Breaking Down the Trends in Commercial Real Estate
For this edition of Perspective, we’ve asked Maggie Montez to provide an overview of commercial real estate in the Coachella Valley. Maggie is Principal with Lee & Associates in Palm Desert. A Coachella Valley resident since 1988, she has been an active commercial real estate agent brokering land, retail, office and investment transactions from Palm Springs to Coachella.
In the world of commercial real estate, Costar is the most widely respected firm for gathering transaction information and reporting results. While their data is good for showing trends, we often find some of their results are contrary to what real estate brokers know to be facts about our industry. With that in mind, the following is a mix of Costar information, gut feelings based on transactions in which I have been involved, and a little cocktail napkin noodling!
Let’s compare where we were in 2006; what the bottom looked like in 2010 and how far we have recovered in 2014. I will focus on the three major segments of the commercial real estate world – industrial buildings (business parks much like those you’ll find in the Cook Street area of Palm Desert, Thousand Palms, and Indio), office buildings, and (my favorite, the world of shopping!) retail buildings including shopping centers.
First let’s look at the sales market.
In reviewing the health of our sales market we look at three metrics: the number of buildings sold, the sales volume in dollars, and average sales price per square foot. As you can see (Charts 1, 2 & 3) we experienced a major drop off in all three categories from 2006 to 2010. Where were we at the start of this past year? In 2014, only 3 industrial buildings sold for an average price of $90/SF for a total of $3.4 million in sales. That’s one sluggish recovery. Retail and office spaces have enjoyed steadier increases.
Now on to the leasing market
In 2006, our office vacancy rate was 14.9%, we had way too many office buildings being built. Our vacancy rates are actually down to 9.4% with rents up to an average of $1.31 per square foot per month. That’s an uneven recovery – but a recovery nonetheless! In the Palm Desert trade area, at the height of our office market in 2005 & 2006, we absorbed 50,000 square feet annually. Between 2006 and 2008, we built over 350,000 square feet – 7-years’ worth of office inventory if we had stayed in the boom times!
In 2006, the amount of industrial space available for lease was a low, low, low 1.3% vacancy rate with rents averaging $0.80 per square foot per month. Our industrial vacancy rate is now 20.1% or 1/5th of all our buildings!
Retail has led the recovery, first with national retailers taking advantage of strong locations being available from motivated Landlords. Then in 2014, we saw many of our local tenants begin to expand as well.
Opportunity?
It has been quite a slog in the commercial real estate world. How rapidly our world fell apart won’t be a lesson that I soon forget. But I am quietly optimistic about the continuing strengthening in each segment. The difference between our 2014 stats, and where we were in 2006 may represent opportunity for those persons and businesses with the ability to make commercial real estate investments.