900 SF Industrial Condo in Santa Clarita for sale — $320,000

This charming condo is part of a new development that is centrally-located right near the 5 freeway, with a ground-level door and excellent small office build-out. Great parking, and incredibly clean!

For more information, please visit our Los Angeles Commercial Real Estate for Sale site.

1,000 SF Industrial Space in Irvine — $2.45 PSF

This ideal location for a small industrial business in in the heart of the airport area, just minutes from the 405, 55 and 5 freeways. The location cannot be beat!

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2,000 SF Office Space in Costa Mesa — $3.50PSF

Looking for an attractive, well laid-out office space on the first floor with excellent parking in the heart of Costa Mesa? Then look no further! This charming space is perfect for an office that entertains clients and needs to impress!

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4,000 SF Artists Industrial Space in Laguna Canyon — $3.00 PSF

Looking for an opportunity to move your business to the heart of the Laguna art community? This rare opening is the ideal fit for an artist’s studio where light manufacturing would take place.

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The “Sticky Floor” of Real Estate Pricing

A lot of people are very concerned with timing their real estate purchases with the bottom of the market, and as a result, want to buy the moment the price has taken a blip down, only to continue to lose at an alarming rate. That game of “timing” is a concept brought over from other investment vehicles, like stocks, that operate on dynamic sin-curves, and the trick is to hit it right before the rapid upswing. Real Estate, however, is historically unqiue.

I will enter into your vocabulary the concept of the “sticky floor” of real estate pricing. If we look back in history to the major booms and downturns in real estate (the Great Depression, the mid-sixties, the mid-80’s, late 90’s, etc.) we see that the pattern of pricing is not that of a sin curve. Rather, it tends to have periods of rapid growth, followed closely by rapid falls, followed by extended periods of relatively flat pricing. After a boom, the “bottom” of the real estate market seems to be when the market has reached stability after the downturn, and lasts until the next upturn. So, rather than have a full sin curve-shape, real estate looks like the lower half of the curve has been lopped off — providing for only upturns, followed by downturns of near-equal proportions — hence the concept of the “sticky floor”; rather than dip down to new depths, real estate prices instead opt to have extended periods of relatively flat growth. In fact, despite the amazing swings in value, the average appreciation of a home is very little above that of true inflation rates in the U.S. (8.98% as compared to around 7.9%…depending on the resource.)

This seems to contradict the basic concepts of economics, but that is not the case — real estate is just a much more complicated model for supply and demand. Glossing over some of the more complicated smaller elements, here’s the easiest way to explain why it is: traditionally — frenzied upswings in value are usually brought on by an outside force on the markets, usually a severe loosening of lending requirements and underwriting (like the 9-11/loan repackaging of the last few years, or the S&L crisis before it, or even the exisitence of subprime mortgages) or a related boom in the US economy in general. The ease of getting money allows otherwise under-qualified potential buyers to become qualified, and demand (and price) are driven dramatically upward. People become very “house rich” and assume more debt, again raising prices further.

Those risky loans to risky people, however, do turn bad when inflated housing prices reach ciritical mass (or loan rates start resetting) and new buyers cannot afford to enter the market (as only “trade-in” buyers can), and those with those homes cannot afford the payments. Once people can no longer afford the homes, banks begin to forclose, and housing prices plummit as it is impossible for banks to not have large real estate holdings, and they have to sell them at steep losses. Swift policy needs to be reformed, and lending requirements tighten back to the point that they were before the boom (or worse), and demand plummets. General panic and pessimism sets in, and homes continue to fall in value until around the time that actual new buyers can afford the homes at the now-stricter lending requirements.

And once that equilirium is met, things go quiet. Why? It is simple: most homeowners are not investors or banks: they live there. And the amount of people who “must” sell is relatively small — and instead the market reacts to the downturn in demand by having a large downturn in supply. People who are financially solvent and don’t have to sell, simply stop trying to sell their homes, and instead hold on to them. What happens is that instead of the price point shifting farther down past the point that it originially was, the volume of transactions goes way down. In that way, the decrease in value is absorbed by a lowering of supply and turnover. Stability is reached in the market, and prices “go flat.”

These flat periods are proportionate to the severity of the uptun and downturn, and tend to last anywhere from 8 months to 5 years. What finally brings the real estate market out of that stability is another “frenzy” induced by ouside forces, which tends to cycle through various forms every 10 or so years.

The author is a residential and Commercial Real Estate Broker in Los Angeles, and has been working in the industry for many years. If you are looking to buy or sell commercial property, please visit his website.

4,000 SF Complete Floor of High-Visibility Irvine Office Space — $4.00PSF

Looking for an immaculate class “A” space in the highly-desirable airport area? Then look no further! Excellent ammenities — intelligent layout — perfect for most businesses! Great visibility / accessability. Contact for inquiries.

