Marterra Market Monitor - December 2024

Year To Date Activity

Properties Sold (single and multifamily): 39

Sales Volume: $54,003,087

Properties Leased: 88

Gross Collected Rent: $8,409,361

I am so incredibly tempted to skip over the election, for there are some meaningful outcomes that will have a direct impact on the real estate sector.

First and foremost, Prop 33, the statewide rent control bill, failed by a considerable measure and Prop 34, the bill that requires health care providers to allocate revenues from the federal 340B Drug Pricing Program. The measure mandates that these providers allocate 98% of such revenues directly to patient care, passed. Wait, what does that have to do with real estate? Michael Weinstein has been using funds from the AIDs Healthcare Foundation to fund statewide rent control ballot initiatives for the last few elections. TLDR: we likely won't have to worry about a repeal of Costa Hawkins for awhile.

Those were the big-ticket items for real estate folks on the state level.

Now, to the elephant in the room - see what I did there?

I think I have lost track of how many times I have been asked some derivative of the following:

Trump is a real estate guy, so he will be good for real estate, right?

My answer has consistently been, I don't know.

There are a few things that will likely get passed (or reinstated) that are objectively good for the real estate sector like:

Trump has signaled intentions to expand Opportunity Zones during his second term, aiming to stimulate investment in underserved communities. Opportunity Zones will be expected to attract more capital into designated areas, leading to new developments and property renovations. The increased investment will likely elevate property values within these zones, benefiting current owners and investors.

Here is a link to a map of the designated opportunity zones across the county.

Additionally, Trump indicated a desire to reinstate 100% bonus depreciation as part of his tax policy agenda. This provision, initially introduced in the 2017 Tax Cuts and Jobs Act (TCJA), allowed businesses to immediately deduct the full cost of eligible assets in the year of purchase. However, under current law, this benefit is phasing out, with bonus depreciation decreasing to 80% in 2023, 60% in 2024, and continuing to decline until it fully expires after 2026. Reinstatement of 100% bonus depreciation would induce investor demand.

However, on the contrary, many of Trump's other proposals (e.g., tax cuts and deregulation) could spur significant economic growth. While economic growth is generally considered to be a good thing, excessive economic growth can be inflationary. One of the most common tools to fight inflation is restrictive monetary policy or higher interest rates. Higher interest rates have obvious negative consequences for the real estate sector.

Only time will tell whether we find ourselves in a favorable or unfavorable real estate environment. No matter how you felt when you woke up on November 6th, it's important to remember that rarely is anything as good or as bad as you think it will be. It is also important to remember, as humans, how we feel sometimes blurs our judgment, as demonstrated by this chart showing that most people who identify as members of a particular party generally think the economy is good, so long as their party is in power.

Single-Family Transactional Market: The transactional market remains slow due to seasonality, higher interest rates and limited supply. So I thought I would take the opportunity to share a quick story and a short lesson on Capital Gains tax. We opened up escrow on another project in Newport Beach, and as a part of the transaction, the sellers had the right to cancel should the purchase of their new home fall apart.

While I was walking the property with our contractor, the seller, who has lived in their home for +30 years, ran up to me and frantically asked

Have you heard of capital gains tax before?

In fact, I have heard about capital gains tax. I walked the seller through how capital gains work, and it looked like they would have an almost $175K tax liability. Upon learning about their tax liability, they canceled escrow, and our deal fell apart. I wanted to describe capital gains and how they apply to your primary residence. NOTE: NOTHING BELOW SHOULD CONSIDERED TAX ADVICE.

What is the capital gains tax?

Capital gains tax is a tax imposed on the profit (gain) from selling certain types of assets, such as stocks, bonds, real estate, or other investments. The tax applies to the difference between the purchase price (cost basis) and the asset's selling price.

Short-term capital gains: From assets held for one year or less; taxed at the same rate as your ordinary income.

Long-term capital gains: From assets held for more than one year; typically taxed at lower rates (0%, 15%, or 20%, depending on your income).

Below are the tax brackets for 2025.

California will also tax your capital gain at the same rate as your ordinary income (between 1 and 13.3%).

How are capital gains taxes calculated?

Capital Gain = Sale Price - (Cost Basis + Selling Costs)

The cost basis is calculated by adding the costs of major upgrades or additions (e.g., a new roof, kitchen remodel) that add value to the home to the initial purchase price of the property.

Are there ways to mitigate capital gains tax?

First and foremost, keep good records of property improvements so you can maximize your basis and limit your overall exposure. Additionally, the current tax laws provide significant exclusions for primary residences:

Up to $250,000 of capital gains for single homeowners
Up to $500,000 for married couples filing jointly

To qualify, homeowners must:

Have lived in the home as their primary residence for at least two of the last five years.
Not have claimed the exclusion on another property within the past two years.

This law was passed in 1997, and the exemption has remained unchanged since 1997. Early last year, there was talk about increasing the exemptions to $500,000 and $1,000,000. Hopefully, that idea will gain some traction in 2025, as increasing the exemption will almost certainly increase the supply of homes on the market.

P.S. Bonus depreciation mentioned above can also be used to offset a capital gain.

Single-Family Rental Market: The rental market in Coastal, CA has generally held up pretty well, especially in light of the significant number of multifamily deliveries we experienced coming out of COVID (a lot of development deals penciled with very cheap debt) and the number of people who have moved out of State. While some locations seem to be weaker than others (eg LA isn't holding up as well as Orange County). I think we will start seeing the California rental market tighten over the next 12 months.

The two primary drivers I see are further decrease in the level of Work From Home (see below) and

the absolutely dismal multifamily start going forward. The absence of future new units coming to market will lead to higher rents in the future.

