The Lee Central Coast Brief
Q4 2016
1 LEE OVERVIEW 2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES
1
155% increase
in transaction volume over 5 years
Lee & Associates Overview
$12+ billion
870
transaction volume 2015
Ranked 2nd
June 2016, Commercial Property Executive (2016 Top Brokerage Firms) LOCAL EXPERTISE. NATIONAL REACH. WORLD CLASS. At Lee & Associates® our reach is national but our expertise is local market implementation. This translates into seamless, consistent execution and value driven market-to-market services. Our agents understand real estate and accountability. They provide an integrated approach to leasing, operational efficiencies, capital markets, property management, valuation, disposition, development, research and consulting.
agents
CANADA
and growing nationwide
OFFICE INDUSTRIAL RETAIL INVESTMENT APPRAISAL MULTI-FAMILY LAND PROPERTY MANAGEMENT VALUATION & CONSULTING EAST MIDWEST
WEST
SOUTH
SOUTHWEST
We are creative strategists who provide value and custom solutions, enabling our clients to make NATIONWIDE LOCATIONS profitable decisions.
Columbus, OH · Houston, TX · Denver, CO · Cleveland, OH · Long Island-Queens, NY · Chesapeake Region , MD · Charleston, SC · Edison, NJ · Orlando, FL · Fort Myers, FL · Manhattan, NY · Greenville, SC · Atlanta, GA · Greenwood, IN · Indianapolis, IN · Long Beach, CA · Elmwood Park, NJ · Boise, ID · Palm Desert, CA · Santa Barbara, CA · Antelope Valley, CA · Dallas, TX · Madison, WI · Oakland, CA · Reno, NV · San Diego, CA · Ventura, CA · San Luis Obispo, CA · Southfield, MI · Los Olivos, CA · Calabasas, CA · St. Louis, MO · Chicago, IL · Victorville, CA · Temecula Valley, CA · Central LA, CA · Sherman Oaks, CA · West LA, CA · Pleasanton, CA · Stockton, CA · Las Vegas, NV · Phoenix, AZ · Carlsbad, CA · Industry, CA · Los Angeles, CA · Riverside, CA · Ontario, CA · Newport Beach, CA · Orange, CA · Irvine, CA, · Vancouver, CANADA
1 Regional Overview
LEE & ASSOCIATES CENTRAL COAST
3 offices
within the tri-counties
11 agents
and growing
Ranked #1
Lee-Associates Central Coast ranks #1 in the Region Pacific Business Times ~ 9/2016
CALIFORNIA
Central Coast
SANTA BARBARA SANTA MARIA LOMPOC SAN LUIS OBISPO PASO ROBLES
Market Snapshots
2 National Economic Overview
GLOBAL ECONOMY
In the past two quarters we have been describing the global economic outlook as troublesome. We still do, but we can point to at least some improvement around the world. The panic over the Brexit vote was short-lived. It didn’t take long for world markets to absorb the news. There’s a long way to go, but the UK’s exit from the EU is drawing much less attention now. The British Pound took a beating, but that may also be short-lived, once the actual process ramps up this spring. When the UK made its surprise decision, the long term survival of the EU became a major topic. Europe’s political union is still in crisis mode and without a governing body with the real authority to enforce anything, it will likely remain so. Sovereign debts keep rising, unemployment is persistently high and GDP growth in Europe is nearing recession territory, despite the aggressive monetary policy of the European Central Bank. Calls for fiscal austerity have been largely ignored, and the ongoing refugee crisis has whipped up nationalist fervor throughout Europe. The Euro and British Pound have taken a beating.
2
GLOBAL ECONOMY
Energy exporting nations are still hurting due to the sharp decline in oil prices, but the recent OPEC agreement to cap production has sent the price of a barrel of oil back above $50. Though, oil is transacted in dollars and the dollar strengthened against other currencies. So, the effect of the price gain may be partially offset. Non-OPEC producers like Russia and Venezuela have also shown a willingness to cap production in order to bring supply and demand into better balance. At the same time, US production looks to be ramping back up, as evidenced by an increase in rig count over the past several months. As the price of a barrel of oil goes up, more wells can turn a profit. For now, supplies are still running ahead of demand and recent agreements essentially cap production at current levels in the hope that an increase in demand from economic expansion over time will eventually absorb excess supply.
National Economic Overview
Oil-rich Middle-Eastern countries, including Saudi Arabia, are burning through cash reserves to cover revenue shortfalls precipitated by the falling price of oil. China is issuing sovereign bonds to help it cope with its massive transition from total dependence on the exportation of manufactured goods. In the past two quarters we have been describing the global economic outloo
do, but we can point to at least some improvement around the world. The pani
None of this sounds like good news and that is undeniably correct. However, the US economy is in much better shape relatively short-lived. didn’t longof for world markets absorb the a lo speaking. Once again, the world views theItUS as the take safe haven choice. That keeps capital to moving into the US news. and muchThere’s of that finds its way to the commercial real estate In fact, foreign demand US real estate assets continues contributePound to gains intook a exit from themarket. EU is drawing much for less attention now. ThetoBritish asset prices, as it increases in all product are willing to payup a premium to assure the preservation becompetition short-lived, oncetypes. the Foreign actualinvestors process ramps this spring. of their capital.
