By Jason Lamoreaux
What recession? I recall in the market recovery after the recession of the earlier 1990’s that reference to the recession slowly moved out of discussions, as if everyone was afraid to mention the “R” word for fear of return. In reality, the real estate market was in a steady recovery in the late 1990’s, which lead to expansion, then hyper-supply, thus returning to recession. Cyclical? Yes.
The same routine has been played out for several decades, both nationally, and locally, however, we seemed shocked each and every time a cycle occurs. Where are we today? The indicators point to a steady, but moderate recovery with expansion on the horizon.
Housing, which has experienced the greatest gain since the bottom of the market in 2009, continues to outpace all sectors in the real estate market with year-over-year gains of 19.3%, with the median price increasing from $150,000 in September of 2013, to $178,950 end September 2014. Price per square foot has also experienced significant gains, increasing from $80.39 PSF, to $97.89 PSF, representing a 21.8% gain for the Victor Valley. As the resale market approaches $100 PSF, home builders are now able to deliver new product to the market, profitably.
On the commercial front, retail vacancies have decreased 130 basis points, from 11.0% to 9.7%, recording net absorption of 394,172 SF year to date. Lease rates are down slightly, from $12.09 PSF annually, to $11.76 PSF. The continued absorption of retail space is a positive indicator we are moving from a recovery cycle, to an expansion cycle.
The Industrial sector has also experienced gains, with a reduction in inventory in most municipalities in the High Desert. Industrial vacancy rates are down from 6.5% at end of 2013 to 5.9% ending Q3 2014, with rents up from $3.40 to $3.51 per square foot, representing a modest gain of 3.2%. Total net absorption was 98,294 SF through September, 2014, indicating a steady demand for space.
Office space remains steady, with vacancies increasing slightly year over year by 10 basis points, from 6.0% to 6.1%. Year to date, net absorption is negative, however, minimal at -4,353 SF.
Lease rates have remained flat at $14.86 PSF annually for the past thirty-three months. The primary challenge for office space is the lack of new inventory that conforms to prospective tenant’s criteria. With a relatively low vacancy rate of 6.1%, a majority of the available office space is functionally obsolete, requiring owners to reposition their properties, or to market the property to a new niche.
Multi-Family continues to be the darling of investment, both nationally and locally, with CAP rates in the High Desert moving below 6.0%, and the average cost per unit rising 69% since the low of the market in 2009, ending 3rd quarter at $50,710. As the housing market tightens and vacancies decline, further pressure on rental rates will drive valuations higher, thus increasing the acquisition cost per unit.
Capitalization rates, referred to as CAP Rates, are at historical lows for investment properties. With an abundance of capital in the marketplace for relatively few available properties, CAP rates continue to decline. While owners are currently benefiting from higher valuations as a result of low CAP rates, concerns are looming of the federal government’s intent to raise interest rates, which would directly impact CAP rates.
Another noticeable improvement to the market has been the land sector, which increased significantly year-over-year, reporting a 21% increase in sales volume. The renewed interest in land is primarily attributed to the strong demand for prime retail space, and an improving housing market. As demand continues from regional and national retailers entering the High Desert, activity for prime, infill parcels will lead the recovery.
Additionally, as the population continues to increase in the region, additional housing compression will demand new inventory, which will result in an increase of activity by developers and builders alike to deliver new subdivisions.
The real estate market has made substantial gains over the past three years, and we anticipate steady growth through the end of the year, and through 2015.
For more information on Coldwell Banker Commercial or to get your free copy of the 2014 Fall Edition High Desert Market Watch, call 760-684-8000 or email firstname.lastname@example.org