*the chart below is for multifamily starts across the nation

Mortgage Rates/Market: As a mortgage lender, I often receive questions about property taxes and how they factor into a transaction, particularly during refinancing or selling a home. Let’s break down some key points to help clarify this process.

Property tax bills in California are typically mailed out in September or October and are due upon receipt. While many homeowners believe the due date is December 10th, this is actually the delinquency date—the deadline to pay before penalties kick in.

If you’re refinancing during the time the tax bill posts on the county’s website, lenders will generally require the property taxes to be paid in full prior to or at closing. This requirement can significantly impact the “cash required to close” for your transaction, especially given the high property taxes in California.

Property taxes show up under the “cost” section of the Loan Estimate (LE) and Closing Disclosure (CD). This often leads to confusion, as many borrowers mistakenly believe property taxes are a hard cost of the transaction. It’s important to understand that while these taxes are included for transparency, they’re not directly tied to the costs of the loan itself.

As lenders, we explain this process regularly, ensuring borrowers understand the distinction and how it affects their final numbers.

While we’re nearing the end of the year, it’s worth noting that lenders generally begin requiring the second installment of property taxes (due February 1) to be paid in full for any transactions closing as of that date. This can further adjust the amount required at closing, so it’s essential to plan accordingly.

Grant Sedlak

VP of Mortgage Lending

310-924-0777

[email protected]

SIDE NOTE: A few months back I wrote a blog entry about how to read, and more importantly estimate what your property taxes will be on a property that you purchase. If you would like to learn how to calculate property taxes in California, you can read more here.

Commercial Real Estate (CRE): A few updates on two stories we have been following: the demise of the office sector and the sale of the Ziggurat Building in Laguna Niguel.

Commercial Mortgage-Backed Securities (CMBS), a type of investment backed by commercial mortgages, are seeing default rates spike to levels near those seen during the financial crisis.

Office CRE fund managers claim the sector has hit bottom, but the sharply rising CMBS delinquency rate tells a very different story.

The General Services Administration accepted a final bid of $177M for the Chet Holifield Federal Building (more commonly known as the Ziggurat Building). The buyers put in a non-refundable $17.7M deposit and have six months to close escrow. The demolition alone will cost an additional $20-35M, and the buyers still need to understand precisely what they can build as they have yet to complete the entitlement process. The buyers are out trying to raise the remainder of the funds.

While I am rooting for the buyers, putting $17.7M of cash at risk without sufficient capital commitments is a wild strategy.

This will likely end in tears.

Macro Observations: Nothing, with the exception of expectations, has changed for the economy, and expectations vary from person to person and industry to industry. I was talking to my brother-in-law, who does creative/advertising consulting for high-end aftermarket auto parts companies. His clients all manufacture their products abroad and sell them in the US. Their businesses will likely need help in the event meaningful tariffs are implemented. As a result, many of his clients are cutting their forecasts, as they expect tariffs (if implemented) will meaningfully reduce their sales. On the other hand, those in the crypto space are elated as Trump has come across as relatively pro-crypto.

If you have not been following crypto (I generally don't) - it's ripped since the election.

Remember what I said above about nothing is ever as good or as bad as it seems? As I said, not much has changed except perceptions and expectations. As it stands today, almost everything is the same as before the election, which, in my estimation, can be articulately described as a "meh economy" and I think the market is telling us the same. The next Federal Reserve Meeting is December 18th, and as of today, there is a 66% probability of a 25 basis point cut. If things had dramatically changed, the probability of a cut would either be much higher or much lower.

As a reminder, the Federal Reserve controls the Federal Funds Rate, directly impacting HELOCs and other loans based on Prime. However, it does not directly impact most mortgages, which are usually based on the 10-year treasury.

The 10-year treasury has been on terror from mid-September until the announcement of Scott Bessent as treasury secretary.

As for where to go from here, unless something dramatic occurs, the 10-year trend should continue to return to its pre-election level. The labor market will continue to soften (not break).

I will keep an eye on the stock market—it continues to defy gravity. A meaningful correction in the stock market could significantly impact consumer and investor confidence.

What's the Good Word: Be still my heart😍😍😍

I'm not going to lie; I'm deeply suspicious that this will materially improve things, but it is a step in the right direction.

Upon hearing about this, my friend Jenn Tanaka asked

So, question… if the city isn’t really reviewing these applications, and no one is inspecting them, what are we paying for? Aren’t permits supposed to be on a “fee for service” basis?

Shameless plug, Jenn writes the Goat Hill Rodeo (link here), it is a blog on Costa Mesa current events. It is exceptional.

Project Updates: We have several active projects; here is a quick update on two. We are always looking for more projects, so if you know of any, please reach out. If you have a property that you believe might be a good candidate for a project, we are happy to discuss partnering up on the project.

Undisclosed Location, Costa Mesa: We are getting close to completing the renovations on this little project. We should be on the market for sale in Q1 of 2025.

36th Street, Newport Beach: We close escrow on this project on Friday, more to come.

Thanks again for reading, and I would like to thank our agents and property managers who provide valuable insights from their day-to-day in the field. Without them, this email wouldn't be very useful or interesting.

If there is anything you need: vendors, lenders, or others, please let me know. We have an extensive network of the best and brightest in the industry.

I geek off this stuff; if you want to grab a coffee or chat about anything related to real estate, the market, or investing, please do not hesitate to reach out.

If you don't want to receive these updates in the future, please smash the unsubscribe button below. No hard feelings; I do it ruthlessly. Lastly, if you found the above informative, please share it with a friend or drop me a line.

Daniel Morgan

Managing Principal

949-413-0912

[email protected]

Lic# 01901285