J.Lamberto & Associates

06/06/2023

Given the recent sale of 350 California Street and other developments, I thought I should weigh in. The sale of 350 California Street has sent shock waves throughout downtown San Francisco. The price, $225 per square foot, prompted Wells Fargo to unload their largely vacant property at 550 California Street for $120 per square foot. The bank paid $108 million for the building in 2005. They will get $46 million from the current sale, assuming it closes, for a loss of $62 million. Is there a landlord anywhere in downtown San Francisco who knows what his property is worth?

The doom loop in commercial real estate has spread to the hotel business as well. Park Hotels and Resorts, a Virginia based real estate investment firm, has stopped paying interest and principal on a $725 million loan due this November. Their lender will take possession of the two properties supporting this loan, the Hilton San Francisco Union Square and the Parc 55 San Francisco. Why is this significant? Because it's the third major default in California related properties year to date. The other two are Brookfield and Pimco in Q1. How are hotels impacted by the commercial real estate debacle unfolding in downtown San Francisco? The hotel business depends on business related travel to support itself. It varies city by city, but in San Francisco, who are you traveling to meet with given the 30% plus vacancy rates in commercial buildings? Given the fact, that Park Hotels and Resorts can't meet it's financial obligations, is it safe to say that the city's receipts for hotel taxes have taken a hit?

All of this begs the question of how the city of San Francisco and the State of California plan to pay their bills. Hotel taxes and property taxes are a substantial portion of the city's budget. We are already forecasting a $700+ million deficit in the coming years for San Francisco before we reassess the property values of commercial properties in downtown San Francisco. And lest there be any ambiguity, if the lender of the Hilton Union Square takes possession, they will sell the property at a fraction of the value at which it is currently assessed. Given the recent sales at 350 and 550 California St. at less than 50% of what they were worth pre COVID, how does the city avoid seeing a drop in property tax receipts? The City of San Francisco has a unit called the Assessor Recorder department which locates taxable property, identifies ownership, and establishes taxable value. The City also operates a unit called the Assessment Appeals Board who decides disputes between property owners and the Assessors Office. My guess is that every landlord in San Francisco is filing paperwork to reduce the value of their holdings which will have an obvious impact on receipts beginning this fall when property taxes are due exacerbating the current deficit projections over the next several years. (Most property owners pre pay monthly, but they're due starting in November.) I suspect they will be slow walking the assessments into 2024 to limit the damage. Empty buildings don't pay rent. The owners of said buildings are struggling to repay their debts and the implications for property taxes receipts are ominous.

For the State Government in Sacramento, the picture is no better. In January, the Governor projected a deficit in excess of $20 billion. He recently increased that to just north of $30 billion and defaulted on a COVID related federal loan of $18 billion and change in April. By triggering the debt covenant in the loan from the federal government, businesses in California will now see an increase in their unemployment insurance costs. There were 22 states who received unemployment assistance aid during COVID. California is one of four states who have failed to repay it. The others are New York, Connecticut and Illinois. I have enclosed a link to the state treasurer's page here which details California's municipal debt rating by Fitch, Moody's and S&P.

https://www.treasurer.ca.gov/ratings/current.asp

California's current rating from Moody's is Aa2, which positions us along side economic powerhouses like Louisiana, New Mexico, Rhode Island and West Virginia. What will our rating be if we fail to either raise taxes or reduce services to make up for the $30 billion deficit? I ask this because the 800 pound gorilla in the room in Sacramento is the unfunded pension liability at Calpers which as of June 2021 was 82% funded and as of June of 2022 was 72% funded. I present for your review their November 2022 statement, the relevant details are on page 6 of 46.

https://www.calpers.ca.gov/docs/board-agendas/202211/financeadmin/item-6a-01_a.pdf

Try to imagine the pension beneficiaries plight when the state can't pay its bills and the pension check for one in four beneficiaries is about to bounce. What will likely happen here is similar to what will happen to commercial properties in downtown San Francisco. The practice in banking circles is known as extend and pretend. Extend the maturity of the loans and pretend the borrower is going to repay the lender and make good on its commitments. The other options include a federal bailout or issuing more debt. None of this is good news, and nowhere can the average taxpayer, property owner or pension beneficiary go to find out what the city of San Francisco or the State of California have in mind as to how to bail themselves out of this mess. The LA Times. the San Francisco Chronicle and The Sacramento Bee are all silent on the declining fiscal position of the state. I mention this because in the not too distant past, California was triple A rated alongside Texas and Florida. The governor has until the end of June to present his budget and the clock is ticking. Frankly, I don't envy his position. The Mayor of SF is in the same boat and with the nearly 100 departments that make up the city government, she is going to have to make some tough choices. Attached below is the list.

https://sf.gov/departments

Which department will be forced to make do with less? How will the State plan to handle the same problem on a much larger scale? These are questions which have no easy answers and it is quite likely that the city council and the state legislature are in way over their heads.

