Creative office landlords are having a difficult time getting security from tenants in the creative field.  One of the major drivers of creative office, especially in San Francisco, is the technology industry.  Start up companies, whose survival depends on continued venture capital funding, compose a very significant component of this market demand. In the dot com bust,  these tech tenants folded like a house of cards.  I lost 13 out of 14 of these tech tenants.  Yes, tech tenants are better capitalized than before.  However, instead of folding in six months, they can last a year or two, maybe. What is different the last time  is that we got whopper security deposits in the form of letter of credits–that ranged from one to three years rent.  Let me tell you, that really helped.  Today, it is hard to get a security deposit equal to six months of rent from these tenants.  Even if you can get more than a 12 month letter of credit–the bankruptcy laws have changed to limit a landlord to only a 12 month rent recovery in bankruptcy–even in the case of a letter of credit.

Also, a lot more creative office is being produced right now.  I don’t even know if the conversions are being counted in the new construction numbers in the brokerage market reports.

Los Angeles did better than San Francisco during the dot com bust since its creative tenancies are more diversified comprised of entertainment, advertising, media, design, and technology. Some landlords are trying to get credit technology companies like Google and Microsoft. But you cannot hold out only for those tenants.

In New York, young tenants build their own room partitions to create more bedrooms to facilitate sharing apartment.  The tenants put the walls up and take them down, often without the landlord’s permission.

In  New York, the trend of do-it-themselves partitioning has run afoul of building and zoning codes which prohibit such partitioning.  Partitioning in New York apartments and code violation issues are discussed in the article below.  The article also references a company who put up and takes down code compliant partitions of different types  (sliding doors, furniture walls, partial height walls) so these young people can accomplish their housing objectives.

In Los Angeles,  young millennials are locating to pricier urban areas, a trend that pushes up rents.  As a result, young urban Los Angeles tenants desire more bedrooms per square foot.

In addition to more bedrooms, Los Angeles young urban tenants also sometimes desire a partitioned office nook.  In one case, one of our young tenants split a large living room in half with screens.  One one side was the office where they worked on laptops, and on the other side was the living room with a couch, coffee table, and computer used as an entertainment center.

The Fall of Temporary Apartment Walls – NYTimes.com.

The Fall of Temporary Apartment Walls – NYTimes.com.

At the June 4 Marcus and Millichap investment conference, a Marcus and Millichap representative gave the results of an investment survey: in 2014, 30% of the existing apartment owners wanted to buy and very few wanted to sell.  In a special research report by Marcus and Millichap called “First Quarter 2014 Commercial Real Estate Investment Outlook”, the report declared “Investor Confidence Trending at 10 Year High.”  Nearly half of  all office investor who already own properties (49% percent) believe  now is the time to buy more, while only 15% consider now the time to sell.  As a result,  prices are climbing, and most properties that are not overly priced receive multiple offers.  Many sellers demand non-contingent offers.

In certain cases, these markets are up they go until they blow. One exception was the market of 1998.  Commercial properties started a steep rise from their historic lows of the early 1990 recession.  Suddenly, world events triggered what was known as the Russian Financial Crisis.  Stock plummeted, and pundits started talking recession.  Property appreciation came to an abrupt halt. Although both the world and real estate market shortly recovered from this interruption, property values slightly dipped and only gradually recovered.  Even as occupancies and rents climbed, real estate values remained stubbornly muted.  Instead, everyone one had stock market and internet stock market fever. Except for properties heavily vested in technology companies, property values did not experience a steep fall during the early 2000 recession and quickly recovered.

It is hard to tell whether property prices will continue to rise until a recession knocks them down, or i f a rise in interest rates creates a much softer landing.

Niche Ink, a site that analyzes education data, has declared Palms to be the best place in Los Angeles for Millennials. (LA ranked seventeenth on the list of best metros, though.) In order to find the optimal areas for youngs, Niche used data including median rent and income from the Census’s American Communities Survey, as well as FBI crime stats and “proprietary Niche rankings” from surveys of college students and grads on things like nightlife and best places to live after graduation.  Niche declared Palms the number one area in LA for young people.

Many people out of college ask where the best apartment deals on the West side of Los Angeles are?  I always refer them to Palms where the rents are lower and the access to other areas is great.   When the expo line is finished, Palms will have its own station that will connect Palms to Culver City, Santa Monica, and Downtown Los Angeles.  Palms is also close to Downtown Culver City which is now filled with hip new bars and restaurants and other amenities.  Indeed, I am promoting Palms to tech companies as a good source of affordable housing for their employees.  Restaurants and bars are taking notice and moving to Palms, according to one of my young colleagues.   You can read the article below.

Palms Is the Best Neighborhood in L.A. for Millennials | The Informer | Los Angeles | Los Angeles News and Events | LA Weekly.

Multifamily Construction Rebounds

A recent LA Times article reported that multifamily construction rose to the fastest pace in six years.  Indeed, my observation is that builders are building  the most for rent multifamily units since the late 1980s.  There are many reasons cited in the below article why this surge will not result in an oversupply over the next year or two.  However, if the trend continues, some caution must eventually be applied to an ever surging supply. Even the 2013 USC Casden Multifamily Forecast warned that an ever increasing supply could eventually lead to lower rents and a rising vacancy rate.   Usually, such overbuilding  manifests itself in rent reductions during recessions and results in steeper decreases than otherwise. In the past, at some later stage in the cycle, developers switch from rental to condominiums and thereby reduce the supply of newly constructed rentals in Los Angeles.

In the short terms, rents continue to rise in Los Angeles and vacancies decline  as the economy improves.    You can read the LA  Times article below:

Apartment construction surges across the Southland amid rising rents – Los Angeles Times.

At the recent Bisnow Multifamily Conference, many pundits debated what inning we were in.  In other words, how many years will the rents rise and vacancies decline before rent fall and vacancies rise.  I find it very difficult to predict what inning we are in. However, we can conclude that rentals properties are not inexpensive per square foot on a historical basis.  Value plays usually occurs in the very early stage of recovery or late stage of the decline.  So from this, we can conclude we are not in the very early stage of  this positive cycle.