“What is really remarkable,” said County Assessor Larry Stone “is that just as major parts of the residential market cooled during the last 18 months, the commercial and industrial market has come back strong throughout the County. While the “boom” in the late 1990’s was significant, long term it is much healthier for the economy to have greater balance among all property types.”
A very hot residential real estate market carried Silicon Valley property values during the “dot-com” decline. This year, commercial and industrial properties are finally rebounding, while some segments of the residential market have cooled. This recovery has been led by construction of selected retail “power centers” and the development of Class A offices from either the ground up or major retrofits of older properties.
Another indicator of the strength of commercial and industrial properties is the increase in tenant improvements. Last year, the Assessor’s Office experienced a 13 percent increase in the number of commercial and industrial building permits. “This indicates that tenants have confidence in the direction of Silicon Valley’s economy, and are choosing to expand or improve their facilities. It also demonstrates the continued realignment of the local economy from high–tech manufacturing to an internet based economy. Companies like Adobe, Yahoo, Google, E-Bay and Apple are expanding while other companies like Sun and HP are consolidating their facilities.
Another indicator is the red hot investment market and the decision by pension funds to increase their asset allocation in real estate. For the first time in several years, a $1 billion “spec” office building is under construction in Sunnyvale. Others are on the drawing board throughout the Valley.” said Stone.
A 19 percent decline in deeds recorded confirms that the once hot residential market has cooled. “The market adjustment in the residential sector is especially pronounced in the condominium sector and the lower end of the residential marketplace. Anecdotally, it would appear that owners with older, “tired” properties are having difficulty in selling their properties without modern upgrades,” said Stone.
The total number of sales of residential properties also declined over the prior year according to data from the local realtors. “While the days of multiple offers above the asking price appear all but over, that is not universally true,” said Stone. “High-end, residential properties are not only retaining their value but are selling well.”
The diversification of the real estate market is evident in the relative changes in Proposition 8 reductions and restorations of assessed values. The “temporary” reductions and subsequent restoration in assessed value are mandated by Proposition 8, passed by California voters in November 1978. Proposition 8 provides that property owners are entitled to the “lower” of the fair market value of their property as of January 1, 2007, or the assessed value as determined at the time of purchase or construction, and increased by no more than 2 percent annually. The overwhelming majority of reductions are for properties that were purchased or constructed at the ‘top of the market.’ Properties where the market value exceeds the assessed value as of January 1, 2007, are not eligible for an adjustment.
While the overall number of properties in a Proposition 8 decline status increased dramatically this year, the amount of the reduction of assessed value actually declined an astonishing 36 percent over the prior year to $4.94 billion. “The simple explanation is that high-end residential market together with commercial and industrial properties have rebounded while in general, the residential market has softened,” said Stone.
In 2007, the Assessor proactively reduced the assessed values of 17, 758, a nearly three-fold increase over the prior year. Over 95 percent of the 16,894 reductions were residential properties, totaling $1.06 billion. However, 864 commercial and industrial properties accounted for 79 percent of the decline in assessments. This represents a substantial change over the prior year when 80 percent of the properties in Proposition 8 status were residential and 90 percent of the value was non residential.
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