Four Experts on 2015 Real Estate Issues

CALIFORNIA—Whether the issues are global, domestic or local, California real estate faces a unique set of challenges and opportunities this year. GlobeSt.com spoke exclusively with four Voit Real Estate Services managing directors in charge of four different California and Western/Southwestern markets—Kevin Sheehan, Sacramento; Eric Northbrook, San Diego; Tom Johnston, Phoenix and Las Vegas; and Eric Hinkelman, Orange County and parts of Los Angeles—about their respective markets and the issues they and the CRE industry as a whole are dealing with this year.

GlobeSt.com: What do you view as commercial real estate's most concerning issues for 2015?

Sheehan: A potential pullback in the stock market and declining oil prices are my biggest concerns on a macro level. If the market was to have a real pullback, that's concerning for commercial real estate investment. If oil prices continue to decline, but there will be loss of employment, refineries will scale way back because they can't afford to remain the same, and this will have a trickle-down effect on CRE. Investors in stock also buy CRE; when they see things getting dicey, they pull back and sit on their hands.

Northbrook: The Southern California economy is still a concern. Everything appears to be moving in the right direction, but we haven't seen growth in the bigger blocks of space—more than 30,000 square feet. And obviously what happens with interest rates could affect a number of things in our world as it relates to private client investing.

Johnston: Anemic job growth is a problem in Phoenix and Las Vegas. We've recovered two-thirds of the jobs lost in the recession, but a lot of them were consumption-based jobs—not a lot of high-paying jobs. And the leasing velocity in office and industrial is also a concern, as is what's happening with interest rates.

Hinkelman: In speaking about Orange County, from an industrial standpoint, supply is one of the biggest concerns. Over the last few years, some industrial slated uses have gone to multifamily and other higher-end uses. The base has gone down, and vacancy is so tight, we are supply constrained, especially for quality product that users can look over and decide between.

GlobeSt.com: How would a rise in interest rates potentially impact your markets this year, and how would you deal with that?

Sheehan: I don't think interest rates are going anywhere in 2015, so it will not have any impact on our market. I think the fact that they're still so low will allow a lot of owner/user purchasers to buy their own properties.

Northbrook: If there's any rise in interest rates, we won't get more than 250 basis points. I don't see a huge jump in rates if they move in that direction.

Johnston: If the Fed decides to start inching the interest rates up, we will see price per square foot for user buildings stall, and we will see those asking prices stabilize and level out. It will slow some things down.

Hinkelman: Interest rates will probably rise in the later part of 2015. This will affect some of the smaller buildings where financing tends to be a bigger play. Institutional and foreign capital is not as big of a concern. The typical user looking to buy a building will look to rent instead.

UNTAPPED OPPORTUNITIES

GlobeSt.com: What untapped opportunities exist in your particular markets?

Sheehan: Sacramento is the low-price leader in terms of rental rates and investment properties. Investment money is coming in from the Bay Area and L.A., and we'll see a lot more of that this year. I also think there will be opportunities in back-office deals from the Bay Area into this market. You can do back office for half the cost in Sacramento. We will also see some people buying land, and there will be opportunity for people to come in and purchase properties to do condos, retail and office because of the synergy the Kings Arena will create.

Northbrook: We're starting to see some more redevelopment vs. repositioning—redevelopment where a functionally obsolete building gets taken down to the ground and developed for higher and best use for that particular site. Some of those opportunities certainly exist in Kearny Mesa and other submarkets of San Diego, including Sorrento Valley and areas west of the freeway.

Johnston: Some opportunities we're seeing are conversion of the warehouse district to the south of Phoenix into high-tech repurposing space and infill sites being repurposed for retail or office. Existing big boxes are being repurposed for call centers or fitness centers. They're creating hubs where they can live, work and play.

Hinkelman: We're seeing more creative office in Orange County. What started as a big play in Northern California has made its way down south, to Silicon Beach in L.A. and now to Orange County. It's a relatively new opportunity in our market that still has quite a bit of legs left.

GlobeSt.com: What are the challenges in each of our markets, and how are you approaching them?

Sheehan: There has been nothing built in the Sacramento market since 2007. There was a flight to quality in the last four to five years, and now there's no open quality product. National retailers have pushed out local guys and taken spaces, so now there are no spaces in boxes for retail, and there won't be as much retail leasing this year.

Northbrook: In San Diego, there are many private-client owners, trusts and family offices. As some of the ownership is getting toward the senior part of their life, their real estate requires some management. We've created an opportunity there to help those clients for the next generation by selling those properties and redeploying that capital into much more passive investments.

Johnston: For both Phoenix and Las Vegas, the future is really bright. The next three years we expect continued growth, new construction and rental-rate growth, but at a pace slower than we've experienced in other markets. We're moving in the right direction.

Hinkelman: The theme of tightness, with industrial leading the way, is where we are in Orange County. Office is becoming more constrained, particularly if you want large blocks of office space in Southern Caliofrnia and other parts of California. The old adage of staying in touch with your clients and friends rings true. There are a lot of off-market deals being done, so being in touch with your clients, friends, neighbors, etc. is key when you have a lack of readily available opportunities. We will see lots of off-market transactions from being in touch this way.