Commercial real estate shows signs of life

February 13, 2015

 

buzz oatesSTOCKTON — The old real estate adage, about location being everything rang true in the commercial real estate sector in 2014. If you happened to be in the Bay Area or Sacramento, the sector showed large improvement.

Central Valley brokers and builders say that while they have seen some improvement, the local market still has a way to go to climb out of the recent recession.

“There has been very little new development in the area,” said Tom Solomon, partner, part-owner and broker with CoSoL Commercial Real Estate. “Existing properties have returned to pretty good levels. If it’s good real estate, it will be filled.”

Solomon, who has been involved in commercial real estate for more than 30 years, said that despite the epic climbs and precipitous falls of the last decade, commercial real estate values have been fairly consistent over the last 20 years.

“If you took the overall health of the industry from 1990 to 1999, there was between 15 to 20 percent growth,” he said. “The next decade, from 2001-2011, it went skyrocketing up and then down. But when it was all said and done, it saw pretty similar growth.”

The latest plunge, that occurred between 2007 and 2010, hit the Central Valley especially hard. The area led the nation in home foreclosures and saw commercial real estate foreclosures jump as well.

With the recent recovery, area commercial real estate growth has slowly begun to return to its historical norms. One of the biggest areas of growth in the area has been in the logistics and warehouse industries.

In November, Prologis broke ground on a state-of-the-art logistics center in Tracy. It’s the first part of the Prologis International Park of Commerce, a planned 19 million-square-foot industrial park. The main purpose of the park is to serve as a distribution hub for the nine-county Bay Area and parts of Northern California.

Ultimately, the company hopes to include high-tech manufacturing, final assembly and related commercial activities. The complex could result in tens of thousands of area jobs.

This isn’t the first such project the company has been involved in. The company was a major developer involved with the construction of the Amazon fulfillment center, located just seven miles east of the current park.

In Patterson, also home to an Amazon fulfillment center, another huge distribution center is in the works for home decor retailer Restoration Hardware.

“The Patterson market has an interesting dynamic with the Bay Area influence,” said Ryan Swehla, partner of NAI Benchmark. He said that dynamic, also present in Tracy, has led to those areas recovering faster. “Oakdale, Ripon, you don’t see it there.”

Swehla added that in Modesto, the industrial market has tightened to the point where there are nearly no vacancies. He expects the area could start seeing more construction in the next year or two.

“The industrial sector has recovered. We’re definitely getting to where demand has outstripped supply,” Swehla said. “The office market is still trying to catch up. Retail is somewhere in between.”

CoSoL’s Solomon agrees.

“The commercial office side has been tough,” he said. “Our rates for the commercial rentals are back where they were 1990s rates. I own property so I have seen it from the side of an owner as well as an agent. It’s not been fun.”

He said that with the increase in activity by agricultural businesses, there is hope that it will eventually trickle into other sectors of the market.

“Most tenants and owner/users are taking a cautious wait-and-see attitude,” he said.

One thing they will see in Turlock will be a new brewing facility just west of Highway 99 on Dianne Drive and Fulkerth Road. The project received approval from the city planning commission in November and groundbreaking is expected in March.

The project is one of the efforts to boost industry on the city’s west side. Real estate brokers credit Turlock as well as Patterson with aggressively seeking projects.

Another issue that can have a major impact the area’s growth can be a city’s perceived problems. While areas in south San Joaquin and Stanislaus counties have seen projects spring up over the last few years, Stockton has struggled.

Xavier Santana of Northgate Commercial said crime is one of the things that has held retail expansion back in Stockton.

“Crime doesn’t keep people from shopping, but it does make them cautious about the times they go shopping,” Santana said. “People need to feel safe.”

He added that the region’s high unemployment rate affected retail in San Joaquin and Stanislaus counties as people had less money with which to shop. That drove a lot of stores out of business.

During the height of the recession retail vacancy rates were between 12-15 percent in Stockton and 8-9 percent in Modesto. Retail vacancies of 5-7 percent are considered healthy.

Stockton’s retail vacancy rate is down to about 9 percent now, while Modesto’s is at about 5 percent.

News about Stockton’s bankruptcy has also kept investors away.

“The bankruptcy has deterred investors because they’re looking at the overall health of the economy,” Santana said. He added that some tenants have shown interest in opening stores on the periphery of the city, but they can’t because the city’s problems have halted annexation plans.

Brokers believe things may improve in 2015 now that the bankruptcy is coming to an end.

 

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