Market Data

Coasting Along

The Pacific region continues on a smooth path.

The West Coast still is seeing its fair share of growth. Nearly every commercial real estate sector has new construction in the pipeline in at least one city in the region.

An increase in Los Angeles County's multifamily inventory - 49 percent more properties on the market in 2005 than in 2004 and a predicted 35 percent more in 2006 compared to 2005 - is causing units to stay on the market longer and selling prices to deflate, says Kimberly Roberts, vice president of major asset services at Re/Max Commercial Brokerage in Los Angeles.

Demand for industrial properties in the Puget Sound/Seattle market is at an all-time high, according to CB Richard Ellis. More than 3 million sf of industrial space is under construction in the region. A $4.3 million, 103,500-sf industrial shell building in Pasco, Wash., was recently completed and landed its first tenant earlier this year: FedEx Ground leased 30,000 sf of the property, which is for sale.

An 8 percent increase in office inventory is expected during the next two years in San Francisco, reports Colliers International. Despite rising construction costs, developers are optimistic about the city's office market and expect nearly 1.7 million sf to be completed by year-end, with an additional 5.3 million sf proposed.

In Portland, Ore., the 1.2 million-sf Clackamas Town Center began an 18-month, multimillion dollar renovation and expansion in June. A 20-screen movie theater and 40 new stores and restaurants will occupy the additional 250,000 sf. The county is ready for new retail with approximately 50 percent of households earning $50,000 or more annually.

In Northern California, luxury opportunities abound, and naturally the hospitality industry is keeping up. Kirkwood Mountain Resort's Expedition Lodge in Kirkwood, Calif., is a five-star fractional ownership club that is offering 56 one-eighth ownership interests in seven residences in the High Sierras, a ski area near Lake Tahoe. The development is scheduled to open in 2008 and partial ownerships range between $319,900 and $369,900 for the three- and four-bedroom luxury residences.

RANCHO CUCAMONGA, CALIF.
Growing Communities Set Pace

Construction of the Inland Empire's largest speculative class A office project began in August and is expected to open in April 2007. Empire Corporate Plaza is just one of the many developments contributing to Rancho Cucamonga's status as the seventh fastest-growing city according to a U.S. Census Bureau report. The area is drawing research and development, healthcare, financial services, insurance, banking, and high-technology companies, says Linda Daniels, Rancho Cucamonga's redevelopment director. Three other California cities rank in the top 10 fastest-growing U.S. cities. (See chart.)

PUGET SOUND, WASH.
Retail Market Revs Up

• Several new retail developments are underway in Bellevue, Wash., and Seattle. For example, Bellevue's Shops at the Bravern, a 130,000-sf shopping center, including regional newcomer Neiman Marcus, part of a larger mixed-use development containing two class A office buildings, is slated for completion in 2008.

• Vacancy in the Puget Sound metropolitan statistical area is a low 3 percent, indicating that it is an underserved market. But more than a dozen retail projects currently are underway accounting for 84,250 sf in Bellevue and in downtown Seattle approximately 168,000 sf are under construction as well.

• Developers are moving into several suburban areas. Community centers are under construction in Marysville and South Puyallup. Other suburbs, such as Mountlake Terrace, Burien, and Kenmore are undertaking downtown revitalization projects to create more of a live-work-play environment.

Source: CB Richard Ellis and Schnitzer Northwest

ANCHORAGE, ALASKA
Luxury Condo Boom Moves North

While multimillion-dollar condominiums aren't an anomaly in markets such as Miami, Chicago, and Los Angeles, two developments featuring condos priced at $1 million and up are the first to be built in Alaska in 30 years.

Both developments are being constructed in Bootleggers Cove, a section of downtown Anchorage infamous for being difficult to build on due to its clay soil. These conditions require strict building codes calling for "extra-strong steel, foundations, and structural upgrades" according to Alaska Journal of Commerce Online.

Developer Sky Carver, who is building the nine-unit Shoreline complex featuring condos between 1,700 sf and 2,500 sf, rooftop decks, and large windows that provide picturesque mountain views, is confident Anchorage is ready for luxury living. The units are priced between $950,000 and $1.3 million and are being marketed to retired baby boomers looking for luxury without the upkeep of shoveling snow and mowing the lawn, Carver says. The units' features are designed for comfortable aging - walk-in showers, wheelchair-accessible fixtures, and elevators. Construction is slated to begin during summer 2007, but the complex's two most expensive units - $1.3 million and $1.25 million - were sold by August.

The other project, a 10-unit complex by Sarada Development, features units ranging from 1,300 sf to 2,500 sf costing between $695,000 and $1.3 million. Construction was completed in October and as of early August four units already had sold.

