By Rick Lazar
The demand for and value of commercial real estate properties is definitely on the rise. From the number of warehouses continuing to pop up along the Interstates 10, 15 and 215 Freeways it is easy to see why the Inland Empire is now the number one industrial warehouse market in the nation. The amount of speculative industrial warehouse buildings that are being leased, sold and developed is staggering.
As the industrial market continues to sizzle, the question is when will the recovery in the office market occur? In a recent article by Joe Ascenzi of the I.E. Real Estate Insider, the case is made that the office market is in recovery mode. I tend to agree as statistics clearly show that the absorption of available office space and the price of office buildings are rising.
It is also apparent that the supply of existing buildings is quickly dwindling. As the demand increases and the supply decreases, the value of existing properties should continue to rise
There has been almost no speculative development of office buildings occurring going back to 2008. The reason for this is that from 2008 to 2012 most companies cut back on staff, reduced their office space requirements or simply closed their doors. During that period, the office vacancy factor reached levels not seen in recent times with vacancies well over 30% and many buildings and projects were foreclosed on.
The current overall vacancy factor in the Inland Empire is now trending below 20% when at the peak of the recession the vacancy factor was well over 30%. The majority of leasing activity has been occurring in the west end of the Inland Empire. The east end is somewhat lagging behind, however, it is improving. At least for the balance of 2015 there will not likely be any new office space built. In fact, it is our opinion that there will not be any new office development until the vacancy factor remains consistently below 10% for a reasonable period of time.
We believe that as the residential housing market continues to thrive, the demand for office space will increase. Title insurance companies, escrow companies, mortgage companies, architects and engineers, insurance companies, etc., will all determine the need to expand their companies after having down sized significantly during the previous recession. In addition, the combination of a strong labor pool, affordable housing, an excellent interstate freeway system and available land for development, will attract more and more national companies. These companies will recognize the Inland Empire as a possible location for locating their headquarters or adding regional offices such as Monster Energy in Corona and ESRI in Redlands. Another important factor is that with the aging population of the Inland Empire, the need for medical office facilities will definitely continue to expand.
One reason why the Inland Empire is not likely to see any new construction occur in office space in the near future is due to the increased development costs based on new California governmental regulations. In particular, the California Building Energy Efficiency Standards are requiring contractors to install energy efficient lighting which can add as much as $10.00 per square foot to the cost of construction. In addition, due to the strict State Regional Water Quality Control Laws, developers are now required to insure that storm water is drained on site instead of allowing it to drain out to the street and ultimately into gutters or flood channels. This cost can add as much as 10% to the overall cost of construction.
image002.pngIs this a good time to invest in commercial real estate and in particular office buildings if you are a business owner? We believe this could be one of the best investment opportunities in the last decade.
In a recent consultation with a well established commercial lender, I was advised that interest rates are close to their all time lows. You can easily expect to obtain a commercial mortgage interest rate of 4.5%. Over my entire 39 year career, I have never experienced a time when interest rates were this low.
In conclusion the demand and value of office properties will see a significant increase in 2015 and 2016. The opportunities are there, the question is, are you in a position to take advantage of it?
Rick Lazar is Senior Vice President at Coldwell Banker Commercial Sudweeks Group and can be reached at (909) 793-3600.