EURO AREA REAL GDP
2
(QUARTER-ON-QUARTER PERCENTAGE CHANGES)
When the UK m the long term sur major topic. Euro in crisis mode and with the real auth it will likely rem keep rising, une high and GDP gr recession territor monetary policy Bank. Calls for fi largely ignored, crisis has whipp throughout Europ Pound have take
2 National Economic Overview
GDP GROWTH GDP GROWTH 2
National Economic Overview
US GDP, the primary metric for tracking the total output of US goods and services, is perhaps the most closely watched statistic in the
USworld. GDP,Our theeconomy primaryis,metric total output of US goodsmore andforeign services, isand perhaps most closely by far, for the tracking largest on the the planet and we also consume goods servicesthe than any other nation. watched statistic in the world. Our economy is, by far, the largest on the planet and we also consume more Whatever happens here at home, is felt and observed the world over. foreign goods and services than any other nation. Whatever happens here at home, is felt and observed US GDP growth picked up in Q3 after several dismal quarterly performances that had the domestic economy running theFortunately, world over.
just above stall speed. In Q1, the economy expanded by just .9%, followed by a disappointing 1.4% rate in Q2. The third and final estimate of Q3 in atpicked 3.2%, which breathingdismal a collective sigh of relief. However, a that ratherhad obscure Fortunately, US growth GDP came growth up inhad Q3investors after several quarterly performances the but important fact is that the export of soy beans resulting from a poor harvest in South America accounted for more than a fourth of that domestic economy running just above stall speed. In Q1, the economy expanded by just .9%, followed number. by a disappointing 1.4% rate in Q2. The third and final estimate of Q3 growth came in at 3.2%, which
had investors breathing a collective sigh of relief. However, a rather obscure but important fact is that the Unfortunately, the first estimate of Q4 growth came in at just 1.9%, which left 2016 with a growth rate of just 1.6%. That is good export of soy beans resulting from a poor harvest in South America accounted for more than a fourth of that relative to the rest of the world. Europe and Japan are still in tough shape, despite drastic monetary and fiscal measures to keep their number. economies from sliding into recession. QUARTER-TO-QUARTER GROWTH IN REAL GDP
GDPNow, the Atlanta Fed’s weekly index measuring GDP, currently estimates 2.9% growth for Q4. If that proves true, the US economy will at least surpass 2% growth for the year, which is weak, but still on the right side of the line. In 2015, GDP grew at a 2.4% clip. Unfortunately, the first estimate of Q4 growth came in at just 1.9%, which left 2016 with a growth rate of Even with that decline, the US looks relatively good. Europe and Japan are still in tough shape, despite drastic monetary and fiscal just 1.6%. That is good relative to the rest of the world. Europe and Japan are still in tough shape, despite measures to keep their economies from sliding into recession. The central banks in both regions continue their experiment in NIRP drastic monetary and fiscal measures to keep their economies from sliding into recession. (Negative Interest Rate Policy) and they have ongoing and bond-buying programs to encourage businesses to borrow at low or negative rates. Even with all that meddling, GDP growth remains well under 2% in the Euro Area, and the unknown danger associated with GDPNow, index measuring currently 2.9% growth Q4. and If that unwindingthe the Atlanta EuropeanFed’s Centralweekly Bank’s monetary experiment isGDP, still looming. Theestimates Bank of Japan keeps printingfor money buying proves true, the US economy will at least surpass 2% growth for the year, which is weak, but still on the right bonds in such volume that it is running out of bonds to buy. So, it has resorted to buying equities to get the stimulus money placed.
side of the line. In 2015, GDP grew at a 2.4% clip.
There is no denying the reality of globalization and things are not going well outside our borders. Political turmoil, civil unrest and economic challenges around world weigh heavy on good. the mindsEurope of domestic figure into the strategy of Even with that decline, thethe US looks relatively andinvestors, Japan and aremost still definitely in tough shape, despite our central bankers. Thefiscal question that remains whether or not US companies andsliding consumers willrecession. accept the slower model drastic monetary and measures toiskeep their economies from into Thegrowth central as the “new normal” and act in a way that promotes further growth. banks in both regions continue their experiment in NIRP (Negative Interest Rate Policy) and they have
ongoing and bond-buying programs to encourage businesses to borrow at low or negative rates. Even with
2 National Economic Overview
GDP GROWTH
No discussion on economics can be had without considering the newest wild card in global economics: Donald Trump. The US President-Elect stunned the globe with a victory that odds-makers didn’t see coming. Neither did Hillary Clinton and her followers, who woke up on November 9th in a world they least expected. Regardless of your political persuasion, there’s no denying the immediate effects of the election. Equities markets soared on the expectation of lower corporate and personal income tax rates, reduced regulations and a huge infrastructure spending program. Of course, none of that has yet happened. Mr. Trump will have just taken the oath of office as this writing is released and he will only be beginning to navigate a political system designed to have big change occur over time. Checks and balances built into the US Constitution give the minority protection against being steamrolled. So, our new leader, who is used to calling all the shots when making business decisions, will need some time to acclimate to a different set of rules. But, the preliminary indication from the business world has been positive now that the reality of his victory is sinking in. What impact he can have on GDP in the short run is a complete unknown at this point, but the psychology of decision making going forward may be influenced by the prospects of a more business-friendly President. Volatility in equities has been on the rise in 2016, as US companies grapple with sluggish market conditions. Corporate earnings have declined repeatedly the last six quarters and companies have been resorting to cost-cutting and stock buyback programs to increase profits and earnings per share. Reducing operating costs means job cuts and that means reduced consumer spending, which accounts for roughly 70% of GDP. Though, it is important to note that the most recent earnings cycle did show signs of improvement. As we have pointed out all year, US consumers have been riding the brakes on spending. Retail sales growth, a large component of consumer spending, has been a problem and wage growth has been lagging behind previous economic recoveries, though it did spike in December to 2.9% year-over-year. Auto sales set a record, but most of a December increase can attributed to incentives to move slow selling vehicles off the lots before the year ended. The bottom line on GDP is that it could go either way. If the Trump effect lasts for a while, business investment and consumer spending could build some momentum and those are the two main components of GDP. If that happens, however, the Fed will make more interest rate moves and that will strengthen the US Dollar and hurt exports, another key component of GDP.
