Is The California Land Rush On Again?
June 1 1990 by Michael T. Harris
Should you have a piece of California real estate in your portfolio? The answer, according to a number of experts, is a qualified yes.
The sag which followed the end-of-the-’70s real estate collapse in California is over and property is on the rebound. Texas is down, and New England halfway to the bottom. But in selected parts of California land has taken off again, and both domestic and foreign investors are doing more than making plans.
A recent Barron’s study showed that vacancies in the suburban office market were still climbing in New York and Boston, but throughout California the vacancy trend had turned down.
“California is a nation, not just a state,” says Sanford R. Goodkin, executive director of the KPMG Peat Marwick/ Goodkin Real Estate Consulting Group, based in San Diego. “It creates more manufacturing jobs than all of Western Europe, and at 80 percent of Japan‘s rate. This is not a place for flakes or eccentrics. California is a very serious investment.”
“The bottom line is that California real estate can be excellent,” says Larry Krause, principal of Lawrence A. Krause and Associates, San Francisco. He points to the state’s key role as one of the Pacific Rim areas and a bridge to the Asian market. “There is a tremendous amount of cash coming in from Asia,” he says. “We can’t imagine the amount.” His last reminder: “The people that-a few years back-began to invest in southwest real estate thought California property had appreciated too much-so they went to Texas. Guess what they found?”
WESTWARD HO-NOT HUM
California will continue to grow right through the year 2000 and beyond. Roughly 450,000 persons per year will be added to the residency rolls. About 55 percent of that number is due to the birthrate; 45 percent is from immigration, says Leslie Appleton Young, economist with the California Association of Realtors (CAR). The state’s population should reach 33.5 million by the turn of the century, up from its present 29 million.
“Typically, California has had about a to 2 percent higher growth rate than the rest of the nation,” she says. And real estate appreciation over the rest of this decade should continue to climb.
“Our long-term projection is a little above the inflation rate, maybe in the 6 to 7 percent range. But some areas will climb at a much higher rate.”
BIG STATE, SMALL TOWN
The names of this decade’s fastest growing cities and regions might not be familiar to those in the midwest or east-for now. But for those considering investing, they are names with potential: Sacramento, Fresno, Modesto, Stockton, Bakersfield, San Luis Obispo, Apple Valley, Lancaster, the Inland Empire, the Coachella Valley, Temecula, Rancho California, and the eastern part of San Diego County. These are the areas where growth is expanding, despite softness elsewhere, and where a good portion of 450,000 new residents per year will go.
A good example is California‘s state capital-Sacramento. Traditionally it’s been a one-industry town: government. But during the 1980s, a diversified industrial and service sector base has been building as companies and employees moved east from the San Francisco Bay Area.
“The Sacramento population right now is around 1.4 million and growing,” says Harry Hartnett, director of research for Kenneth Leventhal & Co. That’s because leasing office space at $16 to $18 per square foot is a lot cheaper than paying $35 to $40 a square toot in larger urban areas.
“A company can move there, operate a business at a considerably lower cost than in Los Angeles or San Francisco, and the employees can find homes and without a major commute,” he says. And the growth zone extends from Sacramento to Bakersfield.
ENTITLED LAND IS BEST
`If California were a separate nation,” says Tom Gau, of Kavesh & Gau, Inc., Los Angeles-based financial planners, “it would have the seventh largest gross national product in the world.” Estimated gross state product for last year is around $528.6 billion.
“Is this a good time to be buying real estate? It depends on where the specific piece of property is,” says Gau. “I would be careful about commercial property in Los Angeles, yet apartments still look good. Riverside County looks excellent because of how fast it’s growing.” Environmental action is also a big question mark. But that will have both positive and negative effects.
New developments can also be a good investment, says Goodkin, stressing that California is dealing with a shortage of developable land. “The key is entitlement,” he says.