05/02/2023

In March, when Silicon Valley Bank was dissolved, I discounted the possibility of systemic risk. After the failure at First Republic, I think it's time to rethink that.

Banks basically have two main areas they can get into trouble, the securities they own and their loan portfolios. This gets complicated in a rising rate environment when banks get caught borrowing short and lending long. Add to that the problems of improperly hedging your interest rate risk and you begin to see the scope of the problem facing the banking community today.

There is an additional risk here looming which may threaten to spread. Banks make mortgage loans, commercial loans and commercial real estate loans. Typically, if you're going to buy a strip mall or small office building or a small to mid sized apartment complex, banks operate in a similar fashion as they would if you were simply buying a house. They get an appraisal, they judge the creditworthiness of the borrower, and get a good feel for the borrowers other assets. If on the other hand you're looking to buy the Trans America building, you're probably going to syndicate that risk by issuing asset backed bonds to a pool of investors. Large or small however, if the asset backing the purchase declines materially, the loan in the case of the banks or the bond in the case of larger purchases, simply put declines in value. This is what happened in 2008. I bring this up because in Q1 2023, Pimco and Brookfield Asset Management defaulted on asset backed bonds related to commercial real estate in California. Essentially, empty office buildings don't pay rent by themselves and bond holders didn't receive either interest or principal. I now believe these defaults are what triggered the current banking crisis. These are two substantial names in finance circles and may be the tip of the iceberg.

It would help here to use a specific example. In 2019, 350 California Street, also known as the Union Bank building located between Battery and Sansome, was put on the market for $300 million. Unfortunately, the pandemic hit three months later and the listing was pulled. In 2021, as business conditions improved and the building was put on the market again but failed to raise the minimum bid of $180 million. Fast forward to 2023. Bids are due shortly and this auction is being widely watched from City Hall to the offices of every major commercial real estate office to the lending offices of every bank in the region. According to a WSJ article from April 27, the building is expected to sell for $60 million. That represents an 80% decline from pre COVID. For links to the article go to the Wall St. Journal's web page, type Fire Sale into the search engine and you'll find the ensuing article by Peter Grant and Jim Carlton. They site sources at CBRE for their data.

Let me begin by saying I think the likely sale price of 350 California Street is as much a statement of the financial condition of the seller as it is a statement about the current condition of the commercial real estate market in San Francisco. However, if this trend were to continue, City Hall will expect declining receipts in property taxes. Commercial Real Estate agents will likely see declining revenues from sales. And last but not least, banks will need to increase their loan loss reserves to protect against default. In this point and click world we live in these days, depositors aren't waiting to see if the Federal Reserve will bail them out. They're pulling their deposits and banking elsewhere. Without deposits, a bank dies. This happened at both Silicon Valley Bank and First Republic. Initially, it was explained that SVB's held to maturity portfolio (largely Treasuries) was responsible for their downfall and regulators were asleep at the switch. I don't think we'll get the whole story however until all of the dust clears, the lawsuits are settled and some well placed insider writes a book. Until then, there is a material risk in the commercial real estate market percolating throughout the Bay Area, where the work from home movement has hollowed out downtown San Francisco.

As to whether this will impact other cities, that's difficult to say at the moment and we won't know for sure for many months to come. Brookfield for example pointed to the Washington DC area as well as California for being responsible for their financial troubles. Any way you look at it, if you own local banks with commercial real estate exposure, you should brace for impact. If this were an easy problem to solve, neither Pimco nor Brookfield Asset Management would have defaulted earlier this year. In order to limit the contagion of bank runs, the Treasury Department has thus far guaranteed both insured as well as uninsured depositors at Silicon Valley Bank, First Republic and Signature Bank all of whom have been seized since March. JP Morgan stepping up to buy First Republic may have stemmed some of the fear circulating in financial markets, but again time will tell. The markets for the moment are looking at where interest rates are going and we'll be hearing from the Fed shortly in that regard. I would have preferred to end on a happy note, but I believe we're in for a volatile period where speculators will be searching for the next bank to go under. With a recession looming, this could get complicated rather quickly.

