Friday, January 2, 2015

5 PREDICTIONS for Orange County Commercial Real Estate...2015

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I LOVE this time of year...the holidays, college football bowl games,  recaps of the year gone by and PREDICTIONS for the year to come! So with 2014 almost in the books, what's in store for Orange County, California commercial real estate in 2015?

As industrial real estate is my focus (as opposed to office space or retail), these predictions will center upon what can be expected in the world of manufacturing and distribution space in Orange County, California.

Sales prices will stabilize: Since the beginning of 2013...only two years ago...we have seen sales prices for industrial real estate rise by a whopping 50%! That's right, a building that traded for $100 per square foot in January of 2013 would now sell for $150! AMAZING. All good things come to an end, someone famous once opined, as will the rise in sales prices, in my opinion. The reason is simple...the market just can't afford it! Cheap money and a thin supply of available inventory has fueled this price escalation but prices have risen to a point that leasing is now more economical. I actually dissuaded two clients from buying this year because the pricing is so crazy.

Lease rates will increase: Manufacturing companies are growing in Orange County...either organically or through acquisition. This growth creates a need for more space. As these growing companies visit the market for additional space to house their growth, they are met with 97 of every 100 buildings occupied. Concessions such as free rent, tenant improvement dollars and deep discounted rental rates are a thing of the past. These growing companies must secure any space they can and/or figure out a way to make the existing physical plant function more effectively. Additionally, we witnessed a record number of deals transacted in 2010 (five years ago) and 2012 (three years ago). Most leases of industrial space fall into the three or five year term category. Thus, a number of companies that signed leases in 2010 and 2012 will face a lease expiration this guessed it, will be forced to renew at substantially higher lease rates. The growth, record low vacancy, and higher renewal rates will, by default, cause lease rates to rise.

Gross absorption will decline: Defined as the amount of total square footage that leaves the market (leases or sells) each year, gross absorption will decline. The reason...simple...fewer availabilities will mean fewer deals this year. If you own a misfit toy, this could be your year!

Net absorption will increase: Defined as the difference between what comes on the market (new availabilities) and what leaves the market (leases and sales), expect the net absorption to increase this year (more will leave than come on the market). Remember those fast growing companies that will need expansion space and will find fewer availabilities this year? That's right, many of the remaining 3 out of 100 available spaces will leave the market (lease or sell) with no corresponding available inventory to fill the needs. Expect the vacancy factor to trundle down to around 2-2.5% this year.

Be prepared for a surprise: I have been cautiously observing this market for the past year. These record values scare me to death as 2014 feels eerily similar to 2007...record stock market, record low unemployment, commercial real estate values on the rise and then BANG...Thelma and the cliff we plummeted! I'm not sure what will be our demise...falling oil prices, the European recession, the devalued Ruble, a slowing Chinese economy, another cyber attack the likes of Sony, a drastic rise in interest rates? Who knows? Having witnessed the Phoenix of 2009-2014, nothing will surprise me.

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