Commercial building demand, prices on the rise throughout Central Valley

By Sim Risso
Business Journal Writer

July 7, 2017


STOCKTON — As the Central Valley gets deeper into 2017, things are trending positively for commercial real estate. Industry professionals are reporting low vacancy rates, high demand leading to an increase in leasing rates and construction on new buildings ramping up to meet that demand.

Jim Martin, Senior Vice President of Lee and Associates Central Valley Inc. has been working the local commercial real estate market for 21 years, specializing in industrial real estate. During that time, Martin has seen ups and downs in the market, but he said the current market is one of the stronger ones he can recall.

“On the industrial side, I’d characterize the demand similar to what we saw in 2006 and 2007,” Martin said. “But I would say that what we haven’t seen, which we saw in that cycle, is an over flow of supply in terms of new construction starts.”

According to a report from commercial real estate services firm CBRE, there was one commercial construction building completed in the first quarter of 2017. It was a project in Tracy totaling 381,600 square feet.

While the building in Tracy was the only one completed in the first quarter of 2017, there are nine buildings under construction totaling 3.5 million square feet. Six or seven of those projects should be completed during the second quarter of 2017.

However, filling those buildings with tenants shouldn’t be too difficult. The vacancy rate in the first quarter of 2017 was only 2.2 percent.

Brian Peterson is First Vice President for CBRE and covers the office real estate market in the Central Valley. Peterson said he expects to see more projects in the future, but the approach will be measured due to a lack of available, entitled land and developers’ desires to have the building occupied quickly.

“They’ll probably look to build in really strong submarkets or have it pre-leased to justify,” Peterson said. “I don’t think you’ll see spec-office building in the near term under construction to put a major chunk of space on the market. It’ll probably be something that can be absorbed pretty quickly after delivery.”

The CBRE report also cited an increase in the average asking Industrial lease rate. It increased 1 cent per square foot across the board to 40 cents overall.

Tom Davis, Senior Vice President for CBRE’s Central Valley Industrial Practice group, expects the price per square foot to continue to increase in the coming year.

“Rents and building prices are up compared to this time last year,” Davis said. “We expect further increases in the coming year. Almost all vacancies in the market are seeing activity.”
Peterson offered a similar prognostication in terms of office real estate.

“Office lease rates and sales prices are up year over year in most local submarkets,” Peterson said. “I don’t see any change to the trend and expect a moderate increase in pricing throughout 2017.”
There’s also been a trend where the submarkets of Tracy and Northwest Stockton are noticeably strong in the office market. Peterson said part of Tracy’s market could be influenced by the Bay Area, as well as a lack of supply driving up demand. In Northwest Stockton, the Brookside business park is in demand.

“Many buildings are fully leased or just have a couple suites available,” Peterson said. “And again, rents are going up. Each deal seems to be pushing our rates up a little higher than the last.”
Martin has noticed the same thing, with Stockton seeing an increase in demand on the industrial side.

“Historically, there’s always been a preference for Tracy, Lathrop and Manteca, given their proximity to the Bay Area. But as those markets have reached nearly full occupancy, Stockton has been the benefactor of that overflow in demand,” Martin said.

And there’s a diversity in industries driving the demand. On the office side, Peterson cited medical offices, government-related uses, financial and professional services.
Davis also mentioned a wide array of tenants are driving demand in his discipline.

“Tenant demand is very broad on the industrial side,” Davis said. “E-commerce, the electrical vehicle industry and just consumer staples, food and beverage, are the most active sectors.”
Between the demand on the limited supply currently available, the measured amount of construction adding an amount of supply to the market that can be absorbed, and the increase in price per square foot, the market is in a good place. The industry professionals expect it to keep trending that direction too.

“We’re in a healthy market,” Martin said. “Values are up, rents are up and supply is short. So there aren’t very many options, and we’re starting to get to a point now where more and more buildings that are available are getting multiple inquiries and in many cases multiple offers. We haven’t seen that for some time.”

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