03/12/2023

On Wednesday, Silicon Valley Bank revealed they had suffered losses of $1.8 billion and were seeking to raise $2.5 billion in the debt markets. By Friday, regulators had seized the bank marking the largest bank failure since 2008. If you live outside of California, you've probably never heard of Silicon Valley Bank but they are a strategically important bank for the Venture Capital community with clients ranging from Israel to China. On Sunday, Treasury Secretary Janet Yellen revealed there would be no bail out for Silicon Valley Bank. I wanted to weigh in here and offer four takeaways.

First, there are implications here well beyond San Mateo and Santa Clara counties. There are tech startups in Israel, China and the EU who are going to feel the heat here and will be scrambling to make payroll. As of December 31, 2022, 95% of Silicon Valley Banks deposit were unsecured. These include deposits not just of start up companies but publicly traded companies like Roku.

Second, there are Venture Capital firms who were going to fund another round of startups whose available cash is either tied up in court for the foreseeable future or lost forever. The shareholders and bondholders in Silicon Valley Bank face a similar situation.

Third, there is the question of contagion. What other regional or community bank will be impacted? Here, I believe the fear is overblown. Don't get me wrong, if you own shares in a regional or community bank, I would expect some rough sailing over the next 90 days, but I think Silicon Valley Bank's unique role in financing startups and with a tech heavy portfolio of clients is something you won't find in a small, local bank in either Iowa or Maine.

Fourth, Silicon Valley Bank has a unique role as a lender to Napa Valley with over $4 Billion in loans throughout the wine making industry. Many of these vintners also have deposits on hand at Silicon Valley Bank which will pose a potentially serious problem near term. I'm not worried about Ernest and Julio Gallo here. I'm more worried about the small run vintners who are really running small farms. They have very small margins and many have tens of thousands of gallons of unsold wine sitting in storage. As of this writing it is unclear how widespread a problem this will be, but there are 450 wineries in the Napa Valley. Near term I will say a prayer for these small vineyards and hold out hope the damage is limited.

Will this impact the real estate market? The answer there of course is it depends. If your buyer was using deposits held at Silicon Valley Bank as collateral for a mortgage, I suspect they will be withdrawing their offer. The same would be true for an employee of a company who used Silicon Valley Bank to distribute payroll. Further, I expect this have a negative impact on local area layoffs. Outside of that, I don't expect this to be as big an issue as what the Fed does with interest rates at their next meeting. The ideal solution would be for the FDIC to find a buyer, ideally before the financial markets open on Monday. We'll have more clarity on the situation over the next 48-72 hours. Any way you look at it, bank failures are not a welcome feature of the economic landscape.

09/27/2021

This year’s Susan G. Komen fundraiser for breast cancer was held at the SF Zoo. Those interested in donating can go to Komen.org or by searching Facebook or Instagram for KomenSF.

02/19/2021

Most real estate professionals agree that the March to September window is where the rubber meets the road for the real estate market. This is where the lions share of the business is done year after year. With the ides of March just around the corner, I wanted to share a few items of good news, one or two warning signs and offer some year over year comparisons in the hope of offering guidance to buyers and sellers in 2021.

First, the good news. According to a February 18th editorial in the Wall Street Journal by Dr. Marty Makary from Johns Hopkins, the peak of the coronavirus may be behind us. That is to say, based on a statistical analysis of the population, we may reach herd immunity by April. Since the beginning of the year, the number of new cases is down 77%. Dr. Makary is speculating somewhat but he theorizes that the reason the virus is in decline is that it is running out of people to spread to. The problem in judging this is the level of asymptomatic spread. If the Dr. is correct, we will likely have a summer economic rebound of substantial proportions.

Second on the good news front, Governor Newsom announced on January 8, that the State of California is operating with a $15 billion dollar surplus from 2020. This contrasts favorably with New York State which sadly is $15 billion in arrears and facing substantial tax increases as a result. According to the Governor, we now possess $34 billion in budget resiliency which includes $15.6 billion in the rainy day fund. This was somewhat surprising for those of us monitoring California's finances, as earlier in the year the Governor was warning of a $50 billion dollar deficit. Back in June, there were calls for tax increases on a number of fronts as a result and this news was largely overshadowed by the events in Washington on January 6 at the Capitol building. For more information go to gov.ca.gov.

On the other side of the ledger, there are two worrying signs. The first is the persistent unemployment picture. Initial claims are stubbornly continuing in the 700,000+ region (normal is less than 200,000) and continuing claims exceed 5 million. It is expected these will both decline substantially as certain industries, notably hospitality and tourism, come back online. The recent resurgence in Hawaii is encouraging in this regard.