CHULA VISTA, CALIF.
Suburban Industrial in Demand

Developers in Chula Vista, Calif., a suburb of San Diego, are finding creative ways to meet the growing demand for small-user industrial space. While only 298,000 sf of new industrial product is planned for the near future, nearly 3,000 acres of the submarket are zoned for reconstruction according to the San Diego Daily Transcript. Voit Development Co., based in Woodland Hills, Calif., is redeveloping several projects including Chula Vista Commerce Center, a six-building, 183,000-sf industrial park; Chula Vista Commerce Center II, a two-building, 38,000-sf industrial condominium property; and Chula Vista Distribution Center, an 11-unit, 80,000-sf industrial condominium project.

LOS ANGELES
Market Snapshot

The California real estate market seems vulnerable as it has for quite some time due to low capitalization rates. In the Los Angeles market, it has not been uncommon to find cap rates at 5 percent. ... Building owners are seeing return rates of 5 percent. There is a lot of concern among buyers, owners, and brokers that return rates of 5 percent are just not attractive to investors. Return rates were closer to 10 percent just five or six years ago.

On a positive note, vacancy rates are at all-time low levels. Los Angeles County office space has a vacancy rate lower than 7 percent, down from 14 percent just three years ago. Apartment space also has historically low vacancy rates as demand is high. These factors account for good upside in rental incomes. This should help to maintain values as net income returns rise while investors demand higher return rates.

I expect a 10 percent to 15 percent price correction at most. Conditions are far better now than in the early 1990s when we had a drop of nearly 40 percent.

--Syd Leibovitch, president of Rodeo Realty/Paramount Properties Division in Los Angeles


INTERNATIONAL BEAT
Korean Office Market Strengthens

For more than five years, the Korean office market has been growing. Office transactions in Seoul and its surrounding submarkets increased by approximately 383,269 sf between 1Q06 and 2Q06 to approximately 1.6 million sf according to the CCIM Korean Chaptepr research team. In 2Q06, the transaction dollar amount totaled approximately $523 million, an increase from 1Q06's $472 million. The sales price per pyung (1 pyung = 35.6 sf) increased by 17.6 percent during the same time span.

The Seoul office market is characterized by strong institutional investment, rising sales prices, and an increase in mixed-use building transactions, the team says.

Strong performance is expected to continue. Rising class A office rental rates will trickle down to smaller properties and the increased demand will cause fixed rents to rise. The vacancy rate in Seoul's CBD is expected to be around 5 percent, while the Gangnam and Yeouido submarkets vacancy rate will increase from 2 percent to 5 percent.


HONOLULU
Office Market Grows Hotter

Honolulu's office space continues to become even rarer as availability fell below 9 percent during 2Q06. Average asking rent is increasing accordingly - in the central business district it rose 8 cents and in the suburban submarkets it went up 21 cents. Annual rent increases of 3 percent to 5 percent have become an expected occurrence marketwide.

With increasing construction costs and less availability, the market is shifting in landlords' favor, leading to fewer tenant improvement concessions. At midyear, absorption was a healthy 94,808 sf overall, and in the suburbs, where absorption recently had been negative, it was 25,139 sf.

Sublease space is being gobbled up by tenants as well. Representing less than 1 percent of the net rentable area (approximately 11.6 million sf), 78,216 sf of sublease space is available in Honolulu's metropolitan area.

Source: CB Richard Ellis

PORTLAND, ORE.
Multifamily Market on the Rise

• Portland's overall average vacancy rate is 3.09 percent. Every submarket has seen a drop in vacancy except southwest Portland.

• Downtown, new multifamily properties' vacancy is less than 1 percent, while older properties have slightly more than 1 percent vacancy on average. Certain floor plans have been especially popular downtown - two-bedroom, two-bathroom apartments saw a rent increase from $1,461 per month to $1,477 per month on average between 1Q06 and 2Q06.

• Effective rents rose significantly during the first half of the year. This is attributed to fewer concessions and lower vacancy. Portland's net operating income is predicted to increase more than any other western city over the next year.

• Institutional investors are showing interest: A California-based investor spent $35 million, or $113,000 per unit, on Ione Plaza, a 307-unit mixed-use apartment complex adjacent to Portland State University.

• Other significant transactions include: The 342-unit One Jefferson Parkway in Lake Oswego, Ore., bought by FPA/Azure Jefferson Associates LLC for $33.2 million and a 3,390-unit complex in Portland, purchased by Monterey Springs LLC for $27.8 million.

Source: NAI Norris, Beggs & Simpson

Carolyn Bilsky

Area report is written by Carolyn Bilsky, associate editor of Commercial Investment Real Estate. Contact her at (312) 321-4507 or cbilsky@cciminstitute.com.

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