Rising interest rates cool local commercial real estate market • Long Beach Business Journal

0

With the Federal Reserve quadrupling interest rates so far this year, the local market for commercial real estate, including industrial, office and retail, is cooling, with more properties remaining vacant. long time. Asking rents remain high, however, as uncertainty remains, experts said.

At the start of the coronavirus pandemic, the Fed cut its target rate from 0% to 0.25%, where it remained for two years. On March 17 of this year, the board began raising target rates starting with a 25 basis point increase to 0.25% to 0.5%.

After three more increases of 50, 75 and 75 basis points in May, June and July, respectively, the rate is currently between 2.25% and 2.5%, its highest level since the summer of 2019. The president Fed chief Jerome Powell said in June the rate should hit a 3.8% hike by the end of next year.

Industrial

Despite the upward pressure on interest rates caused by inflation, the local industrial real estate market remains strong, if slightly muffled, according to Lee & Associates director Brandon Carrillo.

“What’s amazing is how quickly things changed when interest rates increased,” Carrillo said. “Usually this kind of stuff takes time to trickle down to our local markets, but it’s crazy how instantaneously it impacted transactions right off the bat.”

Prior to the rate hikes, Carrillo said industrial buildings were being bought up quickly, mostly with seasoned institutional buyers paying everything in cash and striking deals quickly. These groups, however, began to scrutinize offers more as rates rose, he said.

Sellers’ eyes have turned to owner-users, who often use US Small Business Administration loans, which have lower interest rates. These deals typically take longer due to government scrutiny of the money, Carrillo said.

Carrillo noted that even with the recent hikes, the Fed’s target rate is historically low. In 2000 and 2006, the rate was 6.5% and 5.5%, respectively.

In the South Bay, net absorption was negative 615,252 square feet in the second quarter, meaning more space was vacated or newly opened than leased, according to a report by Lee & Associates. From April to June, 1.6 million square feet of industrial space was leased, the lowest amount since the third quarter of 2004, the report said.

The slowdown in the speed of sales and leases does not mean that demand for industrial space has dropped significantly, especially near the ports of Long Beach and Los Angeles. The vacancy rate increased slightly quarter over quarter to 1.3%, which remains extremely low supply.

The average asking rent, meanwhile, rose from $1.35 per square foot in the first quarter to a record high of $1.55. Average rents were below 90 cents per square foot five years ago and have continued to rise amid tight supply and strong demand.

“I made a deal five years ago, and their lease renewal is coming up,” Carrillo said. “They’re in sticker shock because the rent almost doubled.”

The average selling price for industrial space in the South Bay was $361.71 per square foot during the second quarter, compared to $322.37 the previous quarter. In the second quarter of 2017, the average sale price was less than half the current rate at $162.45 per square foot.

The region’s re-emerging aerospace sector is one of the factors contributing to continued demand in the region, particularly in Long Beach, Carrillo said. Over the past seven years, rocket manufacturing and launch service providers have flocked to the city. Virgin Galactic – now Virgin Orbit – came first in 2015, followed by SpinLaunch in 2019 and Rocket Lab and Relativity Space in 2020.

“It’s pretty amazing how much [the sector] east,” Carrillo said, noting that Virgin and Relativity have expanded their presence in the city since moving in. “We see the wave of the future.

Detail

The Long Beach retail market is still recovering from the pandemic, which has wreaked havoc on countless businesses, especially restaurants that were forced to close for months. Many restaurants never reopened.

Luckily for the market, people will still need to eat, and there are plenty of dining concepts, said Doug Shea, partner at Centennial Advisers.

“We’re still seeing second-generation restaurants stealing shelves,” Shea said. A second-generation restaurant is a new concept that takes over a space that is already set up for restaurant use.

“We can fill that space every day,” he said, adding that small retail spaces have been in the market for “a long time.”

But inflation is also hitting restaurants and retailers hard. Shea said one of his clients in Naples was going to have to raise his prices twice this year, while he has sometimes gone up to three years without any increases.