The second worrying sign is the recent uptick in interest rates. Now, we all know somebody who bought a house in the 1980's and they had a 30 year mortgage of 15% or more, so why is the 3% level currently worrying? The level itself isn't, but the trend line is. The 10 year treasury has bumped up from under 1% to 1.3% since the election, while shorter rates are flashing negative. This is pushing the 30 year fixed mortgages to tick up from 2.91 % to 2.99% over the last week, down from 3.69% a year ago. One of the primary drivers in real estate is the cost of borrowing money and if you speculate that property values generally grow in the 3-5% range, borrowing money at current rates is a huge win, particularly in the luxury market. I would urge buyers to get pre-approved sooner rather than later and lock in rates as low as possible, for once the economy fully reopens, rates are likely to jump and buyers will miss out on this pandemic induced opportunity.

Lastly, I'd like to outline some trends for 2021 and offer some comparisons from 2019 and 2020. Currently the Napa market has approximately 100 listings with a median price of $897,000 with a median days on market of 31 days. A healthy market in Napa for this time of year is 300. We are woefully short of listings currently and experiencing a carryover of the urban flight trend which characterized 2020. Although the real estate market nationwide was surprisingly positive in 2020, this was not true in all markets, notably New York and San Francisco. Both of these markets have high concentrations of smallish condos whose values declined due to the pandemic related closures. California reversed a 20 year trend toward smaller and smaller homes in favor home office space, a yard and possibly a home gym as the pandemic related closures forced buyers to reevaluate their needs.

It used to be that if San Francisco sneezed, the rest of the Bay Area caught a cold. This was most notable when the dot com bubble burst in 2001 and the Great Recession of 2008. That didn't happen in 2020. In fact, many markets which had been in hibernation since the tax laws changed in 2017, had remarkable comebacks. This would include the likes of Carmel, Lake Tahoe and Tiburon. One of the surprising comparisons of 2020 involve Los Angeles and Miami, both of whom had breakout years. Miami in fact sold more luxury properties in the $5 million plus range than we did in the Bay Area for the third year in a row. Miami was also second to only Los Angeles nationwide in the $50 million and up market. If I were to use a football analogy to describe last year's real estate market, I would say Miami and Los Angeles were in the Super Bowl, whereas San Francisco and New York both missed the playoffs. What's equally surprising about this, is that Palm Beach sales aren't included in the Miami data.

Finally, I'd like to offer the following comparisons for buyers and sellers in Napa. In 2020, there were 985 properties sold compared to 925 in 2019, an increase of 6.49%. The most expensive property was 1681 Green Valley Rd. for $15.7 million consisting of over 950 acres. The number of properties over $5 million that sold were 13, up from 5 the previous year. I suspect this was due to historically low rates. The median price per square foot was $451.08 in 2020 versus $427.68. The median sales price was $740,000 in 2020 versus $699,000 in 2019. All of these increases took place in spite of record high unemployment, which in all likelihood points to even greater increases once the economy comes fully back online. Imagine you borrowed money at 3% or less in 2020 and saw a 6%+ increase in median prices, you'd feel pretty good about your investment I suspect. Ok, it's not like owning Bitcoin, but then what you do own is far more tangible. I suspect 2021 will be a very good year for the real estate market nationwide, here in California generally and specifically in Napa. My number one piece of advice for both buyer and sellers alike is to consult an experienced local broker for these trends are constantly shifting. My sources for the data presented herein were the Wall Street Journal, Bloomberg, and BAREIS. Feel free to reach out should you have any questions about ongoing trends in rates, markets or public finance.

01/02/2021

Now that the New Year is upon us, I wanted to weigh in on the ongoing relationship between the pandemic, the economy and the real estate market.

First, the pandemic. With the arrival of the vaccine we have turned a corner in the fight against COVID 19. Depending on which vaccine you receive, you will need two shots approximately 21-28 days apart. For California to reach herd immunity, we will need to vaccinate something on the order of 60-70% of our 40 million residents. The availability of the vaccine to the general public will likely occur by March and it will likely take 6 months after that to vaccinate the required numbers for life to begin to return to normal. I for one look forward to the day when we can attend a Dodgers-Giants game and argue about such things as balls and strikes for a change.

Next up the economy. There are three metrics to monitor going forward to measure the health of the economy and a fourth issue which is specific to California. Those metrics are jobless claims, retail sales and oil prices.

