This quarter I wanted to highlight some interesting trends affecting commercial real estate (CRE) markets. While these trends stem from national metrics, they will ultimately affect our local markets and may offer valuable insight to investors, owner/users, developers and tenants who are considering acquisition, disposition, expansion or relocation decisions.
Nationally, over the last eight quarters, sales volume has been trending lower, while sale prices have been trending higher. The same pattern can be seen locally and can be partially attributed to the lack of new supply. The cost of new construction has increased much faster than the rents that support it, and as a result, planned projects are held back until the economics justify moving forward. The takeaway here, especially for tenants, is that now may be a good time to sign that new long term lease or move to that new building in order to take advantage of still relatively low rents.
Another national trend relates to the differentiation between large institutional-type properties, which are declining in sales volume, and smaller individual investor-type properties that are seeing increasing demand and greater sales volume. The never-ending “hunt for yield” is now leading investors to smaller tertiary markets located outside of the major metros, where returns are generally a 100 basis points or more higher. The takeaway here is for investors or owner/users considering a purchase. Demand is increasing locally, which should lead to further price increases, so now may be a strategically wise time to buy.
“In our area, relative to Truckee, Sacramento and the Bay Area, the returns are higher by a couple hundred basis points (used to express differences in interest rates and other percentages in finance),” he said. “For example, cap rates (the ratio of net operating income to property value) are 5-6 percent in the Bay Area, and are 7-8 percent here. Investors looking for higher returns will start to look in our area — there’s more value, more upside. It could improve the future of the commercial industry.”
For more information, please check out The Union Newspaper’s recent article on Western Nevada County’s commercial real estate market at:
At mid-year 2017, the nation seems to be enjoying what has been referred to as a “Goldilocks” commercial real estate market. In the children’s fairy tale, Goldilocks finds the perfect bowl of porridge – not too hot, not too cold, but just right. We currently have roaring stock values, growing GDP, minimal unemployment, rising disposable incomes and increasing spending, which historically would result in rising inflation, market overheating, and a downward turn in the economic cycle. However, this is currently not the case as overall inflation during the first two quarters has been almost non-existent, interest rates remain very low and stable, and commercial property values are rising, but not at the expense of yields and other real estate fundamentals. Seemingly, we are sitting in front of a lovely bowl of porridge!
It’s interesting that in such a favorable market, sales volume is down in 2017 compared to 2016, both nationally and locally. Various factors may be contributing to this including gridlock and uncertainty in Washington, dissipating “distressed property” sales, low new supply, and “peak pricing” concerns (where investors sense a bubble and feel upside may be limited). As to peak pricing, this is definitely not the case locally, as Western Nevada County has greatly lagged its immediate neighbors – Bay Area/Sacramento and Truckee/Reno – in price appreciation over the past few years. This leaves Nevada County positioned for greater profit potential than surrounding areas and the promise of a very strong second half 2017.