Home to nearly 850,000 people and rapidly growing, the City of San Francisco is packed into a little less than 47 square miles. Having long been known as one of the primary financial, tech and cultural hubs of the United States, San Francisco is a place where many people want to be. Business is booming, companies are competing for employees, and the city is as culturally vibrant as ever. It seems like every week there is another article about San Francisco topping another a “best of” list. Supply, Demand, Rent Control Every city endures growing pains during times of economic expansion – new construction, rising rents and home prices – not to mention added stress to the local public infrastructure. The supply of housing in San Francisco remains relatively static for various reasons, with strict building and zoning regulations, a comparatively fixed supply of buildable land and the added complications surrounding the development of real estate in a densely populated, coastal city. On the flipside, demand for housing, which most consider a necessity, is highly inelastic. This is due to the average per-capita income for San Francisco residents, which is about 80 percent higher than the average per-capita of the …
Market Reports
San Francisco is a veritable boom town that has already surpassed the market roar of 1999. It can even conceivably be compared to 1849, when gold was discovered 100 miles east. In fact, this year is so utterly off the charts that most of us in the commercial real estate industry have never seen an upcycle like this in our entire careers. Witness the fact that through the first three quarters of 2014, San Francisco’s gross office absorption reached 7.6 million square feet. Net absorption in this same period was 2.4 million square feet. This compares with 1999, the record year, when gross absorption was 7.4 million square feet – and that was for the entire year! It is quite possible we’ll hit 10 million square feet of gross absorption by the time 2014 closes out. Incidentally, net absorption for 1999 was “only” 526,000 square feet. Not surprisingly, three out of the four biggest leases in the third quarter were completed by tech companies. The tech frenzy in San Francisco has been well documented. Most of the Silicon Valley companies want, or need, to have a presence in the city. The trend is employment-driven. Young techies don’t want to commute …
With the scarcity of vacant land in Orange County and the need for antiquated properties to be updated, the trend seems to be redevelopment with an eye on mixed-use retail, including a multi-story residential component. There are currently several new development projects either in the planning or construction phase. Los Olivos Marketplace – Irvine The Irvine Company plans to build Los Olivos Marketplace, a new 120,000-square-foot retail center across from its Los Olivos Apartment Community on Irvine Center Drive near the 405 Freeway in Irvine. This development would be situated adjacent to its existing 62,000-square-foot retail center, and just minutes from the firm’s Irvine Spectrum Cente. Whole Foods Market has already signed a lease for 40,000 square feet at the center. It plans to open in spring 2016. The Source – Buena Park On a more international scale, M+D Properties is building a 400,000-square-foot, mixed-use center known as The Source in Buena Park. It would include world-class, high-end retailers and restaurants, a 150-room Hyatt Place, a seven-story office building, a 1,200-seat movie theater, and a 54,000-square-foot performing arts center called YG Land, from South Korea-based entertainment company YG Entertainment. The project is expected to be complete early next year. Pacific …
No one will deny that the Orange County industrial market is tight, boasting a 4.1 percent vacancy. If you are an industrial user looking for 100,000 square feet or more, your options are extremely limited, as supply and demand are not working in your favor in terms of rental rates and landlord concessions. According to CoStar, positive net absorption was just above 900,000 square feet for the second quarter of 2014. Compare that with the 978,000 square feet currently under construction and it is easy to see why most believe these rate and scarcity trends will continue. A number of large warehouse and industrial buildings in Orange County are also being raised and converted to high-density residential or data center space. These facts beg the question, where will all the industrial users go? Two counterbalances have the potential to cool the decreasing vacancy and create disintermediation to the benefit of Orange County industrial users. As rental rates continue to rise in Orange County, more and more companies are being lured to the Inland Empire where they can still make two port trips a day and consolidate into a much more efficient and affordable building. Companies that grew by necessity in …
The Los Angeles industrial market continues to lead the country with the lowest vacancy of any industrial market. The combination of the overall market’s size and lack of inventory continues to put upward pressure on rents. Not only is there limited inventory, but a lack of quality product puts top economical facilities in high demand. The inability to build new product readily, combined with increasing demand, changes the focus of the marketplace going forward. As rents for high-quality properties continue to rise, developers and land owners are looking for ways to redevelop existing product to take advantage of this need. A number of redevelopment projects have recently commenced construction, and many of those properties are already pre-leased prior to completion. This increased demand also gives owners of older, less functional properties the ability to spend the necessary funds to upgrade their facilities with the anticipation of receiving higher rents and a return on their investment. The increase in demand from international commerce through the Port of Los Angeles, combined with growth in the manufacturing, aerospace and healthcare sectors, have all assisted in this overall increase in demand. The need for third-party logistics companies to acquire large chunks of space to …
