The commercial real estate market turnaround is underway in a few select geographies, but the new development activity that is occurring is hardly enough to sustain all the AEC firms that once relied on the market for work. Recovery may be happening from a strict economic, almost intellectual standpoint, but in the real world the market is still struggling as we approach 2012, based on research for The 2011-2012 AEC Market Guide to California.
Yet, despite the lack of significant commercial development activity in most metropolitan markets, there is hope. Hassim Nadji, Managing Director, Research and Advisory Services with commercial real estate consulting firm Marcus & Millichap (Encino, CA), says that commercial real estate is on “a solid recovery trajectory.”
Nadji notes that commercial real estate is doing well when compared with its residential counterpart. “The degree of distressed home sales is still high, somewhere between 25-30%,” he said in a September interview. “In commercial real estate, even under distress, it still generates cash flow for the most part. The distressed sales are a lot less, in the 10-12% range.”
Nadji added, “Lenders are modifying and extending loans during the crisis, and the economy added 1.8 million jobs over the past 12 months, so commercial occupancies have stabilized and are beginning to improve. Investors are moving back into the market, taking advantage of low interest rates and the fact that pricing has reached bottom.”
Despite Nadji’s encouraging words, the recent release by ENR California of the list of the state’s top design firms illustrates just how far down the commercial market is when compared with a few years ago (see table below).
Top California Design Firms – Commercial Market
|Company||2008 Regional Revenue ($Mil)||2010 Regional Revenue ($Mil)||Percent Change|
Source: ENR California (2011 rank is for 2010 revenue)
To be fair, AECOM Technology Corp. (Los Angeles, CA) reported $41.1 million in 2007 commercial market revenue (a less-drastic 21% drop compared with 2010) and Gensler (San Francisco, CA) earned $29.7 million from the commercial market in 2007 (only a 7% drop to 2010), so 2008 may have been a better-than-average year in the commercial market for some firms.
Still, the commercial sector has some distance to travel before it is again a dynamic, thriving market for California AEC firms.
Surprise Candidate for California Office Rebound?
In its most recent Office Market Trends report, which includes measures of 2nd Quarter 2011 vacancy rates among major national metropolitan areas, international commercial real estate firm Grubb & Ellis (Santa Ana, CA) reports that Bakersfield has the lowest vacancy rates among top California metros.
In the central business district (CBD), among 58 US metropolitan areas measured, Bakersfield ranked 8th nationally with a vacancy rate of 11.6%. The state’s 9th-largest city fared even better in the suburban market rankings, taking 3rd behind Long Island and New York City’s Outer Boroughs with a vacancy rate of 10.7%.
Given this indicator, could Bakersfield actually lead the office market rebound in California? Opinions are mixed.
“There are a lot of empty buildings here,” says Craig Hummel of commercial, industrial and agricultural real estate firm Craig Hummel & Associates (Bakersfield, CA). “I’d like to think the market is going to rebound, but I’m not sure if that’s a realistic outlook given all the absorption that would need to take place first.”
Hummel isn’t alone in his skepticism, and not all indicators are so positive. The home foreclosure rate in Bakersfield is higher than the state average – in August, 1 of every 159 homes received some kind of foreclosure notice according to real estate research firm RealtyTrac (Irvine, CA). The unemployment rate is above 10% and the retail vacancy rate stood near 12% in the 2nd quarter according to market research firm ReisReports (New York, NY).
Yet, even these indicators are moving in the right direction. The unemployment rate dropped by more than a percentage point from January to July, the foreclosure rate improved slightly from July to August and the retail vacancy rate is down from over 14% in 2009.
Because Bakersfield has traditionally been a center for the oil and agricultural industries, much of the employment in the city is not the type to fill office buildings. However, the city has recently added more technology, manufacturing and distribution firms to its mix, which could help spur demand for office space.
“The market here was never overbuilt, and once the oil companies start hiring at the executive level again, we expect to see a solid recovery in the office sector,” says Matthew Starr, vice president in the commercial office division of Grubb & Ellis’ Bakersfield office. “We’re bullish on Bakersfield’s office market.”