Sunny Outlook in Northern California
The commercial real estate industry in Northern California is booming, with all segments performing well in the major markets. An explosion in the computer, multimedia, and Internet industries has led to a low unemployment rate and a robust economy. "The South of Market area of San Francisco has been drawing high-tech companies from the surrounding Bay area counties and has been named ‘Multimedia Gulch,’" says Michael Miyagishima, CCIM, an independent San Francisco broker. In addition, "Silicon Valley is a major contributor to the San Francisco Bay area," he says. In turn, the real estate industry is experiencing low vacancy rates and high rental rates.
In San Francisco, the multifamily market is "hot, hot, hot," says Ed Craine, CCIM, of Smith-Craine Finance in San Francisco. In addition to a strong economy, high levels of migration and immigration have led to a 98 percent occupancy rate, he says.
Lease rates are up, averaging $2 psf to $3 psf per month in the city, while suburban rents are slightly lower. Sales prices also are up, ranging from $150 psf to $250 psf.
However, Craine says he thinks the market is reaching its peak this year. "Buyers, builders, and lenders should beware of ‘irrational exuberance,’" he says. "The mood of the market reminds me a great deal of the hot days in the early to mid-’80s when nobody thought rents or values could go down."
Across the bay in Oakland, multifamily is experiencing the "strongest market in many years," says Ted Dang, CCIM, of Commonwealth Real Estate in Oakland. "The boom started in 1996-1997 with job growth in Silicon Valley."
Rental markets in the city are very tight with occupancy rates between 95 percent and 98 percent. "Some have waiting lists," Dang says. Rental rates are up, with studios averaging $500 per month, one bedrooms averaging $650 per month, and two bedrooms averaging $800 per month. Sales prices also are up due to a shortage of quality inventory.
Dang adds that it’s fairly easy to obtain financing for multifamily projects, and some construction is occurring. "Savings and loans, banks, and insurance companies are all active," he says. "Prime property is on every lender’s list."
Bruce Hester, CCIM, of Grubb & Ellis in Sacramento, says his multifamily market is active, with 1998 sales totaling $300 million. Class A vacancy rates are at 6 percent, and class B and C are slightly lower at 4 percent.
Hester says multifamily construction has started for the first time this decade. "With a job growth of 18,000 to 22,000 per year and a population growth of 35,000 per year, the area is in demand," he says. More than 2,000 units will be added over the next 18 months.
Sacramento’s booming economy also positively has affected its office market. "The economy is thriving with the growth of local companies and relocation of new companies to the area," says Russel Gallaway, CCIM, of the Corporate Advisory Group in Sacramento. "Sacramento’s office market should see approximately 1.2 million sf of positive net absorption in 1999."
The office vacancy rate for class A and B space is 9.2 percent, which is down 1 percent from last year, Gallaway says. Suburban monthly lease rates range from $1.40 psf to $1.85 psf, while downtown class A rates are between $2.35 psf and $2.65 psf.
Frank Pipgras, CCIM, SIOR, of Aguer Pipgras Associates in Sacramento, says construction on 3 million sf of new office space — both spec and build-to-suit — began in the last 12 months. The construction is taking place because of "plenty of zoned and entitled office land available in all submarkets."
New construction may continue, as financing is available. "Generally, financing is available with substantial equity in the 25 percent range," Pipgras says. "Lenders are the life companies with the CMBS market slowing down." Back office, call centers, and technology will be the high-growth areas, he says.
"Silicon Valley rental rates have remained relatively stable, despite the negative effects of the ‘Asian flu’," John L. Rossi, CCIM, of AMB Property in San Francisco says, referring to the recent Asian economic crisis. "However, the market has experienced an increase in vacancy and negative net absorption." The industrial market has stayed steady in the East Bay area, while the market is very healthy in the Peninsula area.
"The main positive factor driving real estate is land scarcity," Rossi says. "The high cost of land and limited construction activity creates an atmosphere of demand outstripping supply resulting in soaring rental rates and low vacancy."
Lease rates vary widely depending on product type. For warehouse, monthly rates rose dramatically over the past several years, from 50 cents psf in 1997 to 65 cents psf at their peak in mid-1998. Current manufacturing monthly rates of 95 cents psf are slightly below the mid-1998 peak of $1.10 psf. Research and development rates have seen the greatest fluctuations over the years with monthly rates of $1.40 psf to $1.50 psf in 1997, peaking at $1.75 psf in mid-1998 and flattening in 1999, Rossi says.
North of San Francisco, the industrial market is "very active with a 3 percent vacancy rate and projection of 1.2 million sf of gross absorption," says Barry Palma, CCIM, of Orion Partners in Santa Rosa.
