Zestimate In the Pipeline for Office and other Commercial Space

Zillow has been quite successful with their Zestimate algorithm concerning residential values.  Experienced brokers like myself have been doing this for years i.e. a Comparative Market Analysis (CMA) and Broker Price Opinions (BPO) however leave it to technology to update a practice around since real estate first transacted.

Thus it was only a matter of time before we would see similar algorithms designed for commercial spaces including office, retail, industrial and so forth. Commercial is much more complex; unlike residential there are other factors including free-rent, credits for build-out and so forth, however in theory such a system could be viable.

Office provider Knotel and leasing data specialist CompStak are collaborating to create an Automated Valuation Model for commercial real estate. Such a model according to the two firms would be a rough equivalent of Zillow’s Zestimate.

Unlike residential real estate; as commercial is usually investment oriented the model would be able to estimate the net operating income of a commercial property, especially office space, and thus come up with a valuation.

The company spearheading the development of the algorithm is Knotel (as mentioned above) a company which is considered a strong WeWork competitor. In addition to their partnership with CompStak, Knotel recently purchased 42Floors, a commercial real estate search engine and one assumes a collaboration to create their Automated Valuation Model.

CompStak recently rolled out its CompStak Analytics platform, which the company says comprises millions of lease comparable covering more than 10B SF of commercial real estate. Among other things, CompStak says its new platform allows subscribers to:

  • Compare the effective rent performance of a portfolio of properties against those of competitors in real time.
  • Identify investment opportunities by spotting properties that are performing above or below their peers.
  • Track starting rents for tenants in different industries across submarkets.

As a broker who works in both the residential and commercial markets I am intrigued and will be sure to include their proprietary information in my quiver of information sources as an adjunct to personal qualitative and empirical research; an algorithm may be able to assess, analyze and forecast but human intuition and experience is still quite valuable.

 

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Zillow Enters the Buyer and Seller Market in Denver with Cash Offers

While some claim Zillow is a disruptor on the real estate scene with their Zestimate (of note I composed a blog about this: The Internet Says My House is Worth) now the firm is launching Zillow Offers where Zillow will begin buying and selling homes with their own money.

While I personally tried the option with a few addresses and told the system does not yet participate with those addresses, the following is how the system is supposed to work:

A prospective seller would enter their address onto the Zillow website;  Zillow comes back with an initial offer approximating the home’s worth (similar to how one can obtain a Zestimate as present). If the seller likes the valuation, the company sends an estimator out to the home to calculate a more precise value and make a formal offer.

The seller can pick a closing date between two weeks and 90 days out. Zillow said its research has found that timing the sale of a home with the purchase of a new one is a top concern for sellers, and said the program will let sellers avoid “the extra work and time associated with a traditional sale.”

After buying a home, Zillow will list it for sale. Of note Zillow hired Denver’s Atlas Real Estate Group to provide agents that will represent the company in its purchases and sales.

As an experienced real estate broker while I am intrigued by the spin placed on the concept by some very astute public relations and marketing employees (and of note I am an alum of Edelman Worldwide), guess what the concept is far from innovative or disruptive.

  • If you have ever received a mailer advising you can sell your home for cash, no inspections, as-is and so forth, not too dissimilar.
  • Nationally a franchise titled “We Buy Ugly Houses” has been in the market niche for years.
  • Fix and flippers, investors and so forth have been doing this type of prospecting since real estate became a tangible investment and money-making opportunity.

Granted Zillow may make the process easier i.e. input and address and receive an approximate value and if interested an estimator will come out and review, confirm and so forth. I would assume the estimator will like most real estate brokers review comps, look at the condition of the home and so forth to ascertain a valuation.

Yet my concern for prospective sellers; are they taking less capital in return for convenience? True one does not have to list, stage, have showings and so forth. However as brokers we do this for our sellers and our fiduciary duty is to our client to achieve the highest and best offer(s) for their home.

If a seller advises they are in dire straights, desires a delayed closing, wishes to cash out and so forth as licensed real estate brokers we usually have options for our clients to make their sales transaction as seamless and profitable as possible. The reality is Zillow Offer participants are NOT offering their home to the overall market and thus may not realize the true market demand and value and thus accept less than the house is worth on the open market.

There are circumstances when Zillow Offers and similar opportunities makes sense including but but not limited to estate sales, sellers who may be in financial distress, those needing to move or relocate quickly and so forth. However again most licensed real estate brokers will meet with their clients, ascertain their motivations and formulate options and opportunities to secure the highest and best payout.

