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Friday, Jun 2, 2023

Low Vacancy Rates, Higher Rents Predicted for Valley

How is the commercial real estate market doing? It depends on whom you ask. Developers and property owners can look forward to strong demand, increasing property values, higher rental rates and a healthy dose of available funding. But those operating businesses are likely to face a corresponding shortage of choices and increasingly higher prices. That was the message delivered at the recent 2007 San Fernando Valley Economic Summit presented by California State University Northridge and the Economic Alliance of the San Fernando Valley. With most economists predicting a strong economy for the Valley, vacancy rates for all types of properties are expected to remain in the single-digit range across Southern California, but even more so for much of the Valley region. Current vacancy rates in the 2 percent range will allow the Valley’s neighborhood retail centers to increase rents about 4.8 percent by year end, according to a Marcus & Millichap forecast report delivered at the summit by Jonathan Weiss, one of the firm’s managing directors. “Retail demand continues to be one of the strongest in the country,” Weiss told the audience. But with a decided lack of new office or industrial construction, those sectors too should continue to experience very low vacancy rates and increased rents. Douglas Emmett’s Trillium property in Warner Center, which a year ago had very high vacancy rates due to the exit of several major tenants, is now 96 percent leased, said Gina Guarino, senior leasing agent for the company who spoke at a summit panel on office and industrial real estate. “That’s a 50 percent jump from last year,” Guarino said. “We’re expected to be over $3 a foot by December in Warner Center, so you’ll be seeing rents rise a lot.” A recent trend to convert industrial properties for residential use in Warner Center appears to be abating, but the damage in terms of reduced availability of already scarce industrial properties, may already be done, said the summit panelists. “We have a 2.8 percent vacancy in industrial space,” said John DeGrinis, senior vice president at brokerage company Colliers International. DeGrinis noted that Santa Clarita, once the alternative for Valley industrial companies that required more space, is now built out, as is the western end of the Valley extending to the Oxnard plain. “One of the things that concerns me is how are these companies going to grow going forward,” DeGrinis said. “We have a lack of alternate locations for the Valley.” But while business owners who want to expand may be in for tough times, the climate for property owners could not be better. Although new construction is expected to lead to a 3.7 percent increase in apartment vacancies in the Valley, a rising demand for apartments will continue to give property owners the flexibility to raise rents considerably, Weiss said. Asking apartment rents in the Valley region are expected to increase 6.8 percent this year to an average of $1,369 per month, according to the Marcus & Millichap forecast. Weiss noted that projections for employment growth will continue to feed apartment demand. But perhaps more important, he said, is the growing gap between the cost of home ownership and the cost to rent. “The average gap between owning a home and renting is about $3,000,” Weiss said. “That’s a significant gap.” Strong leasing activity also means that prices to acquire properties will remain at the very high levels experienced over the past few years. Cap rates, a figure used to evaluate the value of income producing properties, have remained in the 5 percent range for several years, an indicator of very high prices. And those who expected higher interest rates and other factors would bring those prices down are likely to be in for disappointment, Weiss said. “People thought it was a false cap rate,” Weiss said. “But it’s balanced out and (the mid- to high- 5 percent range) is where it will remain.” With no letup in the increasing value of properties in sight, lenders are actively pursuing real estate deals, according to the panelists at a session on debt and equity for real estate. Lenders on the panel noted that they are still actively seeking deals, although underwriting standards for some have tightened somewhat as a result of the problems in the subprime mortgage market. The current slowdown in the residential market is also affecting interest in lending for condominiums and condominium conversions, some of the panelists said. “The subprime meltdown has affected everyone with regard to who’s out there buying bonds,” said Derek Layne, first vice president for Countrywide commercial real estate and one of the session’s panelists.

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