• Wyatt Franta

Are Commercial Real Estate Prices Falling? | Orange County | How-To's, How Comes, And What Are's

This is How-To's, How Comes, And What Are's, where we answer the most common questions about commercial real estate asked around Orange County.


Today's question is:


Are Commercial Real Estate Prices Falling?

Side Note: California Sunsets are Gorgeous.

Short answer: Yes. But, are commercial real estate prices dropping across all asset types? No, they're not.


Because we're located in Orange County, we will only focus on the OC commercial real estate markets. If you're looking to invest elsewhere, this article will not be for you. For the sake of time and already fleeting attention spans, let's break each asset type down in short, quick explanations backed by data.


MULTI-FAMILY


This tried-and-true asset class is still the most reliable investment vehicle available. Personally, I lost a deal a few months ago because I underestimated just how resilient multi-family valuations have been despite the global pandemic.


Rents: Only down 0.5% YoY, average rents of $2,121 still far outpace the national average of $1,460. Rents are expected to stabilize around the 0.5% mark throughout 2020.


Transactions: DEAD. 2020 has seen roughly $63 million in major transactions so far, whereas 2019 saw $532 million at the same time last year. Garden Grove, Santa Ana, and Costa Mesa are seeing nearly 40% more transaction volume than the 4th most active city of Westminster.

Source: Yardi Matrix

Download the full report provided by Yardi Matrix here:

Matrix Multifamily Orange County Report-
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Download • 1.71MB

RETAIL


Potentially the hardest hit asset type for the past decade. With e-commerce replacing most brick & mortar shops across the nation, retail investors have been working around the clock to revolutionize the consumer's shopping experience to attract more foot traffic. COVID-19 has been the final nail in the coffin for many businesses, small and large.


Rents: Despite the struggles being faced by landlords and business owners alike, the average asking rent has increased 7% YoY. This may due to the fact tenants are looking for smaller spaces to lower overhead costs which result in higher asking rents, or it may be a sign of strength from the essential businesses lucky enough to remain open throughout the pandemic.


Transactions: DEAD. Buyers are understandably hesitant to jump into the retail markets at the moment. With no sign of the shutdown being lifted and no sign of a retail recovery even after it is lifted, retail offers the high-risk high-reward opportunity most other asset classes aren't positioned for.

Source: Kidder Matthews
Source: Kidder Matthews


Office


The office market has been the spotlight of discussion for commercial real estate investors due to the recent pandemic threatening to completely shift the way companies view leasing office space. The spaces most affected are located near airports, with 62% of locations looking to sublease space to offset rents.


Orange County is currently experiencing a 14% total vacancy rate, with the average asking rent hovering between $3.40 - $3.50/SF for Class A space.


Net absorption for Class A space is in the negatives, at -0.4%


Download the Full Q2 Office Report From JLL:

JLL Q2 Office Market Report
.pdf
Download PDF • 733KB

Industrial


With the e-commerce boom that's taken control of global consumer spending, the industrial real estate market has long been a sleeper investment choice for institutional investors, and recently smaller mom & pop investors. With returns being some of the highest across the nation, and tenant security being on par with multi-family, the industrial space is undoubtedly becoming the top choice to park equity even as COVID-19 plays out in full effect.


Investors can expect a national average CAP of 6.9%, with the OC averaging nearly 5%. In comparison to what you'll see in the multi-family market of 3-4%, industrial may be the forefront of investment as e-commerce giants Amazon, Wal-Mart, and others continue to look for warehousing and distrubution sites to bring down shipping timeframes.

Source: Marcus & Milichap

Vacancy rates rose slightly in Q2 across all price points as most small businesses were forced to shut down during COVID-19, but don't let that discourage you, the essential players have been taking advantage and expanding throughout the year.


Cap rates have steadily decreased as demand for industrial investment assets has grown more mainstream amongst investors.


Smaller warehouses are becoming incredibly scarce, which is creating a huge demand. Vacancy for spaces between 10,000 - 100,000 square feet are below 5% nationally.




That's all the information you'll need to know to get you started. From getting a conversation started to raise funds amongst partners, to staying informed and sounding well-versed about the main markets during these uncertain times, this article will keep your arsenal fully loaded.


Leave your thoughts down in the comments below, or feel free to schedule a free 15-minute phone call with Wyatt to talk about anything real estate. Licensed in California, working anywhere from San Diego to Orange County, Wyatt keeps in tune across all asset types and loves staying busy, even on weekends.

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