Real Estate: SoCal Markets Remain Hot, Experts Say
Brandon Richardson
Though some are hotter than others, all real estate markets in Southern California are performing well, according to Edward Coulson, a professor of economics and the director of research at the University of California, Irvine’s Center for Real Estate.
“The office market is the most nebulous,” Coulson said. “Vacancies have been solid and absorption has been pretty good, but going forward we won’t see a lot of action on the plus or minus side.”
Amenities such as nice lobbies and common space are important factors when it comes to office space, Coulson explained. Walkable proximity to food service and the “urban experience” can be important for some types of office environments, but overall it is not as important as some have claimed, he said.
Richard Green, director and chair of the University of Southern California Lusk Center for Real Estate, said creative office space with open floor plans and high amenities is doing quite well, with rents increasing. However, traditional office space, typically in suburban markets, has higher vacancy rates due to the fact that companies are utilizing less square footage per employee, Green explained. So, despite decreasing unemployment rates, the office market is weaker.
“Industrial is doing great, and I expect it to continue doing great because it’s basically substituting for other types of real estate – both retail and office,” Green said. “One thing that worries me is if we have a trade war, that is going to be bad for industrial.”
If a trade war ensues, Green said industrial space near the ports of Long Beach and Los Angeles, as well as in the Inland Empire, will suffer due to a decrease in imports. “If the ports start losing business because of a silly trade war, that could have a pretty profound effect on the industrial market,” he said.
As long as a trade war is avoided, Green said he is very bullish about the industrial market, with low vacancy rates continuing to put upward pressure on prices. Coulson said prices would likely continue to rise over the next 18 months. However, he added that the sky could be the limit on pricing as more and more companies build up their distribution networks, especially in denser environments where it’s difficult to create new space.
“The death of retail has been greatly exaggerated. A lot of companies are decreasing their amount of space, of course, but that creates capacity,” Coulson said. “You can never underestimate the ability of entrepreneurs to utilize capacity.”
Current trends in retail call for more creativity in how businesses use space, Coulson said. Offering services that cannot be purchased online is key, he noted. For example, 20 years ago there were no storefronts where people could drink wine while they painted, he noted. Food is also taking the place of traditional retail spaces, including creative food courts with entertainment options, he added.
Green is not certain how sustainable the current influx of new restaurants is. “The restaurant business is a tough business,” he said. “You can be a great chef and still not know how to manage a restaurant. The capital costs of a restaurant are very high, and everyone can think of a restaurant they really liked that has gone out of business.”
The continuing disappearance of the middle class is going to be problematic for retail for quite some time, Green said. From 2000 to 2014, the number of middle-income households dropped in 203 of the 229 U.S. metropolitan areas examined in a Pew Research Center analysis of government data. While the wealthy maintain their level of goods and services consumption, he said the fundamental driver of spending is the middle class because low-income families often do not have disposable income.
Prices for single-family homes are continuing to rise, and in many areas are within 10% of prices seen in 2006 and 2007, Coulson said. However, price increases have slowed considerably, he noted.
“They can only grow so much before you’re overpriced compared to the matching income group,” Coulson explained. “That being said, the fact that the growth is stalling out does not mean that prices are going to come down anytime soon.”
Depending on the source, home prices have increased 5% to 8% year over year, Green said. Median home price in Orange County is above $700,000 and Los Angeles County is just under $600,000, he said. Green agreed that there are no indicators that prices will come down, due to the lack of inventory. He added that people are moving less frequently, which is another factor in low inventory.
Vacancy rates for multi-family real estate are around 3% in the region, with the Inland Empire being a little higher, Green said. The pace of rising rents has slowed from around 6% annually to 2% or 3% and there is no indicator that they will not continue to increase, he explained, adding that the current market is somewhat paradoxical.
“On the one end, vacancies are low, which should mean that the landlords have pricing power,” Green said. “On the other hand, there is only so much you can get out of people for rent, so there should be some income restraint on the amount of rent that landlords can charge.”
For investors, Coulson said multi-family building prices should have solid growth, in addition to increased asking rents. The cause is a lack of supply and a seemingly endless demand, he explained. Most areas have recognized the issue and are pushing for a relaxation in regulatory requirements to speed up the development process, he added.
A major factor for a lack of rental units is that Millennials are not as quick to take up homeownership as previous generations, Coulson said. This could be due to Millennials having a better understanding of the risk involved in purchasing a home, after witnessing the market collapse during the Great Recession, he said.
