The US Federal Reserve (Fed) has raised interest rates four times so far this year, cooling the local commercial real estate market, including industrial, office and retail, and prolonging vacancies. However, experts say asking rents remain strong as uncertainties remain.
As the coronavirus pandemic began, the Fed lowered its target rate from 0% to 0.25% and held it there for two years. On his March 17th of this year, the board began raising the target rate by 25 basis points to 0.5% from his 0.25%.
After three additional hikes of 50 basis points, 75 basis points and 75 basis points in May, June and July respectively, interest rates are now hovering between 2.25% and 2.5%, the highest since summer 2019. Fed Chairman Jerome Powell said in June: The rate is expected for him to reach 3.8% by the end of next year.
Despite upward pressure on interest rates from inflation, the domestic industrial real estate market remains strong, if slightly subdued, according to Lee & Associates principal Brandon Carrillo.
“What’s amazing is how quickly things have changed with interest rates going up,” Carrillo said. “Usually this kind of thing takes time to penetrate the local market, but it’s amazing how quickly it impacted the trade.”
Carrillo said industrial buildings were being bought up quickly before interest rates were raised, with mostly seasoned institutional investors paying all the cash and completing deals quickly. . But those groups have started scrutinizing deals more as interest rates rise, he said.
The seller’s focus turned to owner-users who often took advantage of low-interest Small Business Administration loans. Carrillo said these deals usually take longer because the government monitors the funds.
Carrillo pointed out that the Fed’s interest rate target is historically low, even with recent rate hikes. In 2000 and He in 2006 the percentages were 6.5% and 5.5% respectively.
The South Bay posted negative net absorptions of -615,252 square feet in the second quarter, according to a Lee & Associates report. From April he said 1.6 million square feet of industrial space was leased by June, the lowest amount since the third quarter of 2004, the report said.
The slow pace of sales and leases has not meant that demand for industrial space has fallen significantly, especially near the ports of Long Beach and Los Angeles. The vacancy rate rose slightly quarter-over-quarter to he 1.3%, which is still very low supply.
Meanwhile, average asking rent rose to a record $1.55 per square foot from the first quarter of $1.35. Average rents were below his 90 cents per square foot five years ago and continue to rise amid supply constraints and high demand.
“I signed the contract five years ago, and the lease is about to be renewed,” says Carrillo. “They’re in sticker shock because the rent has almost doubled.”
The average selling price for industrial space in the South Bay was $361.71 per square foot in the second quarter, up from $322.37 in the previous quarter. In the second quarter of 2017, the average selling price was less than half of what it is today, at $162.45 per square foot.
Carrillo said the region’s revitalizing aerospace sector is one factor contributing to continued demand in the region, especially in Long Beach. Over the past seven years, rocket builders and launch service providers have flocked to the city. The first was Virgin Galactic (now Virgin Orbit) in 2015, SpinLaunch in 2019, and Rocket Lab and Relativity Space in 2020.
“It’s pretty amazing to see how vibrant [the sector] “We’re seeing the waves of the future,” said Carrillo, noting that Virgin and Relativity have expanded their presence in the city since they moved.
The Long Beach retail market is still recovering from a pandemic that has hit countless businesses, especially restaurants that have been forced to close for months. Many restaurants never reopened.
Luckily for the market, people need to eat all the time, and restaurant concepts abound, said Doug Shea, partner at Centennial Advisers.
“We’re still seeing second-generation restaurants flying off the shelves,” said Shay, a new concept that takes over spaces built for restaurants.
“We can fill that space every day,” he said, adding that small retail spaces have been on the market for “a pretty long time.”
But inflation has also hit restaurateurs and retailers hard. Shea said one of his clients in Naples will be forced to raise prices twice this year.
Not only are the prices of goods for restaurants and retailers skyrocketing, but consumer spending is also declining. A Lending Tree study found that 43% of Americans plan to take out new debt in the next six months for necessities such as housing, transportation and health care, leaving them with less money to spend on luxuries and dining out. increase.
Shea said there are plenty of vacancies along the historic 2nd Street Corridor on the Belmont Shore and the new 2ND & PCH Retail Center on that street. Also, the decline in consumer spending is not expected to improve.
However, these two areas, along with the Long Beach Exchange Retail Center near Lakewood Village, boast some of the highest rents for restaurant and retail space in the city. Rents in these areas can be between $4 and $6 per square foot, with 2nd Avenue being the cheapest.
But older spaces, even those that have been recently renovated, are much cheaper to rent, Shea said. was recently purchased, but said he didn’t know which stores would take over.
The Landing, a strip mall on the corner of Clark Avenue and Atherton Street, recently got a facelift and rents for about $3.25, Shea said. The Centennial team recently received an offer for a new cafe, medical spa and butcher shop in the heart of the city.
On the retail side, Shea says discount stores like furniture and clothing and big brands like Target are doing well. A Five Below discount store is coming to the Los Altos area, he added.
According to Robert Garey, senior director of Cushman & Wakefield, uncertainty continues in the Long Beach suburban and downtown office market. Some companies have returned their employees to the office, while others have put them off and some employees never return.
“People were saying, ‘The office is dead,’ but I didn’t believe it,” Gary said. “Some offices are revitalized, but not all companies.”
Some companies have a hybrid model for employees who come to work two or three times a week. The model requires less office space per employee, so some companies scale down to meet their needs, Garey said.
Fewer employees may be in the office at any given time, but Gehry said many businesses are increasing employee spacing in response to health concerns raised amid the coronavirus pandemic. Gary said that may offset the downsizing somewhat, but it won’t be enough.
With office demand declining, Garey says 401 E. Ocean Blvd. 1500 Hughes Way can be converted to residential or industrial use. Several buildings in the downtown area have already been converted to housing, including his former Verizon building at 200 Ocean Blvd.
“This reduces the available space on the market and creates a healthier balance for owners,” says Gary.
Construction costs are also hitting property owners looking to upgrade their buildings to attract tenants. According to Gary, prices for many jobs have nearly doubled compared to pre-COVID.
Downtown office vacancy rates have been among the highest for over 20 years. Overall vacancy rates in the second quarter rose from 26% to 25.9%, according to Cushman’s report. The area’s net absorption rate was -26,029 square feet, only slightly higher than the net absorption rate of -33,154 square feet in the first quarter.
During the second quarter, 54,329 square feet of office space were rented downtown, bringing the overall average asking rent to $2.49 per square foot, up from $2.47 in the prior quarter.
The suburban office market is improving slightly, with vacancy at 22.9%, according to Cushman. This rate is up slightly from his 22.1% in the first quarter.
After a negative absorption of 724 square feet in the first quarter, the suburban market saw a positive absorption of 5,956 in the second quarter. The area leased 192,272 square feet of space, including over 71,750 square feet by Blue Shield of California at 3840 Kilroy Airport Way.
Overall average asking rents in the suburban office market rose 7 cents quarter-over-quarter, from $2.61 to $2.68.
Gary said rents remain high because inflation has pushed up operating costs, especially utility bills. Maintenance and landscaping are also getting more expensive. But to offset stable rents, many property owners are offering more concessions, such as months of free rent to close the deal, Gary said. .
“It’s still a very bumpy road in the office sector,” says Gary. “It’s getting clearer in the world, but it’s still not clear in the office market.”