Granted by selling via Zillow Offers or similar outfits there is no commission. Yet again is the seller getting the highest and best for their transaction (and of note, commissions paid go against one’s basis in the property and thus a tax advantage).

I do believe Zillow Offers is correct on timing and markets i.e. mid-size. With Denver moving towards more equilibrium between a sellers market and a buyers markets and eventually may move into a Buyer’s market Zillow Offers may offer the correct alternative for those wishing to sell quickly, avoid a commission and desiring flexibility concerning closing dates. Yet for every convenience and potential savings i.e. commissions and time is the seller being short-sighted concerning values and potential capital gains?

 

 

 

 

 

How did The Brady Bunch do in The Real Estate Market

Remember The Brady Bunch the iconic television series of the late 1960’s. Well the famous house (the façade shown in the opening and closing credits) is up for sale; the first time since 1973.

Now I always questioned why Mike, an architect would design the children’s bedrooms to be triple occupancy and share a Jack-and-Jill or a Greg-and-Marcia bathroom. Mike and Carol’s bedroom had an en-suite and Alice had her room (see floor-plan link below). Yet the children ensconced in their shared bedroom until Greg had the brilliant idea to convert Mike’s study and later the attic to his own pad including beads and mood lighting. And those kids having to play in the yard with fake grass. I assume Mr. Phillip’s; Mike’s boss was paying him well.

Floorplan of the fictional Brady Residence

The Listing as presented on Zillow: 11222 Dilling Street, North Hollywood, CA 91602

Do to the popularity a low fence had been installed: Brady House Then and Now

Back to the real estate. While the home’s façade was famous the actual filming of the series was on a lot and not in the house. Now the house has not changed much since 1973 as the interior shots show via Zillow.

I was curious on how the fictional Brady’s would have done if they actually owned the house. Now realistically the kids would have moved on by now, or so I hope. Or Jan stayed at home with the parents to take care of them. Greg and Carol would probably be challenged to install a stair-lift on the contemporary staircase. And Alice’s room would probably now be the room of their live-in aid or Jan’s abode.

  • In 1973 the house was purchased for $61,000
  • Adjusted for inflation, that $61,000 would be $346,200 today.
  • The asking price is $1,885,000.

Thus not a bad windfall. The sad news is most likely the next owner may consider razing the home due to its 12,500 SF lot in Studio City, which is a geographically most attractive area of West Los Angeles. If one were to renovate to today’s code and tastes, most likely $400K or higher. Of note being the most photographed house in the United States only 2ndto The White House (the house is surrounded by mature shrubs which has not dissuaded visitors) you are guaranteed all day voyeurs.

Thus The Brady’s at asking will net over $1.5M in 2018 dollars before commissions.

If you may be interested my firm affiliation  Engel and Volkers does have shops in the Los Angeles area.

Why Continued Positive Comments About the Housing Market Scare Me

As a broker I make my living assisting clients purchasing and divesting of their real estate holdings. In this market of ever seemingly positive news I should be thrilled. Yet as a 20+-year broker licensed in two states I have some serious concerns on the macro level, which truly reverberates beyond home sale statistics.

At present the Denver market as well as the US market looks very healthy. Demand is high, employment and wages are growing, and mortgage rates are low.

However based on reports out this past week, if one reads between the numbers and taking into account history and growth trends, the market is quite challenged. Not at present but longer term we may be setting ourselves up for a dramatic shift in the economy and wealth accumulation.

There is continued strength in the overall national housing market with prices 6% higher than the same period one year ago. Some local markets continue to show double-digit growth in prices. Metro Denver’s year over year was 7.9%. Such numbers are driven by the simple law of supply and demand and specifically the limited supply at the lower end of the market. Thus lower end homes are witnessing significant price appreciation due to more competition while higher end listings are languishing or having price reductions (see my last blog).

While I have mixed feelings on Zillow and similar sites, their insights and digesting of data is always an interesting read: “It sets up a situation in which the housing market looks largely healthy from a 50,000-foot view, but on the ground, the situation is much different, especially for younger, first-time buyers and/or buyers of more modest means,” wrote Svenja Gudell, chief economist at Zillow in a response to the latest home-price data. “Supply is low in general, but half of what is available to buy is priced in the top one-third of the market.”