Not only are goods for restaurants and retailers becoming more expensive, but consumer spending is declining. According to a Lending Tree survey, 43% of Americans plan to take on new debt in the next six months for necessities like housing, transportation and healthcare, leaving fewer dollars for luxury items and restaurants.

There are many vacancies along the historically popular Second Street corridor in Belmont Shore as well as the new 2ND & PCH mall across the street, Shea noted. And a decrease in consumer spending is not likely to help.

These two areas, however, along with the Long Beach Exchange mall near Lakewood Village, have some of the highest rents for restaurants and commercial space in the city. These areas can have asking rent between $4 and $6 per square foot, Shea said, with Second Street being at the lower end.

Older spaces, however, even those that have been recently renovated, have much lower rents, Shea said. The Los Altos Market Center, for example, is 100% leased, he said, noting that the former Sears location was recently purchased, though he’s not sure which store or stores will take over.

At The Landing, a mall on the corner of Clark Avenue and Atherton Street that recently underwent facade upgrades, rents are around $3.25, Shea said. The Centennial team recently received an offer for a new cafe, medical spa and butcher shop in the center.

When it comes to retail, Shea said discount stores — furniture, clothing, etc. – and big brands like Target are booming. A Five Below discount store is coming to the Los Altos area, he added.

People walk out of Ding Tea at The Landing, a shopping mall with several spaces for rent near the corner of Clark Avenue and Atherton Street, Thursday August 18, 2022. Photo by Brandon Richardson.

Desk

Uncertainty continues in Long Beach’s suburban and downtown office markets, largely due to businesses navigating the post-coronavirus work environment, said Robert Garey, senior director of Cushman & Wakefield. . While some companies have brought their workforce back to the office, others have waited, and some employees will never return.

“People were saying, ‘the office is dead,’ but I never believed it,” Garey said. “We see it coming back to life with some repopulating their offices, but not all businesses.”

Some companies have adopted a hybrid model for employees, which sees them come in two or three times a week. This model requires less office space per employee, which has led some companies to downsize to meet their needs, Garey said.

While there may be fewer employees in the office at any given time, Garey noted that many companies are spacing out their employees more and even bringing back personal desks in response to health concerns amid the coronavirus pandemic. While that may offset the downsizing somewhat, Garey said it likely won’t be enough.

With office demand declining, Garey said some office buildings like 401 E. Ocean Blvd. and 1500 Hughes Way could be repurposed for residential or industrial use. Several downtown buildings have already been converted to housing, including the former Verizon building at 200 Ocean Blvd.

“It will reduce the space available in the market, which will create a healthier balance for owners,” Garey said.

Construction costs are also taking their toll on landlords looking to upgrade their buildings to attract tenants. Many jobs have roughly doubled in price from pre-COVID, Garey said.

The downtown office vacancy rate remains at its highest level in more than two decades. During the second quarter, the overall vacancy rate rose from 26% to 25.9%, according to Cushman reports. The area’s net absorption was negative 26,029 square feet, only marginally better than the negative net absorption of 33,154 square feet in the first quarter.

During the second quarter, 54,329 square feet of office space was leased downtown, and the overall average asking rent was $2.49 per square foot, up from $2.47 the previous quarter.

The suburban office market is doing only marginally better, with a vacancy rate of 22.9%, according to Cushman. The rate marks a slight increase from 22.1% in the first quarter.

After a negative absorption of 724 square feet in the first quarter, the suburban market saw a positive absorption of 5,956 in the second. This area saw 192,272 square feet of leased space, including more than 71,750 square feet by Blue Shield of California at 3840 Kilroy Airport Way.

The overall average asking rent in the suburban office market increased 7 cents quarter over quarter, from $2.61 to $2.68.

Rental rates remain high largely because operating expenses, particularly utilities, have risen with inflation, Garey said. Maintenance and landscaping have also become more expensive. However, to compensate for stable rents, many landlords are offering more concessions, Garey said, including offering free rent for several months in order to secure deals.

“It’s still a very bumpy road in the office industry,” Garey said. “There is more clarity in the world, but it is not yet clear in the office market.”

Share.

Comments are closed.