2 National Economic Overview
EMPLOYMENT MPLOYMENT 2
National Economic Overview
Job growth is one the most perplexing of economic indicators, especially due to the fact that the U3 unemployment rate is the most widely quoted rate. The base for the U3 rate includes those who are employed and those who are unemployed but have actively sought employment in the last five weeks. We are not sure who made that one up, but we would sure like to know what the logic was. The U3 equation often produces counter-intuitive results. When job creation is good, those who have not been looking for work, re-engage in h is one the most perplexing of economic indicators, especially due to the fact that the U3 their search and are added to the total of those who are actively looking, increasing the number of unemployed workers and thereby ment rate is the most widely quoted rate. The base for the U3 rate includes those who are raising the unemployment rate.
and those who are unemployed but have actively sought employment in the last five weeks. U6 unemployment rate, presents a different story. It includes those working part time in their field of choice, who would prefer to ot sure The who made that one up, but we would sure like to know what the logic was. The U3 be working full time, as unemployed. Many believe U6 metrics offer a more accurate employment picture. It does make clearer the often produces counter-intuitive results. When job creation is good, those who have not been frustration of many in the middle class who still feel like the recession never ended. They are technically employed, but don’t feel the r work, impact re-engage inincome. their search are toturned the total of those who are actively looking, of higher This is theand group thatadded may have the election for Mr. Trump. g the number of unemployed workers and thereby raising the unemployment rate.
6 unemployment NATIONAL UNEMPLOYMENT sents a different includes those part time in their choice, who would be working full unemployed. Many U6 metrics offer a curate employment does make clearer ation of many in le class who still he recession never hey are technically , but don’t feel the f higher income. he group that may ed the election for U6 unemployment is currently more than double that of U3, at 9.7%. Job creation has been slowing over the past year. The 12 month p.
rolling average has fallen to 180,000 per month from 229,000; not an insignificant number and important to note that it includes part time jobs, most of which are at or near minimum wage. Q4 started strong with a total new job count of 161,000. November ployment is currently more than double that of U3, at 9.7%. Job creation has been slowing hit 178,000 and December came in under estimates at 156,000. The low point for 2016 came in May when only 11,000 new jobs ast year. The 12 month rolling average has fallen to 180,000 per month from 229,000; not an were recorded. The best month of the year thus far came in June, when 271,000 new jobs were created. Wild swings in job growth nt number important to note spending, that it includes jobs,cautious most of are to atimplement or near aggressive growth affect and current and future consumer prompting part CEOstime to be more andwhich less inclined wage. strategies. Q4 started strong with a total new job count of 161,000. November hit 178,000 and
r cameDespite in under estimates at 156,000. The low point for 2016 came in May when only 11,000 erratic job growth numbers, the U3 unemployment rate for December came in at 4.7%, which is generally indicative of a fully were recorded. The best month the isyear thusbecause far came in of June, when employed economy. However, that of number deceiving so many the jobs being271,000 created arenew either jobs part time or at the lower ted. Wild swings in job growth affect current and future consumer spending, prompting CEOs range of the wage scale. e cautious and less inclined to implement aggressive growth strategies.
rratic job growth numbers, the U3 unemployment rate for December came in at 4.7%, which lly indicative of a fully employed economy. However, that number is deceiving because so he jobs being created are either part time or at the lower range of the wage scale.
2 National Economic Overview
EMPLOYMENT
The cost of health care pursuant to the Affordable Care Act (ACA) is also contributing to part time employment problem, as employers are inclined to hire workers just under the 30 hour per week threshold that would require them to provide health benefits. The new administration has vowed to repeal and replace the landmark legislation, but that could take years to make happen, if it ever does. Too much water may have flowed under that bridge already. The Labor Participation Rate, the metric that measures the percentage of those eligible for employment between the ages of 16 and 64 who are currently working, also remains stagnant. Choppy job growth reports and the early exit of Baby Boomers, have combined to keep just 62.7% of potential workers in active production. It is important to note that Labor Participation has moved off a five decade low, but it may head down again in the next few years as the rate of early-retiring Baby Boomers increases. Lagging wage growth is another problem that has dogged the US economy in this recovery. Full-time, high-paying jobs are in short supply and wage growth overall is tracking at a rate that finally rose to 2.9% in December. If you are making a middle income wage, a 3% increase may not change your spending habits. Half of that increase will cover inflation, leaving the other half for discretionary spending. That kind of wage growth offers little relief to workers at or near the minimum wage level who are struggling to make ends meet. It’s no wonder that so many middle class workers are disillusioned with a recovery that they feel has left them behind. Layoffs in the energy sector have not helped the job picture, either. More than 700,000 full time positions have been eliminated since oil prices declined sharply back in 2014. Many of those jobs were high-paying technical positions that are not easily replaced in other business sectors like technology and business services that have contributed most to recent job gains.
2 National Economic Overview
MONETARY POLICY
2
MONETARY POLICY National Economic Overview
After a year of sending cryptic mixed signals, the Fed finally stepped up in December and bumped up its benchmark Fed Funds Rate by another 25 basis points to .75%. By historical standards, that is still a very low number, and it will take a sustained series of quarter-point increases to reverse the activist stance of our central bank. Since the financial crisis that began at the tail end of 2007, the Fed has been heavily involved in manipulating the cost and flow of capital, more so than at any other time in its 100+ year history. Many have warned that the Fed has too much influence on the direction of the overall economy. Some believe our central bankers were caught off guard when their first move on rates roiled world markets and sent the US Dollar soaring back in January of 2016. A strong dollar makes US exports more expensive and raises US TREASURY RATES the cost of paying back dollar-denominated loans for borrowers around the world. Simply put, the world threw an economic fit and central bankers around the globe pleaded with the Fed to forestall further increases until the global economy improved. It took several months down, but Ms. Yellen and signals, her colleagues from raising Afterfora things year toofsettle sending cryptic mixed the were Fedspooked finally away stepped up in Dec rates for the rest of the year. Yield-chasers poured money back into the equity markets and the January slide turned into a bull run that was benchmark Fed Funds Rate by another 25 basis points to .75%. By historical sta turbocharged by Trump’s surprise win in November.