“My faith in the Southern California real estate market is pretty strong,” Coulson said. “I think any softening of the market will be followed by a rebound driven by demand from people and entities that want to be part of the Southern California environment, which is always going to be attractive from anywhere in the world.”
Real Estate – Office
Robert Garey
Senior Director, Cushman & Wakefield
The greater Long Beach office real estate office market continues its steady rise from the last great recession. With the transformation underway in Downtown Long Beach and airport sub markets, investor interest is hot and rental rates are at or near all-time highs. New investors purchasing older office buildings are transforming tired and dated office space into the modern workplace environments preferred by today's users. Previously, only “creative" office users such as gaming companies and advertising firms were seeking contemporary and inspiring office environments. Today, demand for collaborative work environments expands to more traditional users including accounting, law and engineering firms which must compete to attract younger, talented workers. The challenge with today's emerging workplace strategies in office product is balancing aesthetics, density, parking limitations, noise levels, and the higher construction costs to deliver this product.
As the economy heats up, demand for construction services to deliver a quality space grows as well. Tenants continue to seek bargain rental rates to grow their companies efficiently. With rising costs for construction, janitorial services, landscaping, maintenance, etc., tenants will be required to pay more for office space.
These are the fruits of a good economy, but also make it challenging as companies try to control costs in a rising market. The Long Beach market looks bright and this trend is anticipated to continue at a measured, steady pace.
David Smith
Senior Vice President, CBRE Group Inc.
The positive activity in the Downtown and Suburban Long Beach office markets that concluded 2017 has carried through to 2018. Surrounding markets continue to see rents increase as options for space dwindle, which is the primary reason that there is increased interest in Long Beach. Since rents in most areas of the South Bay, Mid Counties and North Orange County do not justify new construction, it is likely that tenants will continue to cast wider nets in search of the best alternatives. The lack of large blocks of space in Long Beach will limit the possibility that one or two large transactions can significantly impact market conditions, but there should be a steady stream of small- and medium-size tenants.
Investment activity continues to be strong throughout Southern California. Long Beach is viewed as a market that is undergoing the type of transformation that has been experienced in many of the stronger markets, while still offering excellent value. The building at 180 East Ocean Blvd. and The Hubb, located at 100 W. Broadway, are both on the market for sale and have seen significant interest from investors. Both are expected to sell in 2018. Additional sales activity is likely as some current owners look to capitalize on peak prices, and investors remain hungry for opportunities to place capital.
The remainder of 2018 should see significant interest from investors in any opportunity that comes to the market, steady decreases in vacancy rates across all product types, and increases in rental rates.
Linda Treffry
Associate, Coldwell Banker Commercial BLAIR WESTMAC
The Long Beach office market averaged a 13.3% vacancy rate in Q1 2018; however, this was still lower than Los Angeles and the U.S. averages of 14.5% and 16.5%, respectively. Within the City of Long Beach, the suburban market fared better than the downtown market, according to CoStar, a leading commercial real estate database. Vacancies were reported at 5.5% on average in the suburban market, with Class B office buildings reporting the lowest vacancy rate in the city at 3.2%.
Long Beach Airport was named a Top 10 airport in the U.S. by Condé Naste Traveler magazine in 2017, and demand for office space has been most prominent near the airport. Redevelopment has been steady at nearby Douglas Park, with approximately 50,000 square feet of Class A office space anticipated in 2018. Rent growth of 4.9% (at $2.46 per square foot average) within the last year for the suburban office market continues to exceed the historical rate of 3.2%.
The Downtown Long Beach market vacancy rate was reported by CoStar at 10.6%, with Class A office buildings reporting the highest rate at 13.8%. In January, Molina Healthcare vacated approximately 80,000 square feet at 1 World Trade Center, which had a significant impact on absorption. More than 500,000 square feet of office space is currently under development, primarily designated for government use and therefore not expected to dampen rent growth of 5.1% (at $2.61 per square foot average), which continues to exceed the historical rate of 3.1%. CoStar reports average sale prices at $318 per square foot, which is still significantly lower than the Los Angeles market, and continues to attract investors and developers.
Overall, we are optimistic about the Long Beach office market as it continues to outpace the Los Angeles and U.S. markets in rent growth due to a low unemployment rate and a renewed city focus on economic development and attracting new business.