For the last 9 months, California has been in the top three for unemployment alongside Hawaii and Nevada. Given our population size, it is probable that more people filed unemployment claims in California than any other state in the union. Getting those people back to work is job one. Real estate depends on healthy employment.

Secondly, retail sales are an indicator of consumer confidence. In our economy somewhere between 60-70% of GDP comes from consumer spending. Obviously this is linked to employment and will have a telling role in the real estate market in 2021.

Thirdly, oil prices which for the last six months have languished below $40 a barrel, have recently trended higher. Pre Covid prices were trending north of $55. IMHO, if prices can manage a sustained run in the $55-60 range for the year, it will be a sign that the global economy is well on its way to resuming normal economic activity.

Lastly, I would like to comment on a topic specific to California involving a Stanford publication and the 2020 Census. In September, Stanford published a study showing that in 2018-2019, 765 commercial facilities left California. There have been several notable departures in 2020 as well including Oracle, McKesson, Charles Schwab and Hewlett Packard. This is in addition to 20 consecutive years of net outmigration which the Census is about to publish shortly. This will likely result in the loss of one or more Congressional seats as well as impacting the Electoral College. We will know in the next week or so, when the governor releases his budget how much this has impacted California's GDP and municipal finances. For my part, I'm an optimist and believe California's future is as bright as ever. However, when you see data like this, it does force you to ask, "What do they know, that I don't?"

Finally, on the real estate market, I believe 2021 will be a very healthy market with low interest rates and more sellers feeling confident they can meet their price objectives then was the case in 2020. Full disclosure, I was totally wrong in March in my assessment of where real estate was headed in 2020. Seeing 25 million join the ranks of the unemployed and global stock markets losing trillions of dollars daily, didn't portend for an upbeat real estate market, but I fully admit I was wrong. Low interest rates and a fully engaged Federal Reserve were key components but adding to this were the work from home movement and the urban flight phenomena we witnessed last year. Couples, who might have waited a year or two before moving to the suburbs when they had school age children, decided in mass they needed to pack up and go starting in May. After all, if the restaurants, clubs, gyms, theaters and all of the attractions that make city living worthwhile are closed, where's the upside in paying top dollar to live in solitary confinement in cities where crime is on the uptick? Moving somewhere safe where you could have a home office, a gym and more square footage suddenly became necessary for survival. I believe this trend will continue in 2021.

Over the course of the last 9 months, I have had occasion to study the last three recessions and their impact on San Francisco and Los Angeles. In 2000, while Los Angeles does possess a tech sector, they were harmed far less than the Bay Area and Silicon Valley. In 2008, owing to the nature and size of mortgages in Los Angeles, they suffered a greater downturn, both in real GDP and real estate values. In 2020, largely owing to the large concentration of condos to single family homes in San Francisco, the Los Angeles market faired better. In San Francisco for example, the median price of condos was hovering around $1000 per square foot. Two years ago, we were testing the $2500 limit on the upside mirroring the New York market. Going forward I suspect further weakness in both San Francisco and New York in the condo market until such time as the economy reopens and the restaurants, bars and theaters are once again operating at full capacity. Between now and then there will be bargain hunters out there looking to pick up a deal. All throughout San Francisco and New York, you see boarded up storefronts. Once these shop owners begin to reopen, prices will pick back up. Small business is what makes the world go round and the sooner they get back on their feet, the better off we all will be.

I want to conclude by wishing everyone a healthy and happy new year and should you decide this is the time to buy or sell your home, feel free to reach out. My number one piece of advice is that experienced local agents have insights into their market that can save you thousands.

06/26/2020

These are two homes west of Jefferson close to Fuller Park desperately in need of an investor. While neither home is currently on the market, I believe the current owners could be persuaded with the right offer. If you or someone you know invests in distressed properties, give me a call at 917-287-4652. A neighboring property recently sold for $1,295,000.

06/25/2020

Bottega, Michael Chiarello’s Italian restaurant in Yountville, is now open for lunch and dinner. Seating is available for indoor and outdoor dining. One by one, our restaurants are coming back.

06/22/2020

At the French Laundry, Thomas Keller grows his own vegetables across the street in about a 2 acre garden with everything from rosemary to garlic. This is his strawberry patch.

06/18/2020

COVID 19 update

The governor said that the order came in response to both a growing body of research and the need for more precautions as the state reopens the economy.

06/16/2020

Stags Leap is now open for tastings. Please call ahead for an appointment. Limited seating. (707)261-6410