“To get entitled land-property that is ready to build on-is so complicated, that it’s a precious piece of investment. There are a few funds being created that private investors as well as institutions can participate in for new home ventures.”
Buildable land-or rather the lack of it-is one of the factors pushing prices, says CAR’s Young. “Take for example Ventura County-just north of Los Angeles. Almost every city there has a cap on the number of units to be built. That definitely pushes prices up because demand is so great.”
OTHER REAL ESTATE PRODUCTS
“If you own directly, you have more control,” says Gau, “but if you’re 2,000 miles away, you’ll have a tough time managing it.”
Krause echoes his concerns. “I happen to be a big believer in the idea that unless you happen to make real estate your business, buying property at a distance is usually asking for trouble,” he says.
But management companies can be a crapshoot. “There are some good, and some not so good,” says Gau. “Make sure you interview them thoroughly, and get lots of referrals.”
That’s why Goodkin also likes California real estate investment trusts (REITs)-despite their sharp slide elsewhere in the nation. “You can check out the track record,” he says. “If it’s well managed, it can be a low-risk investment and should be a part of any portfolio. They’re usually cash-flow oriented, which is another plus.” One he likes is a real estate limited partnership called Realty Income Corp. of San Diego. It’s what he calls a low-risk oriented investment.
Gau picks the Rancon Corporation as one example of a real estate development company that has a good track record at raising funds and giving a good return. “They invest primarily in Riverside and San Bernardino counties,” he says. “They do development on an unleveraged, or low-leveraged basis. They are not a tax shelter, or a high-risk endeavor. Rancon has experienced a 22 percent return for the last 20 years.”
One new and novel partnership-style offering is based on the concept of shared appreciation, something in which Krause was actively involved. “Someone from the East Coast comes into town with maybe $100,000 to use as a down payment, but they find they can only buy half the house they had at home,” explains Krause. The partnership-Cornish & Carey Shared Appreciation Limited Partnership-would then lend them the other half of the down payment. At the end of five years the purchaser would either refinance or sell, and pay the partnership anywhere from 35 to 55 percent of the appreciation.” Cornish & Carey is one of the Bay Area’s top real estate agencies.
“The California microeconomic indexes still look very good,” says Stan Ross, managing partner with Kenneth Leventhal & Co., Los Angeles. “Immigration, new job formations and disposable income look good. All of those (positive) indexes mean that real estate has to be positively impacted. Good statistics mean more demand.” Any slow-down is likely to be temporary.
Ross thinks apartments look good for the long term. “It has to do with immigration,” he says. “Usually people moving here can’t afford a home right away. Also, they want to be close to their jobs.” He also sees a continuing trend to “rehab” older sections Of California’s major urban areas. The rehabbing of Koreatown in Los Angeles is a good example.
But, Ross adds, that doesn’t mean some areas aren’t a little soft right now. Los Angeles, especially the west side, and Orange County are experiencing a price plateau. “But Southern California can wind up with a funny kind of result,” says Ross. “You might see it as overbuilt right now at the high end, but underbuilt at the low end. The key to growth is the affordability level. What you want to do is look geographically at the state as a whole.” If parts of Los Angeles, the Bay Area and Orange County are sagging, other parts are going up like rockets launched from Vandenberg Air Force Base north of Santa Barbara.
Money is the fuel that lifts real estate prices, however, and “right now,” says Ross, “the banks and savings and loans institutions aren’t putting much money out.” Leventhal’s Hartnett adds: “What will put the damper on the future will be the leading institutions. They’ll create constraints on supply-once a certain level is reached-and new projects won’t get funding unless they are more than 50 percent pre-leased.”
Even in California, taking the long view is always a necessity for property investors. “The key to real estate is staying power,” says Krause. “If you’re going to do it for a quick turnaround, that’s usually a mistake.”
Michael T. Harris is a financial writer, and business consultant with the Hume Group of Toronto, Los Angeles, and Atlanta.