Real Estate – Industrial
Brandon Carrillo
Principal, Lee & Associates Commercial Real Estate Services
Total SF of Market – 215,344,706
Vacancy – 1.2%
Average Lease Rates – $0.92 PSF
Planned / New Construction – 768,093 Sq. Ft
2018 has been a strong year for the Long Beach industrial real estate market despite the lack of supply. This trend will continue through the remainder of the year. Lease rates will maintain their upward trend, as the vacancy rate will continue to hover around 1%. In Downtown Long Beach, we are seeing older product being overhauled or demoed for new product. This can be contributed to very few areas available for development. Many of the remaining land sites in our market are either contaminated or in the process of remediation for future development.
The ports will continue to handle record twenty-foot equivalent unit (TEU) loads as we see more megaships entering the ports of Los Angeles and Long Beach. During the 1st Quarter 2018, TEU count was up almost 13.83% with 575,258 TEUs. This was the port’s biggest 1st quarter in their 107-year history. This year we saw continued growth of the next generation of aerospace with Virgin Orbit taking on more industrial space in Douglas Park. With companies like Toyota and others leaving California for business-friendly states such as Texas, many thought a huge exodus would ensue. However, we have seen the next generation of companies establishing roots in California. The L.A. Basin has become home for trend-setting companies like SpaceX, Virgin Orbit and Bird Scooters. The future looks bright for Long Beach in 2018.
John Eddy
Executive Vice President, Coldwell Banker Commercial BLAIR WESTMAC
The first half of 2018 saw a substantial drop in sales transactions compared to the fourth quarter 2017 due primarily to the lack of inventory. In the industrial real estate market in Long Beach, we have historic lows in vacancies and available properties for sale and lease. This is the quintessential tight market. As Long Beach has fallen into a nationwide spotlight, more and more favorable opinions and articles have brought out-of-state tenants and buyers into the area. Where traditionally we saw Long Beach businesses moving and expanding into different Long Beach buildings, we’re now seeing national and international companies looking to Long Beach to fill a gap in their business model. I frequently have to schedule my appointments based on when a prospective buyer or tenant lands at Long Beach Airport.
As far as industrial areas across the country are concerned, Long Beach is still seen as a bargain. Even compared with other South Bay markets and Orange County, we have favorable pricing. Out-of-state brokers think Douglas Park is one of the nicest industrial products, not just in Long Beach but in all of Southern California.
Tie all of these together and you get stable prices. I would dare to say that we will continue the remainder of 2018 as we have been. Where normally we’d see rising interest rates cause a dip in prices, the limited availability and market attention we’re experiencing here in Long Beach seem to balance that out. That said, I did just open escrow on an industrial property which exceeded asking price.
Bill Townsend
President, INCO Commercial
Long Beach industrial real estate appears to be in good shape as the economy and business growth continues to move forward in 2018.
With a strong first half of the year and continued low vacancy of approximately 1%, this will continue to be the theme going into the second half of 2018.
The average rents and sale prices have steadily increased and the fundamentals continue to look good. There is just not enough property available, even with new projects coming up such as the Pacific Edge development of the former United States Post Office on Redondo Avenue. This 424,000-square-foot, three-building project will be a great reuse of the site and should attract major users to Long Beach.
The cannabis industry was red hot last year, pushing prices to extreme levels with multiple bids on those types of properties, but it’s a different story this year. This segment in the market has definitely slowed in 2018 and the trend appears mildly active with less inflated values and more normal pricing. The demand has decreased since many more cities are now available for this type of business.
All the signals still look good for Long Beach industrial real estate. We should continue to see strong demand for buildings and low vacancy for the remainder of the year. The problem is we just don’t have enough property.
Real Estate – Retail
Scott Burnham
Founder and CEO, Burnham USA
We continue to have high expectations for the Southern California retail real estate market throughout 2018 and the foreseeable couple years following. The economy continues to fire on all cylinders with healthy growth (albeit in later innings), while enjoying lower unemployment together with continued job growth and inflation remaining in check. There are, of course, looming longer-term economic risks including but not limited to rising interest rates and a potential international trade war. Time will tell how Trump’s negotiations will play out internationally to either positively or negatively impact the greater economy over the long run.