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Gorgeous 4,000 Newport Coast Home — $1.8M

An absolute stunner located in the desirable Newport Coast area. Ocean Views and IMMACULATE interior. For more information, please review our website.

We also have access to Los Angeles Commercial Real Estate Listings, and can help you fidn the perfect space.

Why No One Should Be in a Hurry To Buy a House

It’s tempting to look at the free-falling prices in real estate right now, and start salivating — visions of seeing those prices blip back to their values from two years ago, and realize a 100% profit in a few short years. I only have one bit of advice: wait — it is going to go a lot farther.

Everyone has said that “the other shoe” has dropped on residential real estate, and it is a great time to buy, but in actuality, we are waiting on three more to drop — escalated interest rates, reflected median household incomes, and simple supply and demand.

Interest rates are great right now — in fact, unprecedented…one of the best rates we have seen. Shouldn’t that mean its a great time to buy, since money is cheap and you can get more house for your dollar? In an isolated experiement, yes. And certainly, the rate will deifintely increase. However, in a market in which “value” is tied to the actual and current availability of money, home prices are HEAVILY tied to interest rates, and as rates rise, home values drop significantly. As an example, let’s say a buyer can afford $2,000/mo. in mortgage expenses. If the interest rate (like current) is 5%, he could afford up to a $480,000 house, depending on how much financing he could secure. Now, let’s say available interest rates jump to a historically-normal level of 10% — all of a sudden, that same buyer can only afford up to $240,000 of house — halving his buying pwoer, and thereby, the value of any home he would have been considering. Rising interest rates is not a chance event — it is a certainty. And anyone buying now will have to realize that every point the interest rate rises, the effect will be huge on value.

The second consideration is median household incomes. Though the numbers have not come out for 2008, median incomes are projected to be around $62,000, which is in great contrast to the $255,000 median home price. Traditionally, people can afford to borrow up two times their income, and the disproportionate growth of home values have left this scale still very off-set. And with the general economy on its downturn, it is only likely to greaten the divide. Expect prices to adjust downward to come back into relation to income.

The third is simple supply and demand. Traditionally, a residential property was valued at a point in which the monthly expenses of owning were in equilibrium with renting a comparable building, less a dividend to account for the difficulty of acquiring a down payment. So, the idea would be that a house would cost the same as renting, less a 6-10% return on the total value of a down payment. For the last few years, however, there was no necessary down payment, and therefore no dividend applied to value, and due to the appreciate rates, fell way out of line with renting, because the assumed increase in value would far outweigh the additional monthly costs, which would often be paid by cash pulled from the home’s “equity.” But now that appreciation rates, housing must prove itself once again to be a competitive investment vehicle compared to other elements, or else people will rent.

And so when is a good time to buy? Well, expect this year to be a hard one (30% further drops in value will not be unheard of), and then start leveling off once values are back within reason on the above rules. The nice thing is that after a big boom and bust in real estate, prices tend to level out for several years, which means you can afford to be patient, and wait until things cool down (you can read my article on “sticky-floor” real estate pricing) coming i nthe coming days.

The author is a professional in both residential and commercial real estate in Los Angeles. Please visit his website for more information.

Sorry Home-Owners: 5 Reasons We Haven’t Hit Bottom in Real Estate

With real estate markets across the country in relative shambles, and some of the darkest days in real estate in memory, home-owners are desparately in need of some good news, and some relief.   The bad news? It’s only going to get worse.

Below is a list of the five major indicators that we have not yet hit bottom of the real estate market:

5. Interest Rates and the Tightening of Lending Practices

One of the most important factors that determines the  value of real estate is the Federal interest rate, and the availability of money. 

When the interest rate is low, the actual cost of borrowing money is also lowered, which means that people can afford to take on greater debt.   Affordable debt means that people can afford to pay a greater purchase price with the same relative cost to them, and that, in turn, drives of homes values.

In the last 10 years, we have seen unprecedented lows in interest rates, and the availability of money in the U.S.  Not only that, but banks were lending money to anyone that asked for it at rates below the federal interest rate (that is the “sub-prime” part of sub-prime mortgages….but more on that later.)    

To give you a historical perspective, see the chart below, which graphs out the historical mortgage interest rates in the US:

 

As you can see, as recently as 2000 the average interest rate was floating at around 8-9%, as opposed to the 5-6% that has been the average of the past several years (bear in mind, this chart excludes adjustable-rate mortgages…the number of which more than quadropled in the last few years.) 

The reason it has been so low is because of Fed rate slash right after 9-11, which dropped the rate from around 7 to a mind-boggling 1%.  It has been on the gradual incline since then, but it is still well below historical norms.  Extended periods of low interest rates are bad for our economy, because it devalues the dollar.  As such, the government is incentivised to increase the interest rate to promote economic stability, so whenever they can, they will raise it.

