Each sector of the commercial real estate market was severely impacted by the recession and it has been a long grind from the bottom. Things have improved substantially since, with some recent noteworthy improvements in occupancy rates and some bumps in asking rents. In addition, supporting fundamentals look far better than just a short time ago. As a result some end-users and investors are again interested in the local market and we have observed a lot of convexity in price, although some prices remain below replacement costs.
We have noticed an uptick in commercial real estate interest. Part of this is stemming from single family yield seekers and flippers looking for higher yielding opportunities in a broader asset class. Additionally, we have seen a pick-up in owner-user activity and more traditional investor interest. Almost worldwide, yields remain subdued and many believe that many equity markets are at frothy values. Noted investor Carl Icahn, commented that the U.S high yield bond market may also be overpriced. Many people consider such markets as a significant challenge from a risk standpoint (we aren’t recommending in any particular direction). As such, many investors are intrigued in real estate, despite retracing much of the losses already.
While top tier markets like Los Angeles, San Francisco and Seattle generally get the most attention, however cap rates are already quite compressed in those areas. After 4.4% cap rates on multifamily in some California markets 5.3% looks interesting in Las Vegas.
In local development news, Prologis has stated that it will build 464,203 square-feet of speculative industrial. Several local analysts and industrial brokers have commented about the need for very large spaces, which has been seen as an obstacle to some new firms moving to the area. Dermody is also noted to be building some space and Panattoni has acquired land near the 215 bend in the southwest.
RCG Economics, a regional economics and policy research firm, along with the LIED Institute at UNLV, has just published 3rd quarter numbers for office, retail and industrial. RCG/LIED found that vacancy rates have declined across all sectors. Industrial is one of the most noteworthy with the vacancy rate dropping from 12.6% in Q3 2013 to 8.6% in Q3 2014. The survey notes that Warehouse/Distribution is the leader in the market segment with the vacancy rate dropping by 5.7%, which is very interesting.
Office continues to lag in several submarkets but is also improving. Speculative office dropped by 3.5% year-over-year.
Anchored retail had a vacancy rate drop of 1.4%.
Please see the full survey comments here:
Carl Icahn Comments:
Prologis Speculative Building