying to capture one and hold onto it into infinity is out of the question.
 
Generally, financial experts agree that the financial crisis of 2007 to 2008 was related to the bursting of real estate bubbles around the world throughout the 2000s.
 
Can a real estate bubble be identified and prevented? “Real estate bubbles, like any speculative bubble, burst because demand outpaces supply for reasons that aren’t ‘fundamental’ to the value of the market’s assets,” says Robert Eyler, Ph.D., a professor at Sonoma State University (SSU) and director for the Center for Regional Economic Analysis. “Unfortunately, one of the trickiest things to do is to try and figure out what real estate fundamentals are.”
 
What a lot of real estate agents do is value property based on comparable sales, and then make a calculation [based on] price per square feet, says Eyler. However, every property is different when you consider location, number of bedrooms, amenities and more. (See “What Causes a Real Estate Bubble?” below.)
 
The North Bay real estate bubble ruptured dramatically in 2007 to 2008, but it is making a comeback. Case in point: Consider the fate of Christopherson Homes in Santa Rosa. In 2006, the construction company poured 421 foundations for single-family homes in Northern California; in 2008, the company poured one. How did it respond? “We had to dig down and make things happen. We had to hustle and make things work,” says Andy Christopherson, a son of Keith and Brenda Christopherson, a local real estate and development family that built nearly 6,000 homes in Northern California over the last 35 years. “There was no capital to investeveryone was locked down. We had to create value in the world.”
 
That “hustle” pretty much sums up the state of real estate for North Bay construction. If you happen to be following the headlines these days, there’s a definite upswing in activity in each county. Here’s an overview of what’s happening.
 

Sonoma County

There’s significant movement in construction and development in Sonoma County these days. That surge is readily apparent with the resurrection of Christopherson Homes.
 
Five years ago, Christopherson Homes got back to the basics and launched Synergy Group, which serves as a platform for four distinct operating companies: Synergy Realty Group, which provides real estate brokerage services throughout the North Bay; Synergy Renovation, LLC, which transforms previously owned homes for resale; Synergy Construction, LLC, a company that provides general construction and remodeling services for both residential and commercial properties; and Synergy Communities, LLC, which is currently developing five new home communities in Sonoma County.
 
Currently, Synergy Group has 35 employees and two new partners: Brian Flahavan, an attorney in Santa Rosa; and Greg Windisch, a co-founder and former owner of Trilogy Glass & Packaging. “Our company is set up to grow with a platform to heavily expand. We have new partners and new viewpoints,” says Christopherson, a partner with Synergy Group (along with Flavahan, Windisch and his parents).
 
Earlier this year, the company began construction on a 10-unit development in Rincon Valley, located across Highway 12 from Skyhawk, in an earlier Christopherson development site. The new project, Sky Vista, will feature homes priced from $900,000 to $1.3 million. The foundations were poured in June, and the first home is scheduled for completion October 2, says Christopherson. Additionally, the company will begin a development named Fountaingrove Vista, at the end of Lake Park Court in Santa Rosa in October; it  will include six semi-custom, single-story and two-story homes.
 
Nearby, Santa Rosa-based APM Homes purchased the 26-acre property known as Skyhawk 9 and 10 in east Santa Rosa from another developer in 2013, began grading the site in preparation for 35 luxury homes.
 
As for the city of Santa Rosa, there’s been an increase in both planning and building permits, according to Chuck Regalia, assistant city manager for the community development department. The number of new planning applications increased by about 12 percent for the last two years, he says. In addition, residential projects are particularly on the rise, as the demand for housing has increased for both single-family and multi-family units, home prices are increasing and financing opportunities are expanding, he adds.
 
In 2010, the city instituted an aggressive economic development initiative program. As a result, says Regalia, entitlement/planning permits aren’t required for about 100 projects per year (building permits are still required). The city also now offers some over-the-counter or same-day building permits, and about 20 percent of permits issued occur online.
 