low number, and it will take a sustained series of quarter-point increases to revers
Meanwhile, central bank policy around the world has been goingthe the financial other way. The European Central Bank hastail taken its benchmark central bank. Since crisis that began at the end of 2007, rate the Fed into negative territory, as has the Bankinofmanipulating Japan. That means that borrowers get paid for borrowing money, which is counter-intuitive at a in it the cost and flow of capital, more so than at any other time minimum. Both those central banks are buying corporate bonds in addition to their own sovereign debt, raising further concerns over the have warned that theeconomic Fed has too much influence the direction ofstocks, the overa long term consequences of actions that are based on unproven models. The Bank of Japan ison even buying individual our central bankers were caught off guard when their first move on rates roiled w an action that would be against the law for our Fed. Critics of central bank policy are calling out individual central bankers for doubling down on failed policies to save US Dollar soaring back in January of 2016. A strong dollar makes US exports m their academic reputations. US TREASURY RATES That argument may just have some merit. The good news about the most recent move by the Fed is that it gave itself a little room to work with if the economic recovery does stall. With GDP growth so weak in the first half of 2016, concern a possible recession was on the rise.
Fortunately, Q3 growth improved, but the first estimates for Q4 came in at a disappointing 1.9%. Hopefully, the Fed can follow through with further rate hikes in 2017 to move further out of the corner it painted itself in to over the past 10 years. If not, it could run out of ammunition to stimulate growth and be forced into the uncharted waters of negative interest rates. Trump’s promise of a massive infrastructure investment has buoyed hopes Federal government will poured help out on the fiscalback side ofinto th raising rates for the rest of that thethe year. Yield-chasers money the equation, and not continue to leave all the heavy lifting up to the Fed. But, that means bigger federal deficits that are already on their January slide turned into a bull run that was turbocharged by Trump’s surprise w way back to over $1 Trillion per year. Bottom line: the Fed still has itself in a pickle and is short on ideas to get the economy back on a track of healthy growth. The takeaway might be that the Fed has reached the limits of its effectiveness, and that might get investors more central bank policy around theWe’ll world hastobeen going theopen other wa focused on markets themselves rather Meanwhile, than what impact Fed action will have on those markets. just have see if we are really to learning that lesson. Real estate borrowers are still the beneficiaries of the Fed’s current monetary policy direction. Mortgage rates have Bank has taken its benchmark rate into negative territory, as has the Bank o remained at historic lows, but they have begun to move Most for commercial property lenders use a spread over the yield on the 10atYear borrowers getup.paid borrowing money, which is counter-intuitive a minim T-bill to set mortgage rates, and that yield has risen by over 50 basis points since the election. Long-term loans are still readily available, banks are buying corporate bonds in addition to their own sovereign debt, rais but underwriting is tightening up and interest rates have already moved higher. The Fed’s willingness to make another move up in the short thetolong term consequences of actions that are on unproven economic m term will be a signal for long term lenders get more aggressive with further rate hikes of their own. Forbased the moment, it’s still a good time to is even buying an sure action that would against theevery lawday. for our F borrow money. Nothing against Ms. Yellen and her Board individual of Governors,stocks, but it would be nice if they were be off the front page
policy are calling out individual central bankers for doubling down on failed polic reputations. That argument may just have some merit.
2
2
National Economic Overvie
US INDUSTRIAL MARKET National Economic Overview
US INDUSTRIAL MARKET
National Ec
2016 US INDUSTRIAL MAR
After a third quarter that was cause for celebration, the industrial market p performance to finish the year on a high note. Talk of the raging bull market r have been largely quietedin another and the post-election surgetheof optimism is h After a third quarter that was cause for celebration, the industrial market put After strong performance to finish yearcelebration, on a high a third quarter that was cause for the market carryhave momentum 2017. note. Talk of the raging bull market running out of breath been largelyinto quieted and theto post-election surge on of optimism is helping performance finish the year a high note. Talk of the
have been largely quieted and the post-election surg
the industrial market carry momentum into 2017.
