A Scarcity of Legitimate Choices

[IMGCAP(1)]

NEWPORT BEACH, CA—With Q4 underway, many industry professionals are looking at what's ahead in order to leverage the current momentum of the market. As recovery expands and activity increases, GlobeSt.com recently asked managing directors at locally based Voit Real Estate Services to weigh in on what the rest of 2014 and the start of 2015 will have in store for investors, owners, and operators of commercial properties.

“The main trend to look for in Q4 and beyond is a continued tightening of the commercial real estate market throughout the Western US and in many markets, a real scarcity of legitimate choices,” says Eric Hinkelman, executive managing director for Voit's Orange County, Los Angeles and Inland Empire operations. “A period of consistent job growth, rising lease rates and positive absorption has been underway in most markets for a while now, and commercial real estate professionals need to make sure they are educating their clients well in advance of lease expirations and perceived needs…not just a few months before, only to find out they will have very few, if any choices.” 

[IMGCAP(2)]

Eric Northbrook, managing director for Voit's San Diego operations, agrees, and says that “Job numbers are up and the national unemployment rate is now at 5.9%, which is the first time unemployment has been below 6% since July 2008.  Employment growth is the key to fueling the current momentum in the market.”

As employment grows, so will demand, notes Ian Britton, managing director for Voit's Southern California operations, who says that he expects to see increasing tenant and buyer demand coupled with more investment capital specifically targeting industrial real estate in infill markets during Q4 and early 2015.

[IMGCAP(3)]

“When the Southern California market first started to recover in 2011, most of the activity was confined to larger industrial buildings, above 50,000 square feet.  Larger companies with better access to capital took the opportunity to upgrade the quality of the buildings, become more efficient across their supply chain, and lock in favorable occupancy costs,” he says. “As the market moves ahead in Q4, smaller businesses—the backbone of our local economy—are now taking the baton, fueling an increase in activity in smaller industrial buildings.”

Britton notes that industries serving an improving residential market, such as tile-related users, fabricators, specialty contractors, etc., will continue to come back in a big way over the next two to three quarters.

“In Orange County for example, specialty manufacturing, tech and local distributors are already competing with each other for expansion space in an industrial market with very few alternatives,” he explains.

Britton also says that, with interest rates being as attractive as they are, a majority of activity in Southern California is from local buyers, sending sale prices near peak levels and climbing.

He continues, “Lease rates are primed to spike given the historically low vacancy rate.  For example, the vacancy rate for industrial buildings under 10,000 square feet in Orange County is a slim 1.26%. Lease rates could certainly pop at a more aggressive pace if interest rates increase, making the cost of ownership less palatable for small business owners.”

In addition, he notes that the price of industrial land has cracked $30 per square-foot in Orange County, and with rising construction costs and developers unable to get suitable site coverage, he anticipates little to no activity in the development of smaller buildings over the next two to three years.

“Existing industrial inventory, if functional, will only become more valuable,” Britton says.

[IMGCAP(1)]

Property values are also rising in the Phoenix market, where rapid market growth is underway, according to Tom Johnston, managing director of Voit's Phoenix and Las Vegas operations.

“With a favorable business climate spurring demographic growth, the Phoenix market is one of the fastest growing in the country,” he says.  “We continue to see a decrease in the amount of vacant and available space on the market, even with new product being delivered.  As we progress through the last quarter of 2014 and into 2015, positive absorption and higher occupancy costs should continue, resulting in ongoing market improvement.”

[IMGCAP(2)]

Kevin Sheehan, managing director for Voit's Sacramento operations, says that ongoing improvement is also expected in the Sacramento, California market, where office, retail and industrial markets have been demonstrating steady growth.

“The third quarter of 2014 marked the lowest office vacancy rate since 2008 in Sacramento, while the local industrial and retail markets continued to post positive absorption,” he says.  “We anticipate growth in each of these sectors over the next few quarters, as well as job growth of around 2.1% in the Sacramento area by 2015. These factors will further fuel the tightening of the market.”

Overall, each of Voit's managing directors note that the outlook is good for commercial real estate market growth throughout Q4 and early 2015, and they agree that now is the time for action.

“The market as a whole will continue to tighten and those who keep their finger on the pulse of this movement will emerge as most successful and valued by their Clients” says Hinkelman.