Is the commercial real estate market cooling down in the Central Valley?

September 19, 2017

 

By KENT HOHLFELD
Business Journal Writer
[email protected]

A new report by the University of California Los Angeles Anderson School of Management indicates that investors are cooling on the sunshine state’s commercial real estate market.

The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey measured sentiment looking at the next three years. While the survey focuses on the fear of a future softening, current trends in many sectors are good according to local experts.

“There are still some very good values out there,” said Kathy Hanley, Agent at Grupe Real Estate. “My experiences are the prices are good, and the activity is good.”

The report focuses largely on Southern California, the Bay Area and Silicon Valley. Much of the expansion seen in the Central Valley is due to the explosive growth in prices across the Altamont Pass.

Real estate is always a fickle area of investment in California. After the housing crash and great recession, anything that hints at a cooling market sends shivers down the backs of those who make a living in the industry.

However, most current indicators are good in the Central Valley, and the area may buck any cooling trend of the larger metro areas according to area agents.

“Lease rates and sale prices are both trending upward mostly due to limited turnover and a lack of new product,” said Brian Peterson, First Vice President at CBRE, one of the leaders in the Central Valley Office market.

One of the reasons is that the Central Valley hasn’t seen the same kind of construction boom that the Bay Area has. San Francisco had the sixth most construction cranes dotting its skyline in 2017 according to a semiannual count from Rider Levett Bucknall, a firm that tracks cranes around the world. All those construction projects have investors concerned about a glut of commercial space on the market in the Bay Area.

The biggest drop in confidence comes in the office and retail sectors. According to the report, only 38 percent of developers are looking at starting new projects in the next year. In the Central Valley, office space is an area that never saw a large uptick from the recession.

“Office uses hasn’t been real strong here,” Hanley said.

The UCLA report attributes much of that trend to fewer people using traditional offices, opting instead for telecommuting or working with smaller staffs and tighter offices.
One area that the Central Valley has seen a significant upswing is in the warehouse demand in the last three years.

“That has a lot to do with Amazon and online shopping,” Hanley said.

Amazon has opened fulfillment centers in both Tracy and Patterson in the last five years. Stockton’s location and easy access to rail, shipping and major freeways has drawn a variety of companies opening logistics operations.

“Logistics is really big in San Joaquin County,” Hanley said.

Overall, the UCLA reports says that optimism the industrial market is strong, just not as strong as it once was. Eighty-seven percent of the panel surveyed said that they had started a new project within the last year.

One area that had widespread agreement was losses in retail market space. With online shopping soaring, former staples such as Sears, K-Mart, Macy’s and JC Penney’s continue to close stores. Few new outlets are clamoring for those spaces.

While retail space is plentiful all over the state, multifamily housing isn’t. According to the UCLA report, California’s hot job market and income gains continue to power increases in rents and a stronger outlook for occupancy rates. Multi-family developers now see opportunities in new projects for the coming three years in every market.

The Central Valley has seen increased rents from Modesto to Stockton. The average monthly rent in Modesto surged more than $300 in the last four years to $1,097, according to RentCafe, a nationwide apartment search website. The site reported that Turlock renters experienced a $200 per month increase in the same time frame. Stockton renters have seen rents soar from $748 to $1,051 since 2013.

Much of the growth is due to even higher rents in the Bay Area and a lack of new units being built.

Overall optimism is the strongest sentiment in the Central Valley commercial real estate scene.

“I expect most current trends to continue; modest increases to lease rates and sale prices, decreasing vacancy,’” said Patterson. “The strongest submarkets in southwest San Joaquin county and in northwest Stockton could see disproportionate increases compared to the larger market area as users and investors continue to focus on the most desirable locations and product.”

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