That comes despite the Fed’s action raise the Fed Funds Rate in Decemb market carrytomomentum into 2017. That comes despite the Fed’s action to raise the Fed Funds a Rate in December. When central bankof made a similar move in December bank made similar move in the December 2015, it caused global econ 2 of 2015, it caused global economic upheaval that took months to calm. This time around, the Fed’s move has been largely lauded as That comes despite the Fed’s action to raise Fed Fun took months to calm. This time around, the Fed’s move has beenthelargely la omic Overview necessary and appropriate, and markets around the world took the change in stride. The biggest impact of the Fed’s move has been bank made a similar move in December of 2015, it c and appropriate, and markets around the world took the change in astride. stronger US Dollar against most took months to calm. This time around, the Fed’s move of t of the world’ major currencies. and appropriate, and markets around the world took th VACANCY RATES BY BUILDING TYPE 2001 - 2016 bee Anticipation of the rate hike, Total Market Flex Warehouse VACANCY RATES BY BUILDING TYPE 2001 2016 US along hike, along factors, has mo Flex Warehouse already pushed mortgage rates borrowing dustrial higher, marketbut putsteeper in another strong ma ECONOMIC have running done littleout to of dampging bullcosts market breath Ant en buyer enthusiasm to industrial acquire f optimism is helping the hike DRIVERS properties that have reached fac record-high values. While it is pus GROWTH that lendersWhen are toughening Rate intrue December. the central hig up oneconomic underwriting standards, sed global upheaval that EMPLOYMENT bor it clear they are s beenthey’ve largelymade lauded as necessary to keep They’re hange ready in stride. Thelending. biggest impact don
KET
2016 ENDS ON A HIGH NOTE Vacancy Rate
16% 14%
16%
12%
14% 12%
Vacancy Rate
10%
8% 6%
10%
8%
GD
6%
P
4%
4%
2%
2%
0%
2002 Q4
just taking a harder lookmove at eachhas of the Fed’s deal, which astronger good beenis probably a thing anyway. US Dollar against
2003 Q4
2004 Q4
2005 Q4
2006 Q4
0%
2007 Q4
2008 2002 Q4 Q4
20032009 Q4 Q4
2004 2010 2005 Q4 Q4 Q4
20112006 Q4 Q4
2012 2007 Q4 Q4
2013 2008 Q4
2014 2009 Q4 Q4
2015 2010 Q4Q4
20112016 Q4 Q4
2012 Q4
2013 Q4
MONETARY POLICY
buyer properties enthusiasm that to acquire buyer enthusiasm to acquire have properties reached that have record-high values. While it is true that lendersFUTURE are tou GLOBAL ECONOMY PRELEASED & record-high values. While it is true that lenders are toughening up on underwriting standards, they’ve made it clear t most of the world’s up on underwriting standards, they’ve made it clear they are growth160 In Q4, major net absorptioncurrencies. and rent growth were strong, vacancy declined and new deliveries continued at a steady pace.just Q3 GDP ready to keep lending. They’re taking a harder ready to keepestimates lending. They’re just taking a harder lookthing came inAnticipation at a revised 3.2% annualized rate and preliminary for Q4 growth are in the same range. That bodes wellatforanyway. a US140 In of the rate each deal, which is probably a good economic recovery has been signs of stalling out. Third quarterabsorption earnings season improved somewhat for six decli hike, alongthatwith othershowingeach deal, which is probably a good thing Inafter Q4,slowing netvacancy and rentanyway. growth were strong, 120 straightfactors, quarters. The economic growth picture still isn’trent good,growth but there was some improvement during the second half the grow hasglobal already absorption and were strong, vacancy and new deliveries continued at adeclined steady pace. Q3ofGDP year. However, banks rates around the world are still printing money and experimenting with negative interest rates rate to prop up preliminary sluggish100 pushedcentral mortgage a revised 3.2% and es new deliveries continued atinaatsteady pace. Q3annualized GDP growth came AHEAD indicators, the US industrial market continues to outperform expectations. economic growth. but Yet, despite that mixed bag AofLOOK economic higher, steeper 80well f for Q4 growth are in the same range. That bodes in primary at a revised 3.2%market. annualized rateoffered and for preliminary estimates Vacancyborrowing continued itscosts declinehave in almost every and secondary Quality space lease got even tougher to find and economic recovery that has been showing of stall for Q4 growth are in the same range. That bodes well for a US signs 60 done little to dampen economic recovery that has been showing signs of stalling out. 40 ched FUTURE DELIVERIES RECENT DELIVERIES 20
arket
BC CANADA
WEST
MIDWEST
EAST
SOUTH
SOUTHWEST
LEASED & UN-LEASED SF IN DELIVERIES LAST 5 YEARS
Preleased RECENT DELIVERIES
Un-Leased
160
Un-Leased
300
LEASED & UN-LEASED SF IN DELIVERIES LAST 5 YEARS
140
275
120
250 Un-Leased
300
100
225
275
80
200
225
40
200
0
175
2016 Q4
2017 Q1
2017 Q2
150 125
150 125
100
s
20
175
s
M illio n SF
250
60
Leased
2017 Q3
0
2012
2013
Leased
M illio ns SF
PRELEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER
M illio n SF
ening y are ok at , net and came mates a US out.
2016 Q4
M illio ns SF
2015 Q4
0
Third q six str good, Third quarter earnings se the ye six straight quarters. The money good, but there was som sluggi the year. However, centra indica money and experimentin expec sluggish economic growth primar t the USeven indu 2014 indicators, 2015 2016
expectations.
Vacancy
2
2
National Econo
National Economic Overview
inefficient space or settle for relocating to space that doe generation space, there’s a price to pay, as landlords o their buildings. Rent growth is being driven by the increa in materials handling technology can help tenants think demanding longer terms and stronger credit on top of hig
many tenants are force d to either renew in inefficient space or settle for relocatingbuyers, to space that doesn’t optimize For those Owner/user anxious to takeefficiency. advantage of cheap m tenants choosing first generation space, there’s a price to pay, as landlords often have multiple interested parties lined up to lease Property values have been rising at a double-digit pace their buildings. Rent growth is being driven by the increased efficiency offered in new projects where the latest in materials handling owners can are reap windfall profits a sale, they technology can help tenants think more three dimensionally. Owners of new space demanding longer terms from and stronger credit on are lo top of higher rents. It truly is good to be an owner these days. doesn’t help much, as trading up just means paying a pr
the same thing. Still, buyers remain aggressive, especiall
Owner/user buyers, anxious to take advantage of cheap money while they can, are lining up to pay record prices. Property values have at 90% of a property’s value. That can keep occupancy c been rising at a double-digit pace for several years in many markets, but even though owners can reap windfall profits from a sale, they are loathe to sell and face the massive tax hit. Exchanging doesn’t help much, as trading up just means paying a premium for someone For aggressive, investor especially buyers, user thebuyers oddswho forcan successful acquisitions else’s property who is trying to do the same thing. Still, buyers remain take advantage of SBA financing at 90% of a property’s value. That can keep occupancy costs flat for up to a 25problem years. property remains for buyers who have to bid pri
Increased activity in secondary markets has had the sam
Millions SF
