By ERIN MARIE REARDON
South County commercial real estate continued to be a hot investment in the second quarter, with properties changing hands at record-high sale prices and unprecedented cap rates.
Investors are taking advantage of interest rates that are near a 40-year low. Buyers can borrow money at rates in the low- to mid-5% range and earn leveraged returns between 5% and 6%. This has driven demand for commercial investment properties.
It’s been a solid market for both sellers and buyers as real estate investment returns continue to outperform alternative investments.
1031 exchange buyers continue to set the pace, paying premium prices for office, industrial and retail properties.
Sellers that have a low basis also can take advantage of their 1031 exchange requirement and leverage aggressively to buy larger properties. The move increases their after-tax cash flow.
The retail market in South County remains tight. Vacancy is virtually nonexistent at 2% across all center types,community, neighborhood, power, specialist and strip. Vacancy is down 26.7% from a year ago.
Asking rents in South County continue to rise in the second quarter. Average lease rates were $2.68 per square foot, a 12.1% increase from last year.
With the combination of low cap rates at about 6.25%, high rents and low interest rates, retail prices remain high.
While retail remains the darling of South County, office may soon follow.
Continued demand for office space has pushed vacancy levels down and boosted rental rates with more spikes in rent expected to follow.
Pricing for office buildings is in the 6.5% to 7.5% cap range, depending on the location and quality of the building. Overall asking rents increased 4 cents per square foot to $2.16 per square foot in the second quarter.
South County’s office vacancy rate fell from 13% to 8.1% in the second quarter, compared to a year ago. This is a huge decline and indicates that lease rates will continue to climb aggressively.
The outlook for the industrial market remains optimistic.
Cap rates for South County industrial properties worth more than $5 million have averaged 6.6%.
The manufacturing and warehouse vacancy rate fell 38.2% to 4.3%, versus a year ago. The research and development sector saw a 28.1% rise to 7.8%.
Strong investment fundamentals ranging from low and decreasing vacancy rates, increasing lease rates and strong investor demand for all commercial real estate types indicate stable or increasing values for South County properties during the rest of the year.
Reardon is an associate in CB Richard Ellis Group Inc.’s Private Client Group in Newport Beach.
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