Currently, there are numerous residential projects under review by the city, says Regalia. And recently, the city approved a 72-unit apartment complex, called Pullman Lofts, just a few blocks north of the future Sonoma-Marin Area Rail Transit (SMART) station in Railroad Square. In addition, 120 apartment units, named Range Ranch II, were also approved on Range Avenue in Northwest Santa Rosa. Single-family units have also been approved, including: Calistoga Cottages on Calistoga Road; Meadows at Taylor Mountain on Kawana Terrace; Pink Viking on Ridley Avenue; and more.
 
As for the commercial side of development, there are three, large-scale winery and tasting rooms proposed, says Jennifer Barrett, deputy director of planning for the county of Sonoma.
 
Meanwhile, the city of Santa Rosa is taking steps to attract residential development and to support and encourage affordable housing, as home prices continue to rise, says Regalia. And, though the housing market is making advances, there’s still a significant shortage of affordable housing—and this scarcity is driving up rents. (See “The Rental Market Catch-22,” below.)
 

Napa County

While there continues to be construction activity in Napa County for individual homes and condos, wineries and vineyards drive all major development projects, as does the city of Napa. “Tourism and winemaking are the fuel for growth in Napa Valley. Napa offers truly immersive travel opportunities, like the great encounters one can have with talented winemakers and chefs and their creations,” says Keith Rogal, developer of Rogal Projects in Napa.
 
“The city has become a destination, and the larger south county area has come into its own as a destination for dining, wine tasting and lodging,” he adds.
 
Construction is underway for the Archer Hotel, a new 183-room hotel with a restaurant, meeting rooms and retail space in downtown Napa on First Street. Renovations are being completed to the River Park Shopping Center on Imola Avenue. A new Hampton Inn hotel is under construction on Harte Court.
 
As for residential properties, there are new single-family “infill” subdivisions, new mutli-family apartment projects and new “for sale” attached residential/condominium units.
 
These include the Vista Tulocay apartment project, a 480-unit multi-family apartment project on Soscol Avenue; and a Stanly Ranch Resort project was also approved for a new 150-room hotel and spa on Stanly Lane. 
 
“It’s an exciting time in Napa. There’s a lot of investment interest in all sectorsresidential, commercial and hotels,” says Ken MacNab, planning manager for the city of Napa. “The city’s past planning efforts have put it in a good position for meeting this demand. We believe this upswing in activity is attributable to improved lending conditions, improved employment conditions and the continuing strength of our tourism-related industries.
 
In the coming year, the city will implement new parking management strategies in the downtown area, and review its development impact fees. “We’re also initiating a comprehensive update to the general plan for the city of Napa to guide its physical growth and development over the next 20 years,” says MacNab.
 
As the tourism industry continues to grow, so does the need for housing that’s affordable to local residents who work in the industry; and providing more affordable housing continues to be a challenge, admits MacNab. “The city of Napa is working on a number of programs to assist with the production of affordable housing units,” he says. “These include eliminating zoning and fee constraints to the production of accessory second units [granny units], and allowing for the development of duplex and triplex units on large, oversized single-family properties,” he says.
 
The city is also working with the hospitality, wine and real estate and development industries on increasing funding for production of affordable housing units. In addition, the city continues to offer a wide range of assistance and first-time buyer programs through its Housing Division.
 
“Affordable housing is very topical right now,” says MacNab. “It’s a community-wide issue where the responsibility should be shared by both business and government.  The State Legislature also needs to intervene by passing laws to prevent abuse of environmental regulations by residents opposed to new affordable housing projects in their neighborhoods.”
 

Marin County

The state of real estate development in Marin County continues to be steady, since it’s a desirable area to live in and tends to be less impacted by ruptures in the marketplace. “We live in a bit of a micro-economy in Marin,” says Doug Degnan, an owner and project manager at Millsap, Degnan & Associates. “The average income here is above average; there’s a concentration of wealth here and in surrounding Bay Area communities due to the proximity of San Francisco and Silicon Valley. Because of that, the recession had a lesser effect in Marin than in the general Bay Area.”
 