For investor buyers, the odds for successful acquisitions are just as long. Competition for industrial investment property remains expanded their acquisition criteria. All industrial product a problem for buyers who have to bid prices up and cap still prefer big bulk distribution deals, but they’ll still compe rates down under 5% in primary markets. Increased activity in secondary markets has had the same effect, as investors bus * For Top 42 Markets NET ABSORPTION looking for less competition have expanded their acquisition gro 100 criteria. All industrial product types remain in high demand. and 90,912,425 The institutional players still prefer big bulk distribution deals, 90 rep but they’ll still compete against local and regional players 80 offic for the multi-tenant NET ABSORPTION * For Top 42 Markets business parks. Developers unable to find land for exp 70 ground-up development are playing the add-value game, buil and in many instances adding the most value comes from 60 58,695,051 kee repurposing properties to multifamily and mixed-use retail/ 52,859,808 51,699,326 in m office projects in gentrifying areas. Land is getting more ex50 pensive to acquire, taking longer to get entitled and buildings Pho 40 are getting more expensive to construct, which is keeping significant amounts of spec building concentrated in major Net 30 land-rich markets like Dallas/Fort Worth, Atlanta, Phoenix fee and the Inland Empire. 20
2016
2016
2016
2016
nat
Q2 Q3 Q4 Q1 Net absorption took off in Q3 when over 118 million square squ feet of positive net gain in occupied space was recorded the e-commerce sector, big shippers and 3PL operators t nationwide. In the final period of 2016, another 80 million the biggest distribution getting most of the bu square feet was absorbed, and property owners again have the e-commerce sector, big shippershubs and 3PL operators to thank for action, the time is now a difference and tertiary new occupancy. Until recently, is was just the biggest distribution hubs getting mostmaking of the action, but the pushin forsecondary “Last Mile” locations to speed up shipping time is now making a difference in secondaryby andleasing tertiary markets. Amazon.com continues its massive expansion multiple fulfillment centers each quarter, som by leasing multiple fulfillment centers each quarter, some over 1 million square feet. is expanding in a similar as part similar fashionWalmart as part of its long termfashion strategy to take t of its long term strategy to take the battle to Amazon. Without the e-commerce boom, industrial market metrics would be profoundly industrial market metrics would be profoundly different, b different, but the e-commerce sector, despite its prolific growth is still a small fraction of overall retail sales. That means it probably has still distribution a small fraction of ongoing overallforretail means it plenty of room for growth and that means the need for state-of-the-art space will be years sales. to come,That especially the need for state-of-the-art distribution space will be on if economic growth accelerates.
accelerates.
New deliveries for both speculative and build-to-suit projects for Q4 reached 60.5 million square feet in 473 buildings. That brings total US industrial property inventory up to 21.94 billion square feet. As the quarter ended, another 256.4 million square feet was still deliveries both primarily speculative and in the construction pipeline, a substantial increase over Q3’s total.New Development activityfor is focused in markets likebuild-to-suit Dallas,
pr buildings. That brings total US industrial property invento another 256.4 million square feet was still in the constr
2 National Economic Overview
US INDUSTRIAL MARKET
Chicago and Atlanta where land is still available at prices that allow projects to pencil at today’s rents. That is not the case in mature markets like Los Angeles where what little land remains is too expensive for conventional industrial development. Infill markets like LA are in danger of losing industrial inventory to repurposing to other product types that make more economic sense. As we reported last quarter, the balance between spec and build-to-suit construction has helped keep market metrics in balance and the risks of overbuilding at a minimum. New deliveries continue to run short of net absorption, which has maintained market equilibrium even in markets with substantial construction. Speculative buildings are leasing quickly to fast growing tenants who like not having to wait for build-to-suit space. The national vacancy rate for warehouse and flex space continued to decline in Q4, shedding another 10 basis points to finish the period at 5.5%. In the past three quarters, the vacancy rate has fallen by 40 basis points, and several major market areas still have vacancy rates in the 2% range, including Central Los Angeles, Long Island, New York and California’s Orange County. Average asking lease rates across the country moved higher again in Q4, ending the period up $.07 to $6.05. Markets with the highest levels of construction are still seeing the most rent growth, as tenants remain willing to pay a premium for efficient, first generation space. Rising land and construction costs are becoming more of challenge, as some developers and lenders are getting more cautious about projecting rents for projects that might be years away from completion. Protracted and expensive entitlement processes have contributed to the problem.
LOOKING AHEAD The US industrial market heads into 2017 firing on all cylinders. High demand, low supply, rising prices and declining vacancy are still driving market dynamics, just as they did as 2016 began. Stronger economic growth, more direction on monetary policy and minor economic improvement around the globe could give the US industrial market growth another boost this year. Our central bankers have given themselves some maneuvering room by raising the Fed Funds Rate in December. Many economists are relieved as a result and they remain hopeful the Fed will follow through with more rate hikes this year. However, that raises the risk that cap rates will decompress in response to higher yields in other asset classes. For example, the yield on 10-Year Treasuries, the so-called riskless investment, has risen over 100 basis points since March of 2016. Internationally, the news is not as bad as it was three months ago. The global economy is still in tough shape, but the post-Brexit scare was short-lived the markets have gotten used to the idea of an EU without the United Kingdom. China and other emerging economies are still facing big challenges, but stock market volatility has subsided and the doomsayers have been largely silenced by those who see the global economy as showing signs of stability, albeit with the assistance of massive monetary intervention in Europe, Japan, China and other emerging markets. The US economy is doing better, relatively speaking. GDP numbers are improving, job creation is trending down, but still in healthy territory and wage growth hit an annualized rate of 2.9% in December, highest in several years. Barring a “significant” economic event, the industrial property market should continue to expand. The US is still the preferred safe haven for foreign investment, as well, and owning US Dollar-denominated assets is a priority for foreign investors, big and small. So, capital will keep flowing into the US, which could serve to mitigate cap rate decompression by keeping demand for industrial running ahead of supply. Vacancy will keep moving lower, as the bulk of new construction is concentrated in distribution hub markets with strong, ongoing positive net absorption. Net absorption should remain positive and healthy in 2017, but may moderate in markets that lack quality options for expanding tenants. More tenants in those areas will be forced to renew in place at higher lease rates, even for functionally obsolete space. Construction will remain at current levels in areas with ample supplies of land, but will decline further in markets with fewer available sites.
