As we get further into 2020, our team at Essel Environmental Engineering will be reviewing the commercial real estate industry in the Bay Area and the wider San Francisco market. Let’s look at some of the key issues affecting the industry, how major players are likely to respond, and what to expect in the coming months and years.
What Is the Current Status?
For much of 2018 and 2019, there has been expectation that the industrial real estate sector in California would continue to thrive. This proved to be true with the market closing the year strongly with lower vacancies and improved rents.
The continued rise in the cost of living, taxes, construction costs, and harsh business climate has done much to push companies to leave California and its Bay Area. However, this effect has been reversed by tech companies like Google and Apple that are actually expanding their presence. Instead of shifting to larger facilities that would leave the previous offices vacant, they are simply adding on. This growth has helped the Bay Area retain its title as the country’s strongest office market with a vacancy rate of 5.4% and an average asking rent of $86.22.
Some malls have had big disappointments in 2019 thanks to a spate of big-box retailers shutting down their stores in California. Firms like Sears, Payless, and Kmart have already begun the process. Others like Bed Bath & Beyond and Forever 21 are expected to continue the same in 2020.
With all this, the retail market has not suffered much. The employment rates improved in 2019, with median household incomes achieving a 4.84% rise to $75,277. Falling mortgage rates have also helped, having reached as low as 3.93% by the end of 2019. With the economy slowing, rates are likely to remain low. It was also expected that multifamily real estate would continue to grow alongside the new construction of industrial properties. Although there is still a high demand for affordable housing, the lowering of interest rates and flattening of house prices has seen an uptick in buyers for single-family dwellings.
What Does This Mean for Commercial Real Estate?
Although the economy and real estate markets are expected to cool in 2020, investors and industry experts are optimistic. According to the Winter 2020 Allen Matkins/UCLA Anderson forecast, the next few years will be the start of an expansionary cycle, with a strong interest in investment in industrial and multifamily projects.
Infrastructure development resulting from Senate Bill 1 is also expected to drive retail and commercial construction over the next 10 years. Contractors have a positive outlook about the opportunities for developing new retail, commercial, and industrial projects.
Will Technology Drive Industrial Growth
Over the next few years, there is expected to be an increased demand for integration between industrial real estate and robotics. These new technologies are expected to become part and parcel of high rise warehouses, helping to achieve more efficient levels of productivity. The sustained growth of eCommerce over brick and mortar establishments is also expected to continue. From now till 2022, this segment is expected to remain highly active and also in need of warehousing facilities.
How Investors Intend to Buck the Trend of Retail Closures
As mentioned, malls have lost many of their big-box retailers, leaving them with expansive vacant spaces. As this trend continues, malls are shifting away from drawing in such anchor tenants to diversifying towards non-retail tenants.
With big-box retailers having taken up over 50,000 square feet, mall owners are having to find multiple other businesses to cover the same ground. From gyms and restaurants to hotels and co-working spaces, there is an effort to redefine what types of businesses are suited to a mall environment. This change will likely cushion malls from being adversely affected during future downturns, but it may take a while to get their occupancy rates up.
Will Bay Area Sustain Its Office Market Dominance?
Forecasts for office rentals indicate that the market is likely to remain the same. Although rents have been steadily increasing over the last few years, they already began to plateau in 2019 and are expected to remain so through 2020. Despite this stagnation, the industry trajectory for 2022 is promising, with renewed investment and demand for office space predicted as an improved economy stimulates job creation.
How Will Rent Control Impact Multifamily Homes
It is also noteworthy that interest in multifamily housing developments has begun to see something of a downturn. Historically, the expensive prices of single-family dwellings in the Bay Area helped to encourage investment in more affordable multifamily properties. However, the slight fall in housing prices and improved growth in inventory over 2019 seems to have drawn buyers back towards the single-family residences, therefore reducing demand for multifamily homes. The growing cost of construction and future rent control measures may also have contributed to a fall in investment here.
California is renowned for being a biotech and pharma hub. With almost half of the country’s top 20 biotech firms headquartered in ‘Biotech Bay’, this high growth industry can be expected to positively impact the local retail and commercial real estate market. The growing demand for biopharma innovations has meant an increased need for space in which to carry out research and development.
With billions in funding coming from venture capitalists, biotech life sciences startups are increasingly looking at putting up new purpose-built constructions. There is some encouragement being given to developers to work on smaller constructions that will cater to startups with lower space requirements. Some landlords are already offering co-working space that the more successful biotechs are likely to move on from as they grow.
This growth is also not likely to be affected by the rise in COVID-19 cases. Biopharma employees are already considered essential and permitted to commute to and from work, even during the current lockdown.
With the negative economic effects of the COVID-19 virus spread and upcoming presidential elections, the CRE sector should not expect much growth this year. Even with these being acute effects, these major events are still likely to mute even the most positive predictions.
At Essel Environmental Engineering and Consultancy we understand the need that real estate developers have for professional and consistent support throughout the course of their projects. As industry experts, we work diligently with our clients to ensure their commercial developments meet environmental regulations and achieve the desired standard of quality. Contact our environmental consultants.