We do expect the economy to finally begin enjoying the benefits of the $1.5 trillion in Trump tax cuts together with the increases in federal spending, which we believe will both have positive implications on the overall real estate industry throughout the latter part of this year and beyond. We also expect this to translate into an increase in consumer spending. While the industry may be tempered by the fed’s interest rate hikes over the next several years, we don’t see the rate increases having any significant effects on the real estate industry throughout 2018.
All in all, things continue to be very good for the Southern California retail real estate market throughout 2018!
Catherine Morris
Vice President, William Morris Commercial
The Long Beach retail market has continued to make great strides in 2018. The success of the Streets’ re-envisioning in Downtown Long Beach – especially along Pine Avenue’s Decadence Row and at the Promenade – has been incredible, with 13 new tenant leases signed in just the last two years. Downtown is quickly becoming a “foodie” center with approximately 15 new eating establishments recently opened and another 15 or so on the immediate horizon. The Long Beach Creamery, BurgerIM, The ThickShake Factory, Ellie’s, 123Pho, R-Bar and Poki Cat have recently added variety to the existing smorgasbord. In addition, the future openings of Table 301, Portuguese Bend, Seven Hills, Loose Leaf Boba Company, Gu Ramen and others in downtown will deepen the bench of great dining opportunities. I am currently working on another 30,000 square feet of retail transactions in downtown and continue to cultivate and recruit local and regional, creative concepts that are not duplicative of existing operations. Lately, experiential establishments have been a focus. Companies like Pinot’s Palette, The Harbor Barcade, Trademark Brewing and Pequod Climbing Gym will bring more than just food and drinks to the downtown scene. The future looks bright, with more residents, tourists and workers, as well as more patrons from all over the region, as they come to experience the new Downtown Long Beach.
Douglas Shea
Partner, Centennial Advisers
To understand the local retail real estate market, you still must look globally.
In-store retail sales accounted for 91% of the $5.1 trillion U.S. retail market last year, Newmark Knight Frank, a real estate advisory firm, reports. And retail sales are expected to advance 4.4% in 2018, according to the National Retail Federation. This shows that, while almost 10% of retail has gone to e-commerce, 91% is still going to bricks and mortar.
As I have stated for years, Long Beach is still woefully behind in the retail store sales options, but there is some relief coming. The development on 2nd and PCH should give a huge shot in the arm for Long Beach retail real estate. As some are concerned about the 2nd Street corridor, I see it as a boost to the region. Second Street will have to be more competitive and innovative.
The other development, Long Beach Exchange, is much further along in bringing additional excitement to the area. They are also bringing high rents, but the companies are paying them.
Long Beach rental rates outside of the new developments are continuing to move upward, but at a somewhat slower degree than in the past couple of years.
As long as interest rates remain low, Long Beach real estate should remain stable. Look for growth in rents and values to continue through 2020.
Real Estate – Residential Single-Family
Phil Jones
Managing Partner, Coldwell Banker Coastal Alliance
The only element of our forecast we can offer with any certainty is that we will continue to have a severe shortage in inventory through the last half of 2018. The underproduction of housing in California over the last two decades has created a shortage that, depending which report you reference, ranges between 1.5 million to 3.5 million units. Naturally, the shortage will continue to contribute to a very competitive market for homebuyers and continuing upward pressure on prices. We also anticipate mortgage interest rates rising as we move through the summer and into fall.
We are also watching the market for indications of how the recent tax reform will impact home-buying and home-selling tendencies. There are signs that the reduction for mortgage interest deductibility from the $1 million limit to $750,000 may be impacting the $900,000-to-$1.5 million price range, as the days on market have been extended in that particular category. Any effects of the limitation on state and local taxes to $10,000 are virtually indistinguishable because of the continued strong demand, and there isn’t any reason to believe that the demand for single-family housing will wane whatsoever.
Therefore, we believe the market in the second half of this year will be very similar to the first half, with interest rates and prices increasing moderately.
Geoff McIntosh
Owner, Main Street Realtors
The Southern California region continues to lag the state in home sales on a monthly and annual basis as the bottom end of the market continues to be most affected by the housing shortage and supply constraints, yet home prices still indicate a steady upward trend. The softening in home sales can be attributed to the recent hike in mortgage rates, which reached their highest point in seven years, and price appreciation and competition continue to be the strongest barrier to entry in the marketplace, especially for new homebuyers.
