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Long Beach Business & Commercial Law Blog

Real estate market opportunities with e-commerce growth

Cities near major metropolitan areas across the country are benefiting from the boom in e-commerce in a way that is impacting the real estate market. CNBC looks at one such city in California where fulfillment centers for a variety of online businesses are now providing jobs for residents. The infusion of cash into these local economies is proving to be a boon for commercial real estate and could provide a pull for developers.

Since 2012, the growth of distribution and fulfillment centers designed to deliver to individual customers has created around 10,000 jobs in the county of San Joaquin. Unlike positions in warehouses focused on bulk orders, these jobs offer a higher pay. A professional in the commercial real estate sector claimed these new warehouses also require more staff to meet the demands of small orders.

Commercial real estate market verges on breakdown

Prices and valuations of commercial real estate have soared across many markets, including Los Angeles, and the national averages have grown as a result. However, an author with MarketWatch stated that the end of the national bull market may well be nigh. The Northstar Commercial Partners chief executive and chairman pointed to an increase in vacancies and decrease in rent for office space across several of the largest metropolitan markets. He further noted that a "flurry of activity" is often seen simultaneously and signals the end of the bull run.

The author referenced Los Angeles as a similar case, but he provided more exact numbers on New York City. Here, he said, local employment is still supporting growth of commercial real estate, yet the demand is taking a hit. Vacant space was trending upward in the second quarter to 8.2 percent. Developers are still putting the venture capital and bank lending available to them into building and renovating even as returns fall.

Settlement hopes dashed in Apple-Qualcomm legal dispute

The long-running legal dispute between Apple and Qualcomm is not likely to be settled anytime soon according to business and financial analysts. The two California-based companies are embroiled in contentious litigation over royalty fees, and hopes for an amicable resolution were dashed on July 7 when Qualcomm escalated the dispute by filing patent infringement complaints against Apple with the United States International Trade Commission and in a federal district court.

Qualcomm claims that technology Apple uses to build its ubiquitous iPhone infringes on six of its patents, and it has asked the ITC to halt imports of the popular smartphone and issue a cease-and-desist order to prevent iPhones already in the country from being sold until the dispute is resolved. Apple responded to the legal development by releasing a statement accusing Qualcomm of trying to profit from technology it played no role in developing. Apple also accused Qualcomm of acting unreasonably during settlement talks.

Commercial property buyers can't neglect due diligence

Californians who want to purchase property need to do more than simply find good deals. Experts say that it's just as critical to perform due diligence. This entails learning about the land or buildings that they're going to purchase before they finalize the transactions in question. With commercial properties, due diligence also includes aspects like finances.

Performing due diligence may include a range of different tasks. For instance, investors may find it wise to perform a basic visual inspection of fixtures like plumbing, ventilation and elevator shafts to ensure that there are no obvious material deficiencies. Although professional expertise is necessary for many of these assessments, buyers should still obtain and review copies of all inspection reports so that they can assure themselves of the results. Reports detailing environmental conditions, geology, soil, maintenance histories, structural engineering and commercial operating incomes are all important parts of making an informed purchase decision.

Construction disputes less costly in 2016

California builders and developers might be interested in learning that the average financial toll related to construction disputes in North America fell in 2016 to $21 million. While the disputes were generally less expensive, they did take two months longer to resolve than in 2015. This is according to a report issued by the consultancy and design company Arcadis.

Arcadis also determined that contract errors and omissions were the most common reasons for the disputes. Unsubstantiated claims and inadequate contract administration were also issues. Public developments had the highest percentage of disputes. Joint ventures were involved in a third of the construction disputes in 2016.

Peaks in commercial real estate values

California commercial real estate investors might be aware that the industry is reaching a peak. This could be cause for concern because a peak could be followed by a steep drop. In April, prices hit a new high, and over the past year, prices have gone up 7 percent.

Compared to the last peak in 2007, apartment prices are 53 percent higher, core commercial prices are 13 percent higher and the overall index is 23 percent higher. According to one price index that focuses on REIT-owned property values, January was the high point. Even if the industry has not yet peaked, it is believed that it might be at a plateau.

CRE transactions down after Federal Reserve rate increases

Investors in California and around the country will likely know that the U.S. Federal Reserve increased interest rates on June 14 for the third time in the past several months. The nation's central bank says that the decision to raise rates was taken to stabilize the economy and keep inflation under control, but many financial experts believe that worries over commercial real estate lending may have also played a role.

The 2008 financial crisis was largely caused by irresponsible lending, and sizable increases in commercial real estate values over the past eight years have prompted fears that another asset bubble may be developing. Banks currently hold about $3.8 trillion in commercial property loans, and a large portion of this debt is held by smaller banks with assets of less than $50 billion.

U.S. real estate and the increase in foreign investors

Real estate investors in California may be interested to know that, according to a survey conducted by the National Association of Realtors, there has been an increase in foreign investment in real estate in the United States. In 2016, Florida was a leading destination for international investors, and the investors that that bought and sold the most real commercial real estate for that year were from China.

The survey examined the commercial real estate transactions that were conducted in 2016 by realtors and that involved a client from another country. Twenty percent of the realtors surveyed reported making a sale with an international client. Many real estate professionals believe that the leasing and selling of commercial real estate will increase in 2017 as foreign investors begin to focus on smaller commercial real estate in secondary and tertiary areas.

First quarter commercial property sales down by 18 percent

Commercial property investors and developers in California have generally fared well in recent years, and the markets in gateway cities like Los Angeles and San Francisco have been particularly active. However, a six-year construction boom has created a glut of apartment complexes, office towers and hotels in many parts of the country. Commercial property sales were down by 18 percent in the first quarter of 2017 compared with the same period a year ago, according to Real Capital Analytics. Industry analysts say that a combination of market forces, political uncertainty and more cautious lending practices are to blame.

Reports suggest that many investors are taking a more cautious approach to the commercial real estate market because of doubts over Presidents Trump's ability to deliver on his campaign promises to reduce regulation and oversight and lower taxes. Others fear that pursuing these policies would create inflationary pressures and drive up interest rates. Property values are largely driven by debt and the availability of credit, and interest rates have already begun to creep higher.

Commercial real estate pitfalls to avoid

Commercial property values in California and around the country have been enjoying robust growth, but that does not mean that investing in offices, stores, warehouses or restaurants is without risk. Complex real estate deals can be stubbornly difficult to close, and there are a number of pitfalls that can either cause costly delays or derail transactions completely.

Investors should take steps to find out what commercial buildings have been used for in the past to protect themselves against ruinously expensive environmental cleanup costs. Environmental assessments are usually performed before real estate loans are approved, and soil testing may be required when buildings were once occupied by companies that worked with toxic substances. Building owners can also avoid unnecessary paperwork problems by ensuring that title issues are addressed promptly after loans have been paid off.

Creative Solutions for Complex Legal Issues

Contact Henry B. LaTorraca

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Long Beach, CA 90802-4306

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