2 National Economic Overview
US OFFICE MARKET
2
After a sluggish start, the US office market picked up the pace in the middle quarters and finished the year with a solid and consistent National Economic performance across the board. In fact, the market has been remarkably steady since it began to recover in earnest back Overview in 2011. Vacancy has declined back to levels not seen since 2007, rent growth has been steady and net absorption has remained well into positive territory. New deliveries are keeping pace with net absorption, limiting the chances of over-supply experienced in previous real estate All-in-all, the office market is generally healthy across the country in both primary and secondary markets and there are no clear signs of a disruption to current trend line. That doesn’t mean the office sector is without its challenges. Older, less functional product, especially buildings not in proximity to public transportation, multifamily housing and other amenities preferred by a younger workforce, are faring poorly in many markets. Millennials are redefining the workforce by way of their strong lifestyle preferences, and landlords After caught a sluggish who don’t or can’t respond accordingly are being out. start, the US office market picked up the pace in the middle quarters
US OFFICE MARKET Office Market R year with a solid and consistent performance across the board. In fact, the market has
Let’s take a look at some numbers for the steady final quarter 2016. Net absorption came in back at 26.6 million Vacancy square feet, decline back t sinceof it began to recover in earnest in 2011. hasadeclined compared to a very strong gain in occupiedsince space2007, of 37rent million squarehas feetbeen in each of theand two net previous quarters,has butremained still solidly well in into p growth steady absorption positive territory. For the year, over 113 million square feet of net absorption was realized, which is further indication of the ongoing New deliveries are keeping pace with net absorption, limiting the chances of over-supp demand for office space nationwide. All but a handful of US markets tracked by CoStar across the US posted positive net absorption in 2016. Only Houston and Chicago posted significant losses of 241,000 square feet and 979,000 square feet, respectively. Considering the massive impact 2 on Houston’s local of the energy market economy, is easy to see Overview how things there Nationalit Economic could be much worse.
VACANCY RATES BY CLASS 2001-2016 Class A 17%
Class B
Total Market
Class C
16% 15% 14% 13% 12% 11% 10% 9% 8% 7%
pre cyc the gen acro in and ma are of cur
2002 2003 2004 2005 2006 2007 2008 2009 2016 2010 2011 2012 2013 2014 2015 n include the usual suspects like Boston at 4.4 million square Los Angeles and Q4 Q4feet, Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 re feet, Dallas/Fort Worth and Phoenix, both at 4 million square feet, while tech hot spot n of 3.5 million square feet. Surprise performers for the year included Detroit at 3.6 million That doesn’t mean the office sector is without its challenges. Older, le at 3.5 Market leaders in absorption include the usual buildings not in proximity to public transportation, multifamily housing a market ABSORPTION & DELIVERIES PAST 7 QUARTERS suspects like Boston at 4.4 million square feet, Los a younger workforce, are faringAngeles poorlyand in Philadelphia many markets. Millennials are red nnual at 4.1 million square which 35 their strong lifestyle preferences,feet, andDallas/Fort landlordsWorth whoand don’t or can’t Phoenix, both respond at 1,000 4 million square feet, while tech hot spot Seattle/
30
28.8
Let’s take a look at some numbersPuget for the final of 2016. Sound hadquarter a gain of 3.5 million square feet. FUTURE Surprise performers for the year included Detroit DELIV Net absorption came in at 26.6 million square feet, a decline PRE-LEASED & UN-LEASED SF 23.5 22.9 at 3.6 million square feet and Salt Lake City at 3.5 compared to a very strong gain in occupied space of 37 million 19.2 million square feet. 55 square feet in each of the two previous quarters, but still solidly 15.1 15.5 16.1 in positive territory. For the year, over 113 million square feet 13.1 A major market posting a disappointing45annual of net absorption was realized, which is further indication of result was New York City, which had occupancy 35 the ongoing demand for office space nationwide. All but a
26.0
25
90
2000-2015
Class B
80 Class C
Total Market
70
Millions SF
Millions SF
23.4 ption 21.9 ed, as 20 trong 16.9 14.9 ms of 15 mance, 9.0 ption 10 rise by just 201,000 square feet. bs, as 25 0 RECENT DELIVERIES s are 2015 2016 2015 2016 2015 2016 LEASED & UN-LEASED SF DELIVERIES LAST2016 5 YEARS The level of new deliveries has been remarkably Q1 Q3 Q4 Q3 Q4 Q2 Q2 15 that consistent throughout In Q4, 18.5 Leased the year. Un-Leased ntent 100 5 million square feet of new office space was d play lifestyle preferred by millennial generation workers. Average asking lease rates 0
2017 Q1
SOUTHWEST
2 MONETARY POLICY
buildings not in proximity to public transportation, m a younger workforce, are faring poorly in many market their strong lifestyle preferences, and landlords who don
National Economic Overview
US OFFICE MARKET
2014 Q4
2015 Q4
2016 Q4
challenges. Older, less functional product, especially multifamily housing and other amenities preferred by ets. Millennials are redefining the workforce by way of on’t or can’t respond accordingly are being caught out.
