Commercial real estate insiders say the market’s got its groove back

February 2, 2017

 

randSTOCKTON — Like much of the rest of the economy, the commercial real estate market has been slow to rebound from the Great Recession. However, the market appeared to find its footing in 2016 and market professionals believe that growth will continue into 2017.

“I see improving trends in everything,” said Farmers and Merchant Bank President and Chairman Kent Steinwert.

Steinwert credits the improving economy with helping boost the commercial real estate market. Job numbers have exceeded pre-recession levels for the first time since 2009. The unemployment rate, which had shot as high as 18 percent during the recession in the Central Valley, is back below 9 percent in most Valley cities.

“We were way down in the number of jobs during the recession, and it has been a long slog back,” he said. “All that affects the demand for commercial real estate.”

One area that has seen particularly large growth is the industrial sector. Many companies have placed or expanded distribution and warehouse operations in the Central Valley.

“We have a significant advantage over the Bay Area,” said Steinwert. “It is easier to relocate here. Building costs, land and lease rates are all lower than anywhere in the immediate area.”

The sector has been so hot that one of the biggest problems for area brokers is a lack of inventory.

“We are running out of industrial space.,” said Richard Rand, owner of Rand Commercial Properties in Modesto. “We are missing opportunities where a lot of companies that are wanting something in 30, 60, 90 days. We have been taking people into Stockton because they have more inventory.”

The industrial vacancy rate has dropped from a recession high of 10 percent to just over 2 percent in San Joaquin and Stanislaus counties. Despite the boom in demand, a corresponding building surge has been slow to develop.

Land prices have jumped in recent months, indicating that there is interest in new opportunities.

“They (developers) are a little nervous with the election and the interest rates,” said Rand.

Steinwert said that city policies of increasing building fees to fill budget gaps have slowed some efforts to build in the area. He also thinks some developers are waiting to see what a President Trump administration can get through Congress.

“If there is an infrastructure bill and tax cuts, those will stimulate jobs and the economy,” said Steinwert. “If the Democrats block the legislation, it will slow that down.”

The industrial arena isn’t the only sector to show solid growth. Multi-family housing has also shown big gains in the last 12 months.

“Multifamily housing is one of the strongest sectors in the market,” said PMZ Commercial Real Estate broker Duke Leffler. “Investors are going to be the ones that lift that market.”

He said that while there is some new construction in that sector, many developers are wary after being stung during the Great Recession.

“A lot of people are scared of that market,” said Leffler.

The retail sector, which was one of the strongest hit by the recession, has also shown signs of life in the last year.

“In straight commercial, peak vacancies were over 7 percent in retail (in 2015),” said Steinwert. “They are now under 5 percent. We are seeing rents increase.”

That could prompt new construction in 2017.

“That is a good sign people are feeling better,” said Rand. “People are just waiting right now.”

Amid the good news, one sector of the commercial market that has shown slow growth is the office market.

“The weakest sector has been the office sector,” said Leffler. “They got hit by the recession in ‘08 and haven’t recovered much.”

Surprisingly, many market professionals don’t believe that rising interest rates will be a significant hindrance to the market’s growth in the immediate future.

“On the interest rate, we don’t see much movement,” said Steinwert. “Residential mortgage rates have gone up, but it is a modest increase, and we expect those to settle down as the new administration takes over.”

On the commercial side, Steinwert thinks that rates will be relatively stable in immediate future.

“We think there is a strong possibility of 10-year T-bill rate being lower than we have now,” he said. “It’s more likely down than up.”

Even if rates increase, they are unlikely to hit the highs seen in the past.

“I don’t pay much attention to interest rates,” said Leffler. “I just perceive it as business as usual. Come next May, I will have been in business for 40 years. Interest rates have ranged from 8 to 18 percent in that time. You have the players that will play ball. It is going to dig into the cash flow of the seller or buyer, but I don’t think it will have big effect on anything.”

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