Mid-Year Commercial Property Review

Lock Richards, Commercial Real Estate Broker, Nevada County

In January I summarized the state of the Western Nevada County commercial real estate market for the 2013 calendar year.  During 2013 vacancy rates had fallen in the industrial and retail sectors, but office vacancies had increased due primarily to large space divestitures by some of our local tech companies.  I indicated that I felt prices had bottomed out and were starting to rebound, but were still well-below pre-recession highs, which could provide some attractive buying opportunities.  Now that we are midway through 2014, how is our local commercial property market actually shaping up?

Based on the soaring stock market, certain positive economic indicators and improving earnings reports, one might assume a robust resurgence in our local commercial real estate market.  However, this is currently not the case.  The amount of vacant office and industrial space on the market has actually increased thus far in 2014, with office vacancy now standing at approximately 13.4% (up from 11.9% at year-end) and industrial vacancy coming in at roughly 5.6% (up from 4% at year-end). Increased office vacancy in the second quarter of this year stemmed from a number of smaller office spaces coming on the market, while the industrial sector was hit with a few larger vacancies, including one sizeable user closing down completely.  The retail segment has been fairly stable and it currently occupies the low spot on the vacancy chart at about 4.3%.

With an increasing supply of office and industrial space on the market, one would expect asking lease rates to fall, however this has not occurred.  Office rates have remained stable this year with a median asking price of $1.26 per square foot gross.   Industrial rates have increased this year with a median asking price of $.63 per square foot gross (up from $.58/sf).  This” atypical” supply & demand relationship is likely due in part to higher consumer confidence resulting from the public’s interpretation of certain positive economic factors along with the effects of the greater monetary supply now in circulation.   The retail sector appears to be following standard economic  principles and accordingly asking rents have increased to a median price of $1.47 per square foot in line with falling vacancy.

With respect to property values it is very difficult to get an accurate picture of pricing trends due to the wide diversity of commercial product in the area combined with relatively few sales occurring in each sector.  What can be concluded, however, is that in contrast to the Bay Area, prices locally continue to remain well below pre-recession highs. However,  I do still anticipate that sales volume and pricing will end the year up slightly over 2013 levels.

As I see it, the long range performance of our local commercial real estate market really boils down to jobs.  Tech employment expansion in the Bay Area has been massive and has led to a dwindling supply of commercial space and skyrocketing  values in that area.  Logic and past experience tells us that Western Nevada County, as a nearby tertiary region, should benefit to some degree from the “trickle down” effect of the booming Bay Area.  If our local job market strengthens, supply could quickly become constrained and real estate prices could begin to increase rapidly, as there is very little new supply under construction and planned projects now experience exceedingly  long lead times due to a myriad of restrictions, requirements and regulations. The local employment picture remains a big “IF” however.  We are currently experiencing a “mixed bag” of positive growth, on the one hand, and continuing business failures and closures on the other.  However, if your crystal ball foretells an expanding job market, then we should be in for some strengthening  commercial real estate economics, and now would be an opportune time to buy or lease.

For a more in-depth look at Nevada County’s commercial real estate market, please request Highland Commercial’s just-released 2ndQuarter 2014 “Commercial Property Review” newsletter, available by calling Lock Richards at 530-470-1740, or by signing up online at highlandcre.com.  Lock Richards specializes in the leasing and sale of commercial/investment properties and has over 25 years of experience in the field, including over 15 years in the Grass Valley/Nevada City area.


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