IE Business Daily Business news for the Inland Empire.
By Phil Bensinger
The Federal Reserve continues to try to tame inflation with interest rate hikes. This appears to be the only tool they are willing to try so far. One result from this somewhat myopic approach is that the new home sales market has been decimated. It’s on a current annual level of 500,000 homes which is the lowest since 1952. Market prices of existing homes are falling and adjustable-rate mortgages will soon hit their index increases, (some have already started). These interest rate increases are causing similar hurdles for commercial real estate owners as follows:
Multi-Family
Until recently the multi-family sector seemed to be immune to the Fed’s increases, maintaining very low vacancies and low turnover despite rising rents. Only the most affluent and resilient markets can now make that statement. Unemployment is starting to trend up and was 3.7% in October up from September’s 29 month low of 3.5%. Many major cities have implemented rent control as well as eviction restriction rules tied to the Covid-19 Pandemic. Some new projects that are still encumbered by construction loans are finding it difficult find long term financing as banks reprice their underwriting criteria which in some cases is resulting in a higher capital requirement from the developer.
Industrial
Industrial has been and remains the darling of all the commercial real estate segments. Logistics and online shopping are largely responsible for this. The vacancy rate through the third quarter of 2022 was 1.3% in the Inland Empire. A large percentage of spec buildings are leased prior to completion. There is push back developing from many communities due to the increased truck traffic and environmental concerns. Indeed a few communities have even implemented moratoriums. The (BIG) Barstow International Gateway Project in Barstow has the potential to be game changer regarding truck traffic on Southland roadways. BNSF purchased 4,500 acres in Barstow roughly 7.5 times the size of its existing 650-acre Barstow yard. Located along the west side of Barstow adjacent to an existing BNSF yard. Containers will be transferred directly from ships to trains which will bring them directly to Barstow where they will be processed and transferred and put onto trains moving east. Trains arriving from the east will be similarly processed for movements to the ports. The new facility will create directly and indirectly 20,000 jobs. Additional information on the project can be found at bnsfcalifornia.com
Office
Office vacancy remains high in the 8.3 billion square feet United States market. Net absorption was negative 3.5 million square feet in the third quarter and 4.9 million square feet year to date. The work from home trend has become well engrained and many employers are reluctant to issue return to office instructions. Remote work from home appears to be here to stay with little to no reduction in productivity for most companies. The result will be that a major portion of the office buildings will have to be converted through adaptive reuse to residential or hotel uses. Those that cannot be converted will likely be torn down.
Retail
The overall vacancy of 4.3% in the United States is the lowest in 15 years. The industry is recovering from years of bankruptcies, empty storefronts and outdated unpopular enclosed mall space. A slowdown in new construction, e-commerce companies expanding their physical presence and consumers comfort with venturing out as the pandemic ends up in the rear-view mirror also are helping. U.S. brick-and-mortar sales were $382 billion in August, a 25% increase over pre-Covid levels. Retail leasing has increased substantially. There was 14.8 million square feet net absorption in the third quarter which brings the total for the year to 54 million square feet which is approximately the same as the first three quarters of 2021.