So why is the inventory and supply on the lower end of the market so challenged? A few reasons and many can be seen in your local neighborhood:

Conversion of Inventory from Home Ownership to Rental: During the Great Recession which many of us brokers also call “a housing crash”, investors from large hedge funds to Ma and Pa purchased 100’s of thousands of foreclosed properties. While some were fix and flips, the vast majority became income-producing rentals. At present according to the U.S. Census there are 8 million more renter-occupied homes than there were in 2007.

Granted some renters may be scared off from purchasing and while the investors could cash out and after paying simple capital gains have a nice windfall, at present the cash-flow on rentals is one of the most attractive investments in the market coupled with the underlying equity appreciation of the real estate; thus the motivation to sell is limited. In turn lower end and moderate homes are not coming on the market in meaningful volume.

New Home Sales are Down: In August 2017 there was a 3.4% monthly drop concerning new home sales. If demand is so strong shouldn’t new home sales be booming? Well, it is again simple economics and in this case pricing.

In August just 2 percent of newly built homes sold were priced under $150,000, and just 14 percent priced under $200,000.

Builders advise they desire to build more affordable homes yet profit margins or the lack of is causing constraints. Builders blame the higher costs of land (exurbs with lower cost land is falling out of favor with 1st time home buyers who desire to be closer to urban centers), labor, materials and regulatory compliance i.e. building and zoning codes (and this is before the hurricanes decimated Houston, southern Florida, Puerto Rico and the US Virgin Islands which will demand laborers and materials to rebuild leading to eventual inflation in those industries and supply chains.

One could argue that market forces will eventually realign the housing market. Yet when this will happen is anyone’s guess. Considering we are still in a “Goldilocks economy for housing i.e. jobs and income continue to grow, interest rates remain at historically low levels, financing rules have become more flexible and inflation remains tame at below 2% annually. So what is the problem?

At present our inventory of new and existing homes is static with numbers similar to those found in the mid 1990’s a full 20+ years ago HOWEVER during those 20+ years the country’s population has expanded by 60M. Couple this with a mismatched market as home prices will not come down as long as there are buyers out there willing and able to spend more and more money for less and less house as we have witnessed in hot markets i.e. San Francisco Bay Area, The Northeast and other markets.

Longer term is my concern. We have witnessed locally in Denver our market moving from purchasers to renters. Good for investors not so good for individuals concerning personal wealth. Homeowners are known for making big-ticket purchases i.e. appliances and upkeep and maintenance sustains the construction sector i.e. additions, roofing and so forth.

If we move towards a renter oriented housing market fewer Americas will be able to save and grow their money associated with the ownership and upkeep of a personal owner-occupied residence. Due to demand rents may continue to rise (as less inventory on the market) and thus renters will have less disposable income to spend which will ripple through the economy beyond housing.

Yet Denver may be the litmus test for the national economy as follows:

Upper-End of the Market: is slowing dramatically as prices rose to fast and thus not sustainable. Upper-end buyers are usually market savvy and thus will be more cautious entering the market. Even in the Country Club neighborhood I have witnessed price-drops and re-listings at lower prices all in an effort to generate activity; would have been rare one year ago

Lower-End of the Market: Supply is outstripping demand with the average home in Metro Denver over $410K; yet incomes/wages have not kept up as the average worker is slowly being shut out of the market and thus will be a perpetual renter,

Rentals: The vast majority of new rental buildings are priced at luxury levels (just look at the cranes in Cherry Creek North). Yet that market is slowing and many of the existing buildings are struggling to attract tenants and now offering rental incentives. Yet additional buildings continue to come out of the ground.

Zoning and Entitlements: In Denver while zoning has allowed additional density and not without controversy i.e. slot homes in Cherry Creek, while beneficial to rental development, most rentals are oriented to single and couple households, with few exceptions most new multi-family buildings are not designed for families or larger households.

The above is just some food for thought. Add an existential crisis and this housing “House of Cards” may come to an ugly resolution. While I am not predicting another housing crash, the off-balance market is not sustainable and the overall repercussions to the overall economy have not been considered, quite dangerous.

Opportunity Knocks in Cherry Creek North

Even in an overheated market opportunity knocks.

Every day I scan www.REColorado.com which is the MLS for Denver metro concerning potential opportunities including new listings, price adjustments and days of market. If the property is priced correctly and within a desirable area it will usually go under contract within days if not hours due to pent up demand and limited supply.