On top of that, with the recent foreclosure rates and general replication of the S&L crisis of the 80’s, burned banks are going to have to severely tighten lending restrictions, to ensure that they are making loans that will proform.  Gone will be the 0% down teaser rate mortgages with no credit requirements:  alerady, federal banks and the government have issued requirements that will take effect later this year that will require strict credit checks, and a miminum percentage down payment (likely around 20%.)

HOW MUCH FURTHER WILL IT DROP?

So what does stricter lending requirements and higher interest rates mean to the housing market?  Well, with fewer buyers, and a higher rate, prices still have a long way to go.  To give you a frame of reference, it is a 33% increase to go from 6% interest to 8% interest, that means the negative effect on price from that alone could be a 25% drop in prices which has not yet happened.  On top of that, restrictive limits on lending means with far few buyers, that downward pressure could be incredibly significant.

SHOULD I BE WORRIED?

While the immediate jump in interest rate is highly unlikely (especially given the current economic situation), but over the long term, it will happen if America wants to restabilize the economy.  On those timelines, however, it will likely only slightly affect prices as compared to various other factors, including inflation, appreciation, and population increases. That said, the tightening of lending restrictions is going to happen, and it is going to happen soon; expect it to become a lot harder to get a loan in the coming years, and for that to affect prices accordingly.  

4. REO Bank Holdings and the End of the Fiscal Year

Real Estate is an interesting market – because home purchases are largely not an pure investment choice, housing prices tend to have a “sticky floor.”  What that means is that rather than sell it for a lower price, many home owners would rather sit on the property and wait for the price to return in value.  The effect of that is that instead of housing prices having a natural oscillation between high and low, the prices tend to go high, drop some, and then flatten out for an extended period of time, until they go up again.

That would be good news, if it wasn’t for REO properties.  REO (Real Estate Owned) properties are properties that have gone through the foreclosure process, and are owned by the banks or lending institutions that made the loan on the house. Unlike home-owners, banks ARE investment owners, and sell their homes based on economic need, rather than lifestyle. 

What this means is that with the unprecented numbers of foreclosures and REOs, banks are holding a lot of homes.  And an unoccupied home makes them no money, provides them with illiquid capital, and in fact costs them money through real estate taxation and HOA dues – none of which banks like.  They are extremely motivated to sell, and sell at severely discounted prices, so long as they come close to meetings the balance left on the original loan. REO properties are the single greatest tangible downward market force on home prices, and the more of them there are, the lower the prices will go.

On might argue that banks don’t seem to be slashing their prices nearly as much as I am alluding to.  The reason is two-fold – 1) like any investor, they do still want the best price possible and 2) chances are you weren’t looking near the end of the fiscal year.

Banks and lending institutions are investor-heavy companies, and as such, their business cycles are very much dependent on the fiscal year.  They are heavily incentivised to liquidiate their real estate holdings at the end of each quarter, and specifically at the end of the year, when they must report earnings, and validate their financials to their investors.

HOW MUCH FURTHER WILL IT DROP?

As we get closer to the end of this year, and indeed, even through the end of next year, expect sales volume to start picking up, and prices starting to get slashed.  Some analysts predict a drop of around 10% over the next 5 months, but if the rest of the financial world stays as bad as it is, that number could go even higher.

SHOULD I BE WORRIED?

While this is a very real market condition, and forclosure figures are still very high, this is a more of a symptom than a cause.  The drop will only reflect how worried the market is, and won’t drop anything like it has over the last year.  And if the slump continues through 2009, that drop would be even lower.

 3. The Home Surplus

A very big reason we are not yet at the bottom is our current home surplus . Please look at the chart below for the number of months supply of U.S. homes of the market as of Q2 2008:

 

In a healty market, home inventories tend to stay at or around 6 months worth of homes on the market.  Today, we are nearly at two times that value, and growing.  What it means, simply, is that prices are still to high. 

This is simple supply-and-demand economics: as the supply of homes continues to grow, and the number of willing and able buyers decreases, prices must drop. 

HOW MUCH FURTHER WILL IT DROP?

It is hard to say, because it is closely linked to many of the other causes in this list, but that in order for us to half the supply, it could take up to 50% of of asking prices.

SHOULD I BE WORRIED?

That said, it won’t.  Instead, the return to 6 months supply will be a gradual process that will be part of the “sticky floor” recovery for houses, during a period of stable pricing. More likely, I think it will show an decrease of around 20%, which includes the numbers from the above downward factors.

