January 17, 2018

California Commercial Real Estate to slow down in 2018 

California Commercial Real Estate to slow down in 2018

 

After the 2010 low, commercial real estate in California has been on a steady rise. In some areas, prices have soared to 16% higher than the 2007 peak.

The rise is attributed to the favorable conditions of a thriving post-2008 crisis economy. More investors, especially foreign investors heavily invested in commercial property from 2014.

However, there has been a noted decline in commercial real estate investments since 2016. While many areas are still experiencing rising prices, economists are predicting that 2018 may mark the beginning of a downward trajectory, citing various factors including inflation, the rise of ecommerce and automatic market self-correction.

Favorable conditions.

It’s important to remember, while California commercial real estate prices go up, so do property taxes. What people tend to forget is when the prices come down, the property taxes don’t automatically reduce along with the property valuation. If your property value reduces, so should your property taxes, a simple property tax review could lead to major tax savings.

The post-recession commercial real estate success is attributed to economic reforms which highly favored investments. It saw a rise in foreign investors ($45 billion nationally in CRE) who met growing demand of commercial real estate especially in urban centers.

In Los Angeles for example, the technology and entertainment industry continues to increase. The demand for gaming, tech, and television will continue to supply the industry with the needed demand up to 2020.

Rising employment has also played a factor in the industry growth. . In order to attract more professionals, employers are seeking better working space, hence creating more demand. This explains why the boom is experienced more in urban areas.

Easier access to loans also kindled the increase in investments. In 2015, banks had released $1.7 Trillion dollars towards commercial real estate nationally.
But with the growth of investments, prices have also gone up in California. Even after real estate investments have slowed down since 2016, prices are still on the rise.

For instance, renting office space within the tech-dominated region is 62.4% higher than it was in 2010. A hotel in Santa Monica would cost 48.7% higher than it would have 11 years ago.
The pattern is repeated throughout the state with a reported rent increase of over 19% from after the recession. This is great for investors who are making good returns on their properties.

However, it’s beginning to affect businesses in California. More entrepreneurs are finding the sky high prices unfavorable for business. Some businesses have had to close shop or move as rent prices have doubled within 2 years.

So there is some worry among investors and experts that a serious bubble could be developing if current trends hold going into 2018.

 

What does 2018 hold for California Commercial Real Estate?

 

According to analysts, 2018 holds mixed expectations. While investments and prices will keep growing in the first quarter or so of the year, businesses may find relief as the market self-corrects in the coming months.

The newly passed tax reform will adequately favor investors in commercial real estate. This may encourage further investments within the year.
Economist also believe 2018 is backed by strong economic prospects hence the growth will continue steadily the first few months.

The commercial property sector still has room for growth. According to construction spending surveys, commercial construction has not leveled up with pre-recession levels.
Predictions show there will be fewer vacancies. Nationally commercial property vacancy rate is expected to decline 11.6%. This is expected to increase the demand for space and could further push up rent prices.

However, according to expert predictions, there will be a steady cooling down towards the second and third quarter with prices expected to slow to a plateau. Properties in urban centers will attract fewer buyers and tenants as renting and purchase costs become too high. Orange County and San Diego are already slowing down compared to other counties. In the past 2 years, more cities continue to gradually slow down construction of new office space. This trend, is expected to persist into 2020.

Businesses may increasingly opt to rent tertiary properties which are cheaper. In response, investors will also move towards this option which will create growth for an alternative market, further helping to deflate the growing bubble.

E-commerce businesses will also reduce the need for traditional office space. The demand will shift to warehouses and industrial spaces. 2020 also holds a possible turning point for commercial real estate nationally. So investors may feel a bit shy about making any new real estate investments as they study the market.

As for 2018, the industry is still on the edge of success. The slowdown may help correct the prices for commercial property. Or it would mean an end to the seven-plus years of the bull market. We can only wait and see.