There’s also not a lot of room for expansive, new developments, due to hillside planning and open space ordinances. “There aren’t many large plots of land that meet development criteria in Marin County, so there’s less development,” says Degnan. There’s more in-fill, meaning lots are available for purchase in existing neighborhoods for the occasional new construction project.” What’s more, the cost of land is high, and that’s a deterrent, he adds.
 
“The number of building permits issued by the county has returned to the pre-recession levels we experienced in 2007, meaning our building and safety division issued roughly 3,100 building permits during fiscal year 2014-2015,” says Brian Crawford, director of the community development agency for the county of Marin. “Most of these permits are for residential remodels and additions, a reflection of the land-use patterns in the unincorporated county and a decreasing trend of complete demolition and rebuilds,” he adds. “About 80 percent of Marin is designated for agriculture and open space, and much of the remaining, unincorporated county area is zoned for residential use,” he says.
 
Nevertheless, there has been a shift in the marketplace. “The market is more about additions and remodeling,” says Degnan, who’s been a licensed general contractor since 1985. “[Today], people are more financially conservative. They’re looking to see how their houses can serve their needs. In the early 2000s, the tendency was for homeowners to tear down houses and rebuild. Now people tend to remodel.” He says this is due to challenges encountered at local planning departments that have received pressure from local communities in regard to multi-year, massive single-family home projects.
 
“Most times, people want more square footage and, in older homes, the rooms are typically divided up into traditional dining, living and family rooms,” Degnan continues. “Currently, architects and owners are removing many of the existing internal walls, creating a more open floor plan. The benefit is a more modern look and feel, which seems to support the cost of construction from a resale perspective.”
 
Last year, the county of Marin completed a study of its development review process and is currently in the process of making changes. Some of those changes include: simplifying development regulations where possible; adding staff to the building and safety division to speed up building plan review times; and creating a customer service position to assist applicants.
 
“With respect to permit fees, the county chose not to raise fees for the past five years in the interest of softening the impact of the recession,” says Crawford. The county recently adopted updated fee schedules for planning and environmental health permits. Overall, planning fees were reduced, on average, by about 7 percent, although some fees were increased incrementally to cover the increased cost of permit review.
 
“We’ve retained our ability to reduce or wave planning and building fees for affordable housing projects,” he says. “Permit fees for other projects, such as residential second units and child care facilities, will remain below the actual cost of processing the permit request in recognition of the community benefits provided by these uses.”
 
What can Marin residents expect in the year ahead? “On a countywide basis, I see a continued incremental increase in smaller residential projects consistent with the post-recession trend we’ve been experiencing,” says Crawford.
 
However, there are two larger residential projects expected later this year. First, George Lucas is teaming with PEP Housing in Petaluma to propose an affordable workforce and senior housing project consisting of approximately 220 homes in the Lucas Valley community. (There’s no relation between Lucas and the name “Lucas Valley.”) And in Southern Marin, the new owners of the Golden Gate Baptist Seminary property in Strawberry (an unincorporated portion of the county) intend to submit applications for a rental housing project that may include up to 300 homes, some of which would replace existing student and faculty housing at the seminary.
 

On the horizon

What can we expect in terms of real estate development in the North Bay over the next several years?
 
“I see more units being built while money is relatively cheap and demand is high, and I also see the market starting a contraction once interest rates rise about 100 basis points, or 1 percent,” says Eyler. “It may take that much change to increase the cost of money to make for marginal adjustments, but once interest rates begin to rise, the cycle will begin to end. It may not end for three or four more years, if the rate change is slow, steady and predictable.”
 
“It will continue to maintain a steady trend toward modernization of older homes, bringing them up to modern design, structural, energy and technical standards,” says Degnan. “Marin will continue to maintain its pace. But as interest rates go up, the cost of money may slow this trend. As a builder, it’s important to provide advice based on what’s best for the client—sometimes helping them avoid going in the direction of a money pit. On occasion, we’ve suggested our clients consider the current value of their home plus the cost of the renovation; take that total and see if there’s something on the market the meets their needs. It’s always a good exercise to consider.”
 
