With all our focus on just keeping afloat and wondering how to adapt to all the government mandates and navigate aid packages, it’s easy to lose perspective on the potential long term effects the pandemic may have on the Southern California commercial real estate market…
Right now we are in the middle of trying to figure out how to get some work done from a place other than where we work. That in itself is problematic enough, let alone trying to figure out where this major economic snafu is going to take in is in the next three, six or nine months.
Right now, we are breathing through masks that fog our glasses and make us look like we are on our way to rob the local bank. Frankly, it’s downright surreal and if you’re anything like us, your patience is running thin and you’re anxious to get back to making good things happen.
Tenants are more concerned about being able to pay their current rent than what asking lease rates will be next year, and landlords are busy juggling their own expenses as tenants come to them for temporary rent relief. Property owners who have been sitting on piles of potential gains after a 10-year bull run in property values are rethinking their exit strategies in order to mitigate the perceived risk of a sharp correction. But, they are reluctant to bring their buildings to market without firmer guidance on pricing.
Preliminary readings on leasing metrics show us that rates are holding fairly steady, but some landlords are offering more in up-front concessions and incentives. Thus far, we have not seen a huge increase in available inventory. Leasing activity seems to be strongest in the smaller size ranges, while many larger transactions have been put on hold for the moment.
Owner/users with SBA loans are two months in to a six month payment forgiveness period, which offers welcome relief and a little extra time to decide on a change in their facilities strategy. Those who have ridden the wave of rising prices for the past ten years now have huge unrealized gains that could be tapped for badly needed working capital. So, we may see more owner/users disposing of highly appreciated assets and becoming tenants again.
That dynamic will certainly have an impact on sales prices and lease rates if it becomes a significant trend.
Are we speculating here? Yes we are, but right now we just don’t have enough dots to connect to be sure exactly how things will play out. We do know that we went into this difficult period with the tightest market conditions on record.
Very little new product is in the construction pipeline and we still have record low vacancy. That should cushion the impact a decline in demand could have on lease rates and sales prices going forward. Mortgage interest rates for SBA loans are under 3% on a fully amortized 25 year basis, and vacancy could triple and still be under 8%.
To be sure, the damage to the business community will be significant, but we believe it will vary substantially by industry sector. The biggest players in the hardest hit sectors will survive and thrive as they gain market share from those who don’t. Businesses supporting the distribution sector will probably do well, as the world of online purchases has being given the ultimate shakedown and it has passed all tests with flying colors.
Where will we be in a year? Grinding away like we always have. America is a country full of brilliant entrepreneurs who love a challenge. Couple that with a workforce eager to produce and you have a future that looks pretty good to us. We hope you think so, too.