Multifamily remains the most desirable asset class in Orange County due to a steady increase in apartment rental demand, strong sector fundamentals and the county’s emergence as a Southern California leader in the economic recovery. These factors have become a catalyst for a surge in multifamily asset construction. Apartment rental demand continues to grow in Orange County due to the high barriers to entry in the housing market and recent memories of the Great Recession. Median home values, which now exceed $580,000, place home ownership out of reach for many households. Orange County’s population also grew 4.31 percent from 2010 through 2014, according to Census data. This growth pattern is predicted to hold through 2019, with an expected increase in population of 5.17 percent, or an average of 32,478 residents annually. Orange County’s emergence as a leader in Southern California’s economic recovery is evidenced by superior employment rates in comparison to competing markets. Orange County experienced a high unemployment rate of 10.2 percent in January 2012. That rate has now declined 4.89 percent, as of May 2014. Orange County’s employment figures have increased investor confidence in the region, especially when compared to the national average of 6.3 percent, California’s 7.8 …
We are seeing several trends emerge in the Los Angeles multifamily development sector as we move into the second half of 2014. These trends are influenced by several factors, including job growth, local economy and public infrastructure. The unemployment rate in Los Angeles County has continued to tick downward with true job growth across all sectors, which, in return, has had a direct influence on multifamily project starts. Job growth has been exponential in certain markets, including West Los Angeles, Downtown Los Angeles and Tri-Cities (Glendale, Burbank and Pasadena), creating natural household formations to accommodate the swell of rental demand. Job growth, along with the creation of a comprehensive public transportation system, will continue to drive multifamily development and construction in a way the City of Los Angeles has never seen before. The construction pipeline has swelled to 14,500 rental units, including 12,200 market-rate units. At the end of the first quarter, nearly 29,000 rentals were planned in the county, which is roughly 50 percent higher than the number of units on the drawing board one year ago. With the subway expansion, areas of town that were once deemed undesirable by developers and residents are now being sought after in …
It should come as no surprise at this point that Orange County is on course with a robust economic recovery. Furthermore, there are favorable indicators for a steady increase in value over the next few years. Even though industrial product is limited in the county, development is picking up now that vacancy rates have been on a downward slope and rental rates continue their course on a gradual upturn. While all sectors in Orange County are seeing movement in a desirable direction, quality industrial space is becoming even more of a premium. The larger industrial spaces are drying up in Orange County. Most of the industrial spaces available today are smaller than 20,000 square feet. Meanwhile, many older buildings are being converted or remodeled to invite a variety of other property uses like residential, creative office and self-storage. The average asking price for investment-grade industrial properties of more than 20,000 square feet in Orange County is at $147 per square foot, as of the halfway point through the second quarter of 2014. This number has been on the rise year-over-year since the drop at the end of 2010 when the average asking price dipped to $120 per square foot. The …
Southern California has one of today’s strongest retail markets in the nation. Orange County has fared particularly well recently, showing resilience to the tough economic period of the past six to seven years. According to CBRE research, the average per capita income in Orange County is 20 percent above the national average, while its unemployment rate stands at 5.8 percent. This is well below the State of California’s rate at 8 percent, and below the nation’s rate of 6.7 percent. The overall retail vacancy rate of 4.9 percent has reduced 50 basis points since the first quarter of 2013 and has shown three consecutive quarters of positive net absorption. While the overall retail numbers in Orange County are improving, certain fundamental changes in the personality of the market are evolving after the recession: E-commerce: Bricks-and-mortar stores in Orange County are responding to unprecedented levels of online sales. According to CBRE research, national online sales are up 185 percent over the past 10 years. They’re projected to grow between 10 percent and 14 percent annually through 2017. Many of the region’s retailers are actively enhancing their customer’s in-store shopping experience to create an environment that e-commerce is unable to offer. Customer …
The Los Angeles/Southern California industrial real estate market ended the first quarter of 2014 with the lowest vacancy since early 2008, at an average rate of 3.8 percent. This latest positive trend in activity signifies a full recovery by the end of the year. Asking rents have climbed dramatically over the past 36 months. The Los Angeles industrial market rents have increased by as much as 20 percent to $.55 triple net, from a low mark of $.44 triple net in the first quarter of 2011. They are predicted to grow another 5 percent by year end. This rental increase is due to the robust economic recovery in Southern California, in addition to major tenants’ pent-up demand and a lack of supply for Class A distribution space. To enhance this recovery, the region’s unemployment has dropped to a low of 7.5 percent, or 50 basis points lower than the first quarter of 2013. Los Angeles/Southern California has the largest industrial base in the nation, with more than 1.6 billion square feet of product in all classes. Coupled with the lowest vacancy rate nationally at 3.8 percent – not to mention 18 consecutive quarters of positive net absorption – and this …