As many of my readers know I too am in the market as I sold my primary residence a few months back. However unlike many I have the luxury of living in what I hope is a temporary situation with below market rent thus I am willing to wait out the market. And while I may be incorrect; I believe the market will continue to slow in the middle to upper price ranges. While I am not suggesting a hard fall; existential issues may happen i.e. world events, interest rates and a getting long in the tooth bull market in equities…..my personal view business cycles have not ended and memories are short.

Yet for those looking long term I wanted to provide some real examples of properties presently for sale that have languished on the market yet may provide a good opportunity for someone looking longer term.

Cherry Creek North (1st Ave to 6th Ave, University Blvd to Colorado Blvd): Arguably one of the most in-demand neighborhoods in Denver with asking prices to match. Between the shopping district, The Cherry Creek Shopping Center coupled with easy access to Safeway,  Whole Foods and Trader Joe’s and a diversity of housing styles all within close proximity of downtown, its true location, location, location.

I pulled some statistics as follows:

Sold over the last 6 months:

Average Sales Price: $941,000

Per Sq. Ft. Above Grade: $447.73

Total Per Sq. Ft. i.e. including basement/unfinished: $340.39

On Market at Present:

Average Asking Price: $1,085.000

Per Sq. Ft. Above Grade: $484.83

Total Per Sq. Ft. i.e. including basement/unfinished: $394.84

Granted the numbers above may be skewed due to larger homes, new construction and of course location, location, location. However there are a few bargains available. Please note I have provided “my prediction” concerning closing sale price. This is just my personal forecast as I have no relationship with the sellers or the brokers listing the units and thus have no idea concerning motivations. Thus consider my predictions based on if I was representing a buyer and they asked me what they should offer and eventually close at.

525 Jackson Street: Located in the eastern part of the neighborhood 525 Jackson Street is a smaller 28 unit condo building on the NWC of 5th Avenue and Jackson Street, a pretty tree-lined quiet block. Built in the 1940’s the building is basic with some art moderne elements i.e. glass blocks illuminate the stairs (it is a 3-story walk up). The condos have nice expansive layouts, many closets and off-street parking, individual storage units plus a laundry/bike room.

At present there are two units for sale. Of note some of the challenges for some include no rentals allowed i.e. investors need not look. Per the bylaws there are various restrictions concerning air conditioners. There are no amenities beyond off-street parking, individual storage units and the laundry/bike room. Yet the building (new windows) and grounds (professionally maintained) fit right in with Cherry Creek’s streetscape.

525 Jackson Street #102: This is a smaller 2BD/1BA with 814 SF. The unit has been renovated including granite countertops, a designer bathroom and a unique tin ceiling in the master bedroom. Hardwood floors and ample east sun filtered through mature landscaping. This is a charming unit with an easy layout. Some may object to the 1st floor location and the smaller size, however at $350 PSF with an asking of $285,000 one can afford the Cherry Creek lifestyle for an entry-level price. My prediction concerning closing sale price: $250-$265.

525 Jackson Street #209: This is a larger 2BD/1BA with 917 SF. The unit has been partially renovated with a nice open kitchen. The bathroom is closer to original. It is a corner unit thus nice cross ventilation as it faces north and east. Windows have custom shutters, there are ample closets including 2 walk-ins and 3 hallway and off-street deeded parking. Asking is $299,000 or $326 PSF. My prediction for closing sale price: $270-$285.

Of note the last resale was unit #306, top floor (a walk-up building), nicely renovated including interior swamp cooler vent from the building common area system. An expansive 600 SF one bedroom which was asking $250K and sold for $255K in June 2017. The interior design and finishes were truly top-notch.

264 Harrison Street: A fourplex row house this complex is unique as it is a row house thus no common HOA fees; each unit is fee-simple and sits on its own tax lot. 264 Harrison has been through multiple and dramatic price adjustments. This is not a row house for everyone. The positives are the 2-car attached garage, modern, timeless design by a well-respected firm, Arquitectonica and a unique multi-split level design with the 2 bedrooms, one located on the 1st level, the master on the 3rd level and the middle level constituting the entertaining areas. There is a small private backyard and a balcony off the kitchen. The challenge with this unit is its location; the rear is adjacent to Colorado Boulevard (yet there is a 6′ brick sound wall  coupled with mature landscaping). The interior is dated including the appliances and cabinetry original 1984 with an interior palette of colors more associated with Santa Fe versus Denver. At present asking $474,950 or $287.85 down from $549,900. The value play, the neighboring unit 266 Harrison sold for $535,000 in April 2017. Granted it was completely renovated including updated interior including granite kitchen and Kitchen-Aid appliances, mechanicals, new windows, gas fireplace, built-in surround sound system, rear landscaping and so forth. However if one is willing to invest some dollars into renovation the value is there. Also sans HOA fees additional affordability and no restrictions concerning rentals. Please note I am in total disagreement with Zillow’s valuation of $501K which I assume is based on the sale of neighboring 266 Harrison. My prediction for closing sale price: $415-$440.

