Bay Area Commercial Real Estate Forecast

On Friday I attended a Commercial Real estate forecast hosted by Northern California CCIM and the Oakland/East Bay BOMA.

Bob Bach, Senior Vice President and Chief Economist of Newmark Grubb Knight Frank, shared his insights on the national market and how the Bay Area stacks up against other markets. Here are bullet points from his research:

• The cities in the Bay Area and California that have experienced the most job growth are San Fran & San Jose. This trend is due to the growth in the technology sector and some of the recent IPO’s.
• Austin, Houston, & San Antonio, Texas are leading employment centers for the nation. In fact, Texas had other metropolitan areas that ranked in the top twenty MSA’s for job growth. Real estate investment in these cities has been particularly strong.
• Oil prices are a key indicator for the economy. If oil prices spike, watch out.
• An interesting piece of insight from Bob, was that retail shopping is relatively healthy in the Bay Area but lagging in across the rest of the nation. Part of this is due to the job growth that the Bay Area has seen.
• Commercial Real Estate (CRE) Investment came back early in the recessionary cycle, but investments were not like in the early 90’s. Many investors expected to make huge returns like in the RTC days. Those returns never materialized.
• Cap rates are lower year over year in the 2nd quarter of this year. This has produced an increase in prices in real estate investments.
• This was interesting: The spread between ten year treasury and cap rates are at a ten year high. This means that cap rates could still compress to the historical levels. Or when treasury rates rise, cap rates may not increase in lock step until the spread is reduced.
• Businesses are hesitant to make a move until the “fiscal cliff” is addressed. The fiscal cliff is the looming debt crisis the U.S. is facing, along with the growth of the deficit spending. There is a lot of uncertainty in the market that is causing business to proceed with caution.

Maria Sicola, Executive Managing Director at Cushman & Wakefield and Head of Research for the Americas, shared some of her thoughts on the U.S. economy and on the Bay Area in particular. She focused primarily on the industrial and office markets:

• The San Francisco MSA is projected to outperform the rest of the country with a full recovery in 2014.
• Absorption in the San Francisco office market is strong.
• Currently, asking rent for office space is $51 per square foot (psf) per year. Vacancy is at about 8%.
• Tech space is commanding higher rents. She differentiated between “Prime Creative Tech” and “Class A Tech”. Prime Creative Tech is the more desirable of the two spaces and consists of historic and/or brick & timber construction that has undergone a major retrofit. “Class A Tech” is still attractive to users and is described as traditional office space modified to accommodate technology and creative users.
• Silicon Valley asking rents are $2.80 psf per month. Oakland asking rents are $2.52 psf per month.
• Another interesting note from Maria’s talk was that there is a lack of Class A industrial space. I just read in the SF Business Times that there is a large speculative industrial project going in in Newark.

The event was an interesting one overall. Investors in office should stick to San Francisco and Silicon Valley projects where job growth has been strongest. Apartment demand is strong in the entire Bay Area.

If you are looking to invest in any of these sectors or have questions about your current investment, give me a ring at (925) 385-8798.