What’s ahead for commercial real estate in 2014

January 8, 2014

 

The commercial real estate markets in San Joaquin and Stanislaus counties are often unfairly overshadowed by the markets of the Silicon Valley and Bay Area.

Consider this: our combined population is greater than the population of Las Vegas, Salt Lake City and Cleveland combined.  There are 220 million square feet of commercial real estate in these two counties and yet very little national and regional attention is given to our area.

After looking at information from CoStar Group data, talking to Dr. Jeffrey Michael of the University of the Pacific Business Forecasting Center and taking into account our own firm’s experience, here is a look at state of our commercial real estate market and what we think we can expect in the coming year.

Two thirds of the commercial real estate in Stanislaus and San Joaquin counties is industrial.  Retail makes up 25 percent of the total and just 9 percent is office space.  On average, about 10 percent of this space is currently vacant.  The national average is 8.6 percent.  This means that our market is about 1.4 percent more vacant than the national average — far from some sort of catastrophe.

Since the end of 2010, vacancy rates have been surprisingly steady.  While rental rates have suffered to some extent, our vacancy rates have not moved significantly.  As we read the data, we see a baseline here.  Many might say that our market is starting to stabilize, but as we see it, it has been stable for some time.

As we head into 2014, we are expecting some continued improvement.  The University of the Pacific Forecasting Center recently announced a 3.4 percent projected increase in jobs in San Joaquin County next year.  This is largely being driven by hiring at the new prison healthcare facility, Amazon’s new fulfilment centers and other new facilities near the Altamont Pass.  It is also expected that there will be 3,000 housing starts across these two counties in the next year—something we have not seen in several years.

We think that our market is beginning to recover and will build momentum until about 2018 before it begins to show signs of softening again.  We also think that interest rates will remain low enough in the medium term that they will not significantly impact commercial real estate activity.

Our opinion is that a year from today, vacancy rates in San Joaquin and Stanislaus counties will have improved 1-2 percent and that prices and lease rates will have increased 4 percent to 7 percent.  Given that the process of selling, leasing or buying a building can take between four and six months, it makes sense for businesses and property owners to plan ahead and tackle their commercial real estate needs sooner rather than later.

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