Monthly rental rates range between 45 cents psf to 65 cents psf triple-net. These rates have increased by 15 cents psf since 1994, Palma says. In Marin County, rates are 30 cents psf higher. "High-cube distribution buildings are selling for $41 psf and R&D/flex buildings are selling for $70 psf to $80 psf," he says, adding that these sale prices are stable.
Palma says the market is active with build-to-suits in Sonoma County, and he can see the expansion continuing. "The North Bay of the San Francisco region is very desirable because of its proximity to wineries, reasonable cost of living, available land for build-to-suit and expansion, and rental rates 15 percent to 20 percent less than the rest of the Bay area," he says.
Michael Mullinix, CCIM, of Mullinix Commercial Real Estate Co. in San Jose, says the retail market in his area is evolving into a maturing market. "Retail development has been substantial due to the phenomenal growth of the population and, in particular, the buying power of the general population," he says.
Overall, the occupancy rate is between 92 percent and 95 percent. "I believe this has held fairly consistently over the last two years," Mullinix says. Typical lease rates differ substantially depending on the type of project, the size of space, and the location. He says a broad generalization of monthly rates is $2.50 psf to $4 psf for mall locations, $2.05 psf to $3 psf for new strip retail centers, and $1 psf to $1.75 psf for old strip retail centers.
The retail market is experiencing a large number of sales, Mullinix says. "There is movement on the part of regional malls to sell," he says. "In addition to major mall sales, there is active turnover in unanchored strip retail centers."
A factor affecting the retail market in the Bay area is the emphasis being placed on urban redevelopment, says Bill Mohr, CCIM, of Mohr Financial in Oakland. "Cities are trying to reinvigorate their downtown areas," he says. As a result, restaurants, movie theaters, and other entertainment businesses represent a growing segment of the real estate market. Urban areas are also seeing a rise in the number of big-box retailers as they move in from the suburbs.
Mohr says the retail occupancy rate varies depending on the value of property. "The prime retail properties always do well and are extremely sought after," he says. "The average properties are doing mediocre and the poor are being turned into a different kind of use." For example, properties that once housed retailers that sold products now house businesses that sell services.
Louisville, Ky., Delivers
An excellent economy and steady job growth are contributing to the healthy state of commercial real estate in Louisville, Ky. "Economic activity is very strong," says Walter C. Wagner Jr., CCIM, of Walter Wagner Jr. Co. in Louisville. "United Parcel Service has made Louisville one of its major hubs, which has had an exciting ripple effect in our area."
"Our industrial occupancy is quite high," Wagner says. "In fact, the city has just announced that they will build a 300,000-sf spec facility to help fulfill the demand." There also is a lot of industrial development occurring in Jefferson Riverport, located just south of the city on the Ohio River. "This international port now covers 2,000 acres and has over 6 million sf of office/warehouse facilities," he says.
Typical lease rates range from $4 psf to $15 psf for office/warehouse space, from $1 psf to $8 psf for manufacturing space, and from $4 psf to $4.25 psf for strictly warehouse facilities, Wagner says.
"For the past five years, the Louisville multifamily market has experienced steady growth both in the addition of units, as well as rental rate increases," says Bill Leffew, CCIM, of Holliday Fenoglio Fowler in Louisville. Class A monthly rental rates are in the 80 cents psf range, class B rates are in the 70 cents psf range, and class C are in the 60 cents psf range, he says.
Citywide occupancy has remained consistent for the last few years at 94 percent. Leffew says there are almost 1,400 units currently under construction and more will be needed in the future. "As long as the economy continues to grow, our market will have an additional need for class A through C multifamily," he says.
In Louisville’s office market, "Activity is brisk with absorption above projection both of bulk space and individual space," says Frank F. Weisberg, CCIM, of Prudential Parks & Weisberg Realtors/Commercial Services in Louisville. "Office/warehouse is booming with very high occupancy rates and new product is being added all the time." Annual lease rates vary from $8 psf for office/warehouse space to $16 psf for class A space located downtown.
"The retail market in the Louisville, Ky., metropolitan statistical area is as strong as it has ever been," says Daniel A. Huneke, CCIM, of Dancor Commercial Realty in Louisville.
Annual retail rental rates vary substantially based on location, Huneke says. "In the new strip centers of eastern Jefferson County, signed lease rates are breaking the $20 psf barrier for the minor tenant space and are at the $10 psf level for anchor tenants," he says. "In southern Jefferson County, the rates for minor tenants is more in the $13 psf to $16 psf range and anchors are paying $7.50 psf to $9 psf."