Western Real Estate Business

OCT 2016

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: N O R T H E R N C A L I F O R N I A 34 • October 2016 • Western Real Estate Business www.REBusinessOnline.com Financial markets worldwide have seen dramatic volatility in this past 12 months. The Bay Area economy and new hiring have cooled, while the San Francisco housing and con- do markets have started to normal- ize after four feverishly overheated years. We are hearing about a big jump in apartment vacancy rates, with more apartments for rent than we've seen in many years just as rental rates begin to decline from re- cent all-time peaks. As would be ex- pected, preliminary indicators show a transition to a cooler market when it comes to apartment building sales activity. However, as illustrated in the charts below, we haven't seen any significant changes in the sta- tistics. The second half of 2016 will undoubtedly provide more insight regarding the speed and scale of any market condition changes. San Francisco multifamily assets that contained more than five units experienced a plateau in cap rates year over year between 2015 and 2016. However, this same product ex- perienced an increase in dollars per square foot, price per unit and aver- age sale prices. The politics of new home devel- opment in San Francisco are not for the weak of heart. There are vocal disagreements between neighbor- hood and homeowner associations, developers, affordable housing advo- cates, tenant's rights groups, business groups, and pro-, slow- or no-growth advocates regarding how develop- ments should best proceed (or not proceed). The battles are non-stop in every political and/or legal venue available. There has been a significant cool- ing in development site sales since the beginning of the year. Sites of- fered to the market without entitle- ments or permits in place and shovel ready are the least attractive offering when it comes to a smaller developer pool. Even those sites that are ready to develop are attracting less interest from developers who feel the sting of the current political climate, as well as growing concerns for the future requirements of affordable housing requirements and overall cost. The supply side of the equation may be shifting as well. San Francisco's de- velopment pipeline will likely ramp up over the next 18 months, according to SocketSite. The city's apartment va- cancy rate has inched up for the sec- ond consecutive quarter, now sitting just under 5 percent, while the pace of rent increases has slowed. SocketSite also reports that the vacancy rate for East Bay apartments has dropped to a record low of just less than 3 percent. The development pipeline in the East Bay is a few years behind San Francis- co's and, as such, experts believe rents in the East Bay will continue to climb. THE BAY'S MULTIFAMILY MARKET EXPERIENCES SOME TRANSITION Stephen Pugh President, Paragon Commercial Brokerage NORCAL'S TECH SECTOR DEMANDS MORE DATA CENTER SPACE The Northern California indus- trial market has become a hotbed for buyers and sellers prior to the upcoming November elec- tions. As trends show, industrial investors are migrating from the South Bay and San Francisco into the East Bay where secondary markets are getting a lot of atten- tion, especially the I-880 corridor. The digital world is continuing to grow and so is the need for data storage, with tech companies driving the demand in Silicon Valley where the high rates will continue to rise until more data space is available. Data center demands and the migra- tion to the East Bay have largely affected the Northern California indus- trial markets. The East Bay market is seeing a historically low vacancy rate around 4.8 percent. This tells us that East Bay industrial buildings and land val- ues are continuing to rise, but there is minimal availability. Major play- ers such as Apple, Tesla and Living Spaces occupy millions of square feet in the East Bay and are continuing to grow in the area. Oakland has recently become the industrial hub of East Bay. The Oakland industrial market has been categorized as "peaking," according to some experts, though there is no sign of the market slowing down anytime soon, es- pecially with major construction projects in the area. Prologis recently finished 256,000 square feet on its Global Logistics Center development, which will eventually comprise more than 800,000 square feet of space. The South Bay/San Jose industrial market has seen some progression. Vacancy rates have lowered to around 5.6 percent, while rental rates have risen above $19.70 per square foot, per year. Cap rates have also gone up from 2015 to above 6.5 percent. A big highlight of South Bay's industrial market is the growth of Apple. The consumer tech company plans to develop more than 750,000 square feet of industrial office space in Sunnyvale. Apple's new project is a representation of the develop- ment in the Silicon Valley tech era. As previously mentioned, data center space is needed in the Silicon Valley. Equinix plans to build up to 386,000 square feet of data center space in South San Jose to fill part of this de- mand. BART expanding into the South Bay has also impacted the area by replacing hundreds of thousands of industrial square feet with housing in proximity to the planned BART stations. San Francisco's industrial market has seen slight decreases in the mar- ket overall. Vacancy rates have increased to around 2.7 percent. Cap rates have lowered, but rental rates rose to about $19.32 per square foot, per year due to the lack of available space in San Francisco. The San Francis- co industrial market is seeing new construction developments totaling around 400,000 square feet, which will produce more available square feet for companies in desperate need of space in crowded San Francisco. The total year-to-date industrial building sales activity is down 47 per- cent in 2016 in comparison to 2015. Industrial advisors Devin Pearson, Doug Sharpe and Dante Guazzo contrib- uted to this article, as did senior market research analyst Jake Delgadillo. James Kilpatrick President, NAI Northern California

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