More specifically, in the Long Beach area, new listings of single-family homes were down 5.1% from a year earlier and pending sales down a staggering 48.2% over that same period. Inventory does, however, show signs of improvement with a 9.0% increase from this time last year, although an inventory of 426 single-family homes for sale in May is still historically very low, considering a city population of nearly half a million residents. The median sales price for a single-family home in Long Beach saw a 7.1% increase over the last twelve-month period, settling at $620,000, while the average sales price through May 2018 was $681,125.
Additionally, due to inventory levels, that which is available for sale is going under contract rather quickly and at nearly full asking price. The low unemployment rate continues to be an important driver and indicator to the housing market and, while home sales may be dropping in year-over-year comparisons, this is more an indicator of low inventory than a lack of buyer interest. Over the long term, improving supply conditions will be critical to counterbalance the effect of housing affordability constraints limiting first-time buyers and the next generation of homeowners.
Real Estate – Residential Multi-Family
Steve “Bogie” Bogoyevac
Senior Managing Director of Investments, Marcus & Millichap
and Founder, Bogie Investment Group
Demand for Long Beach apartment buildings has remained strong through the first half of 2018. Renter demand for affordable Class C apartments has kept vacancy low, allowing for above-average rent growth. These factors continue to fuel investors’ desire for older assets that allow potential upside following upgrades and improved management efficiencies. Long Beach continues to be a submarket with value-add sales activity driving minimum yields below 3%.
Diving into real numbers, effective rents in Long Beach have increased 7.2% over last year. However, after hovering at or below 4% for four straight years, vacancy has risen by triple-digit basis points, reaching 4.4%, likely due to affordability and the large increase in the construction of new units.
The Fed has increased the federal funds rate and has guided toward two additional rate hikes this year, setting the stage for as many as four increases in 2019. Interest rates should be watched closely as they have a direct and immediate effect on value. Despite these factors, Long Beach continues to be an extremely solid market to own or acquire multi-family investment properties. Existing owners can take advantage of a 1031 exchange to capture these increases in value and deploy their equity in markets and/or product types with less management responsibility and significantly higher cash flow and return on equity.
George Bustamante and Steve Warshauer
Vice Presidents, Coldwell Banker Commercial BLAIR WESTMAC
The outlook for multi-family real estate in Long Beach remains cautiously optimistic. Strong rental demand, low vacancies and high barriers to entry for development create a landlord and seller’s market.
As gross domestic product appears likely to expand close to 3% for 2018, there is reason to be optimistic. Long Beach is expected to benefit from this good economic news, as the city is home to one of the busiest ports on the Pacific Coast.
The fundamentals for multi-family investments are still tied to supply, demand, costs of capital and income levels. The persistent supply-demand imbalance remains intact for 2018. That means continued low vacancy rates (sub 4% for Long Beach), landlord pricing power and tenants’ limited supply for affordable rental housing. Interest rates remain at historic low levels but have begun a slow rise during the past two quarters and are expected to climb slowly as the economy continues to grow.
Long Beach is continuing to benefit from a lower rent base than neighboring Los Angeles Metro beach communities and Orange County coastal rents. This has created the perfect reason for developers to look at Long Beach for development opportunities. There are currently around 1,500 market rate units under construction, ranking Long Beach in the top one-third of L.A. submarkets for new construction.
As the real estate market moves later into the current real estate cycle, experts see slower growth ahead for rent increases and property prices.
Robert Stepp
Principal, Stepp Commercial
The Long Beach multi-family market has seen a resurgence in investment activity recently. This can be attributed in large part to the news that rent control initiatives will not be on this year’s November ballot and, as a result, hesitant buyers and sellers who were sitting on the sidelines are now back in the market.
Despite the question of rent control, the first quarter of 2018 had some significant activity with more than $120 million in sales volume in properties with 100 units or fewer. Per commercial property database CoStar, there were 508 units that sold at an average unit price of $250,650. We have also been seeing capitalization rates shrink to an average of 4.32% (two years ago they were at 5%) and gross rent multipliers have risen a full point from two years ago as well.
I believe we will continue to see a rise in investment activity for apartment properties over the remaining half of the year. Although many don’t think cap rates can get much lower, especially as interest rates have been on the rise, there is still a significant amount of opportunistic property in the market. As the city’s population grows steadily and the job market throughout the region remains robust, rental demand is on the rise for well-located and upgraded apartments. East Village, Retro Row and Eastside/Traffic Circle in particular are up-and-coming neighborhoods that are increasing in popularity with residents.
The original article can be found here.