“The county [of Marin] is also stepp[ing up its efforts to respond to the challenges of climate change,” adds Crawford. “We’re about to complete an update of our Climate Action Plan, which lays out a number of strategies for local government and the community to lower carbon emissions.”
 
“There will be more in-fill development in the city of Napa, at Napa Pipe, of course, and within the other incorporated cities,” adds Rogal. “There will be continued diversification of restaurants, [and] wine and beer-tasting offerings. Those things will further solidify the south part of the county as a place to live and visit both short- and long-term. The regional economy and essential attractions will continue to draw people to visit and live here.”
 
“In terms of construction locally, it’s getting close to normal,” says Christopherson. “The good news is people are busy—and everyone is happy about that.”
 

The Rental Market Catch-22

The good news is the economy is improving and more jobs are being created. The bad news is hourly wages are stagnant. And the growing concern throughout the North Bay is how to resolve this Catch-22 situation of static pay and soaring housing costs.
 
According to the Pew Research Center, 30 percent of America’s workforcealmost 21 million peopleearn a near-minimum-wage salary. In the North Bay, rents of 50+ unit market rate apartments have increased an average of 7.75 percent annually over the last four years, according to RealFacts, based in Novato. A recent 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.
 
In June, the Santa Rosa City Council considered a moratorium on rent increases. Four of the seven council members were ready to move forward, but the measure needed five votes to pass.
 
“The market is very tight, especially for rental housing,” says Jennifer Barrett, deputy director of planning for the county of Sonoma. “There are adequate sites for new housing development identified in the housing elements of each of the nine cities as well as the unincorporated county, but the units aren’t getting built.”
 
There are similar concerns in Napa County, but there’s been no discussion of rent control, according to Planning Manager Ken MacNab. “The rental market is tight, and it’s a timely issue given the lack of housing,” he says.
 
Napa County has several sites outside the of the incorporated cities that are designated for affordable housing, most notably the Napa Pipe property, which borders the city of Napa and is planned for annexation into the city, says John McDowell, deputy planning director. “The county remains committed to supporting development of affordable housing on the designated unincorporated sites and stands ready to assist projects with affordable housing trust fund money and a streamlined ministerial permit process. Projects meeting the affordable housing design standards require only building permits to advance to construction.”
 
Says Brian Crawford, director of the community development agency in Marin, “The vacancy rate for rental housing currently stands at 2 percent, and we don’t expect that number to go up anytime soon. And comparing housing costs to job wages in Marin gives you a picture of the challenges we face in addressing the disparity between housing need and housing supply. (For example, a preschool teacher earns about $31,000 per year, with approximately $800 per month available for housing costs, he says. But the median cost for a rental unit has increased to more than $3,500 per month, the median price for a condo is more than $600,000 and the median price for a home is in the neighborhood of $1 million.)
 
As rents continue to rise, it leaves many renters troubled by what the future will bring. “When your rent is increasing 10 percent every year, and your pay raises don’t keep pace with the cost of living, you’re not making progress,” says a young engineer who works at Keysight Technologies in Santa Rosa.
 
Says Barrett, “We continue to strive to make housing more affordable in Sonoma County.”
 

What Causes a Real Estate Bubble?

The real estate bubble of 2007 to 2008 happened for three fundamental reasons, according to Dr. Robert Eyler, a professor at Sonoma State University and director for the Center for Regional Economic Analysis.
 
First, high-risk lending increased demand above supply. Second, the risks were then bundled and commoditized in secondary, tertiary and other derivative markets. And finally, interest rates increased when variable interest rates became the norm in many markets, forcing a cost change. What’s more, says Eyler, the ability to easily go bankrupt also helped deepen the crisis.
 
Currently, we’re seeing small increases in high-risk lending as well as the bundling and commoditizing of the various markets, says Eyler. “But none of these conditions are changing at the speed they did years ago, so a bubble like before is unlikely in this cycle.”
 

Did You Know?

In 2008, the United States government allocated more than $900 billion to special loans and rescues related to the U.S. housing bubble, according to an online search.

 

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