149 Harrison Street: Located on the west-side of Harrison Street i.e. not on Colorado Boulevard, a true single-family home for under $1,000,000 in Cherry Creek North. Originally a duplex and part of a larger 4-plex development the two units were combined and the lot separated allowing for a true single-family home on a standard 50’ x 125’ lot back in 2012. This home is not for everyone as 1) it is a ranch thus no basement or 2nd level. While offering 3 bedrooms and 3 bathrooms it is within a tight 1,826 SF. The yard is fenced in; there is a 2-car garage. However for comparable pricing of townhomes on the 100 block of Harrison Street one can own a single-family and the lot value (closer to the main business district similar lots are asking $900K). Yes there is a discount for being on Harrison Street across from Colorado Blvd and the eastern part of the neighborhood. However for a true SF home, renovated, newer mechanicals and materials all for $764,900 or $419 PSF down from $795,000, may be a good option for the buyer who desires a true unattached residence and possible future equity appreciation due to the lot with its G-RH3 zoning. My prediction for closing sale price: $725-$740.

Happy Hunting

Changes to Zillow/Trulia: Brokers and Lay Persons Need to be Aware

Since I am licensed in Colorado and New York I follow both markets. StreetEasy while not known in CO. is one of the de-facto multilist services in NYC used by brokers and clients alike. StreetEasy is similar to how the consumer site of  www.REColorado.com works here in Metropolitan Denver presenting listings to the general public and providing contact information for the Listing Broker.

While the following may be more oriented to brokers, the information is truly relevant to all concerning the presentation of properties and how the listing broker or those looking to build a relationship with a buyer is changing. In Colorado we have quite strict criteria developed by the Colorado Real Estate Commission concerning representation and disclosures.

StreetEasy is planning a significant, industry-wide change to their lead generation process. They are switching their focus from lead generation for exclusive selling agents (those brokers who have a contract to list the property with the seller) to a more buyer agent focused site. Since StreetEasy falls under the Zillow/Trulia umbrella, this will apply to all three sites.

Some brokerages pay the Zillow/Trulia group to keep other agents off the listing detail pages of exclusives (of note, the vast majority of listings in Colorado are exclusives i.e. represented by one agent/brokerage) on Zillow, Trulia and StreetEasy, so that all leads go directly to the listing exclusive agents. As of March 1st, 2017 this option will not be available. Instead, the sites will allow buyer agents to receive leads from all listings. Potential customers on these sites can select the exclusive agent, however, leads will default to buyer agents who pay to appear on listings within specific zip codes.

Will this muddle the information put out to the market? Depends on the level of disclosure. I understand why Zillow/Trulia is taking this action i.e. additional revenue generation. However for buyers and sellers who may be doing research on listings and/or are considering engaging in a brokerage relationship, it will become more confusing. Is the broker who contacted you the listing agent whose fiduciary duty is to the seller, or are they looking to represent you as a buyer and thus owe their fiduciary duty to you, or will they be a transaction-broker?

When I represent a buyer I desire to talk to the actual listing broker; I have access to this information from our Multilist service. For the general public brokerage relationships may become more confusing with the potential for buyer brokers to insinuate representation or insights on a listing which is not actually their exclusive. While it will be the responsibility of clients to insure their brokerage relationship is correct for their needs and their broker, regardless of the relationship is treating them in a professional and ethical manner my concern; the listing of brokers and lead generation will add to confusion on behalf of the general public.

I believe in Colorado we have multiple layers of protection and disclosure forms to insure proper representation and fiduciary duties associated with specific brokerage relationships. However in this day and age of Internet marketing and information  sound-bites there is a good chance there will be confusion. Stay tuned as if we see an uptick of complaints filed with the Real Estate Commission concerning representation, more clarity and disclosure requirements may come down the pipeline to catch up with technology.