2.Resetting Sub-Prime ARMs

Ah, the subprime adjustable-rate mortgage (ARM).  This was really the root of so many of our real estate woes.  A near carbon copy of the S&L crisis of the 80’s, where lenders repackaged bad loans to unqualified borrows and passed them off to national investors, only this time, they were international ones.  The fundamental problem was that the teaser rates would reset from the rediculously low rates to something the borrow could no longer afford, and would have to be foreclosed.  Trillions of dolloars of losses later, banks have learned their lessons, and have stopped offering subprime ARMs, and have again started to tighten lending restrictions.  That was only after the hundreds of thousands of bad loans have gone through the pipeline, and left the real estate market in foreclosure hell.  And it isn’t over.

 

Take a look at the graph below, which charts subprime ARM mortagages in the US, and when they are going to reset the rates on those loans (the subprime ARMs are in gray):

 

 While it may look promising that we are nearing the end of resets, bear in mind that the forclosure process is a 6-MONTH process at least.  Go back sizx months on that chart, and you realize that we are barely halfway through it.

HOW MUCH FURTHER WILL IT DROP?

With billions of dollars worth of real estate subprime ARMs in the pipeline, this can again severely boost foreclosure figures, and drop price significantly. 

SHOULD I BE WORRIED?

Yes.  With only 2/3s of the subprime mortgages reset and through foreclosure, we could be looking at a further 100K+ of foreclosed homes in the coming year and a half.

1.Household Income Vs. Median House Price

Instead of doing much explaining, just take a look at the chart below:

 

From just 20 years ago, housing has gone from at or near median household income, to nearly 4 times.  Why?  For many of the reasons above – cheap and unregulated lending, frenzied consumerism, and international speculation.  Nowhere else in the world are these figures even CLOSE to ours, and it is all value that we will eventually have to give back.

HOW MUCH WILL IT FALL?

This is actually a much larger issue than just the real estate market, and has more to do with the US economy in general.  With our rampant overconsumerism, heavy personal debt, and unrivaled international debt, our economy is largely relying on the support of our international connections to keep us afloat.  Could housing plummet to one quarter of its present value?  Yes. 

SHOULD I BE WORRIED?

Will it?  No.  The US government, and our foreign allies have a vested interest in propping up the US economy for as long as possible.  If that were to happen, we would have to see catastrophies not only in the US, but in European economics, as well as Asia.  It is the one of the interesting elements of global economics: things tend to be far more complicated and interrelated, and, as a result, more stable.  Maybe over 50 years, we will see those numbers back where they belong, but for now, we are safe.

 

SO WHEN DO WE HIT BOTTOM?

This is the multi-million dollar question, and probably why you read this article. 

It is impossible to know for certain when it will happen, or how far it will drop.  My predictions, based on historical housing booms and slumps, seems to indicate that late 2009 to 2010 will have seen the majority of the downward swing, and that when we get there, prices will have dropped a further 20-35%.

That said, there will be clear indicators when we do hit bottom.  The interest rate will have risen by around a point, housing prices will have remained consistent for several months, and the surplus of homes will be on the gradual decline, back towards 6 months. 

As I’ve talked about before, real estate markets have a “sticky floor” for pricing, and tend to have extended periods of nearly flat prices when we have hit bottom, which will remain that way until things go up again.  In the last slump, that flat lasted for 5-7 years, depending on the area.  This crisis was far larger, and far uglier, and I would not be surprised if that flat period lasted for 8-10 years.  My advice to first-time buyers and investors is to wait for 6-8 months of stability before you consider purchasing, and when you do, expect appreciation rates to maintain only with inflation for severla years to come.

 

 

Darren Guttenberg is a real estate broker in Los Angeles, CA, and specializes in commercial real estate investing.  For any of your Los Angeles Real Estate needs, please visit his website.

 

 

Commercial Real Estate for Beginners — Signage

A frequent question I come across in this job is: “What sort of sign can I put on my building, and I can I make it 40′ x 40′ / rotate and shoot sparks / explode candy / be seen from the moon?” There is no doubt that signage is an important part of many businesses — it represents both a physical presence for the company, as well as a potentially very-powerful marketing tool. And the rules that govern them? The vary wider than any other restrictions I’ve seen.

Take L.A. A city plagued by billboards and uber-signage, where over the last 50 years, every corner (commercial or residential) has a giant advertisement. To compensate, the signage rules are incredibly strict, and limit big signs (larger than 1.5 sq-ft per linear foot of street frontage) to those that have been grandfathered in from previous owners. And so in L.A., you have to get creative, and see what is possible within the strict confines of those rules.

Where do you find those rules? Look with your local city planner (they should be online), or you can visit one of your local signage makers, who have the same information, and may be more up-to-date. Ask them that sort of restrictions exist, and what the various classifications and requirements for signage are (this code is normally 20+ pages of REALLY boring writing.) And don’t get too upset if your local broker doesn’t know the answer off-hand — that information changes frequently, and is typically handled by a third=party signage company.

For more information on Los Angeles commercial real estate agents, or Orange County commercial real estate investing, please visit one of our websites. Monocle Real Estate Services — Experience the Difference.