Markets follow cycles, and this is especially true of real estate. If you are thinking of making a real estate purchase, an awareness of the market cycle will help you understand real estate prices better and let you make a more informed purchasing decision. To help you, here is a short survey of the current Bay Area commercial real estate market. Also, if you are thinking of buying commercial real estate right now, we have good news for you.
There Are Only Two Ways Prices Can Go
Graphed across time, price trends form peaks and valleys. Usually the valleys have somewhat flat bottoms: when prices fall, they tend to stay the same for a while before they start to rise again. This period is referred to as the market’s recovery. You will also notice that the rises are usually longer than the falls, that is, prices go up a lot more than they go down.
This inflation is the result of external stimuli, and puts financial pressure on potential buyers or lessees. Back in the 1990s, the so-called “dot.com bubble” drove commercial real estate prices up, making leasing and buying a building more difficult. Similarly, the emerging cannabis industry is currently leading to higher prices in some California areas, including the Bay Area.
Sometimes, though, price trends are a matter of perspective. The market in the area you are looking at may be influenced by purely local factors that are not in sync with larger trends. This is, in fact, largely the case with cannabis. We will see below that the industrial real estate market is slowing down a little overall, but not where the cannabis business is active. But, as clear as all of this is in hindsight, it is not possible to predict future market behavior with much accuracy at all.
Bay Area Commercial Real Estate Price Trends
With all of this in mind, let’s look at the San Francisco Bay Area. Commercial real estate prices have been rising steeply for the last five years. While this is a positive sign for the local economy and good news for those selling real estate, there hasn’t been much for real estate buyers to be happy about.
Now, that situation seems to be changing, at least a little. The Allen Matkins & UCLA Anderson Forecast Commercial Real Estate Survey for Summer-Fall 2017 was entitled “The Turn of the Cycle.” This major industry study compiles the views of major real estate developers about the direction the market will take over the next three years, which is the average length of time for a new commercial project to be completed. Their conclusion? The market is “softening.”
Industrial Real Estate
According to the authors of the study, “both job and income growth ought to support a continuation of the good markets currently being experienced.” But industrial real estate in the state, for instance, is “a white hot market retreating to red hot,” and less “wild” than it had been. In terms of looking for industrial space, this might mean slightly less competition for a property and a somewhat better position for negotiating.
Of course, there are always exceptions to general predictions. For example, in areas designated for cannabis use, competition is rising and in turn, and that means so are prices. Small business owners are being priced out of the neighborhoods they helped establish while new players with lots of cash are entering the market.
Retail Real Estate
Retail real estate is set for a bigger slowdown statewide, but in the Bay Area, there will be only a slight softening. This is due to the continuing effect of online retailing, the authors say. They quote San Francisco-based Cushman & Wakefield managing director Rhonda Diaz Caldewey, who told them that “retail development is far from dead, it’s just different.” Research done earlier this year shows that San Francisco’s iconic Union Square saw vacancies reach 4.2%. That’s not bad, considering that the national rate was 11% at the time, but it was a rise for that space. Simultaneously, the Castro had a 12.8% vacancy rate.
Office Real Estate
The “sentiment” on this market turned in San Francisco two years ago and in the East Bay in June 2016, after a slowdown in tech hiring. This cooling effect will remain the case for the next three years. A cooler market means less competition and more moderate price expectations. If you are shopping for office space, this is a good time to do it.
A 66,200 square foot office building in downtown Santa Rosa sold for $12.4 million, or $187 per square foot, in September 2017. That price was lower than the average market rate because of deferred maintenance and low occupancy. The same month, a 45,000 square foot office building sold for $14.5 million, or $322 per square foot, and a 75,600 square foot medical office building north of Santa Rosa sold for $26.8 million, or $354 per square foot. Meanwhile, office leases had risen 21.8% in the three years leading up to the same month, compared to 14.5% nationwide.
The developers surveyed also expect the trajectory of land prices to be flatter by 2020.
Now Is the Time to Buy Commercial Real Estate in the Bay Area
Overall, the survey reflects a healthy situation on the market and a hopeful forecast for future investment and purchasing opportunities for small business owners. If you are looking to buy, it will be a little easier than it was in years past. If you are aiming to buy a property, you should be familiar with the Small Business Administration (SBA) 504 loan. A 504 loan can be used for:
- the purchase of land or buildings
- the construction of buildings
- the purchase of equipment with a service life of ten years or more
- improvement, upgrading or renovation of commercial land, buildings or equipment
The 504 loan is administered by Certified Development Companies (CDC) and individual loans are granted in conjunction with a conventional lender. Among the advantages of the 504 loan are:
- A fixed, below-market rate
- 10- or 20-year loans (25-year loans coming in 2018) with no balloon payment
- Low 10-15% down payment
- Some closing costs can be rolled over into the loan
TMC Financing is a high-volume, Premier Lender with the SBA, and one of the country’s top 504 lenders. Our experts will be happy to answer your questions about the 504 loan and to guide you through the loan process. Contact TMC today to get started.