Millions SF
2016. ecline FUTURE DELIVERIES PRE-LEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER million Un-Leased 55 olidly e feet 45 on of 35 but a
Let’s take a look at some numbers for the final quarter of 2 Net absorption came in at 26.6 million square feet, a dec compared to a very strong gain in occupied space of 37 mil square feet in each of the two previous quarters, but still so in positive territory. For the year, over 113 million square of net absorption was realized, which is further indication the ongoing demand for office space nationwide. All bu
RECENT DELIVERIES
LEASED & UN-LEASED SF DELIVERIES LAST 5 YEARS
Preleased
90 80
25
70
15
60
5
50
0
2017 Q1
2017 Q2
2017 Q3
Leased
Un-Leased
100
2017 Q4
Millions SF
013 Q4
markets and there are no clear signs of a disruption to current trend line.
40 30
2012
2013
2014
2015
2016
h p C 97 im it
compared to 21.2by million square feet inthe Q3,US 20.3 million square feet in Q2 and 20.7 million square feet in Q1. This has handful delivered, of US markets tracked CoStar across 1 LEE OVERVIEW 2 NATIONAL OVER lee-associates.com allowed the to growinsteadily risk and of overbuilding. The quarter ended with another 152.3 million square feet of posted positive netmarket absorption 2016. with Onlyminimal Houston in significant the construction queue, with most of thatfeet totaland concentrated in the nation’s ten largest markets. New York City is at the top of Chicago space posted losses of 241,000 square that list with over 15.2 million square feet underway. Dallas/Fort Worth is not far behind at 11.8 million square feet, followed by Wash979,000 square feet, respectively. Considering the massive ington DC at 10 million square feet and South Bay/San Jose (Silicon Valley) at 9.9 million square feet. Another tech-heavy market, mpact of the energy market on Houston’s local economy, Sound, rounds out the top five at just under 8.7 million square feet. The largest project underway in Q4 was the 3 World t is easySeattle/Puget to see how things there could be much worse.
ERVIEW
Trade Center tower in Manhattan. That building is set for delivery in early 2018.
make projects pencil,TRANSACTIONS developers5are focusing mixed-use 4 SIGNIFICANT KEYorder MARKETto SNAPSHOTS NATIONWIDE LEEon OFFICES 3 In
projects in urbanized, amenity-rich areas that will bring the highest rents. Rising land and construction prices are outpacing rent growth in many markets and that has kept speculative office development to a minimum in all but the hottest markets. Institutions and private investors are still making aggressive plays to acquire good quality office buildings. Cap rates have compressed into 4% for trophy properties. In January of 2016, CalPERS, one of the nation’s largest public employee pension funds, acquired the 1.7-million-square-foot Equitable building in Manhattan at a price reported to reflect a 4.13% cap rate. However, there are concerns about cap rates heading north, as a tighter monetary policy by the Fed, should start driving yields in other asset classes higher. Since March of 2016, the yield on the “riskless” 10-year Treasury has risen approximately 100 basis points to the 2.4% range. If that trend continues, cap rates are likely to move higher. A 50 basis point rise in cap rate in a 5%-cap world is not insignificant and is a fact not lost on investors already wary of buying in at the top of a cycle. If rent growth slows as it has in some markets across the country, the loss in property values could be substantial. The fact that foreign buyers keep pouring capital into US assets has kept the lid on cap rate decompression by keeping demand well ahead of supply. They like the idea of having their capital invested in a safe place in dollar-denominated assets. By building class, net absorption remains relatively well-balanced, as Class A, B product reported strong Q4 and full-year gains. In terms of Suburban versus CBD performance, over 82% of the Q4 net absorption was recorded in the suburbs, as many suburban submarkets are developing urbanized hubs that appeal to employers who are intent on satisfying the live, work and play lifestyle preferred by millennial generation workers. Average asking lease rates for the US moved up again in Q4, adding another $.32 to $24.30 per square foot. That is a 1.3% increase in just three months. Rents are moving up in most office markets around the country, but there are significant differences in the trajectory of rent growth within local markets as tenants move between building classes and submarkets to realize operational efficiencies.
Millions SF
23.4 23.5 By building class, net absorption 22.9 21.9 remains relatively well-balanced, as 19.2 20 2 Class A, B product reported strong 15.1 15.5 16.1 16.9 14.9 13.1 Q4 and full-year gains. In terms of 15 Suburban versus CBD performance, National Economic Overview 9.0 over 82% of the Q4 net absorption 10 was recorded in the suburbs, as 0 many suburban submarkets are 2015 2016 2016 2015 2016 2015 2016 Q1 Q3 Q4 Q3 Q4 Q2 Q2 developing urbanized hubs that appeal to employers who are intent on satisfying the live, work and play lifestyle preferred by millennial generation workers. Average asking lease rates
Office Market Remains Solid in Q4 HISTORICAL RENTAL RATES 2000-2015
BASED ON FULL-SERVICE EQUIVALENT RENTAL RATES
Class A
Class B
Class C
Total Market
$35
Dollares/SF/Year
$30
$25
$20
$15
$10
2002 Q4
2003 Q4
2004 Q4
2005 Q4
2006 Q4
2007 Q4
2008 Q4
2009 Q4
2010 Q4
2011 Q4
2012 Q4
2013 Q4
2014 Q4
2015 Q4
2016 Q4
Office occupiers across all sectors are finding new ways to leverage advances in communication and computing technologies in order moved up again in Q4, adding another $.32 to $24.30 square foot. is but a 1.3% increase just three tofor usethe lessUS space. Markets with more active tech and healthcare sectors tendper to see bigger rentThat gains, energy marketsinare seeing months. Rents aretomoving up in mostofoffice markets country, butwill there significant differences the rent declines, mainly due to large blocks sublease space.around Slack inthe space utilization take are some time to tighten up. So, in even trajectory rent growth withinenergy-heavy local markets tenants between classes and submarkets to realize when oil pricesofrebound significantly, officeasmarkets willmove be playing catchbuilding up for a while.
operational efficiencies. Office occupiers across all sectors are finding new ways to leverage advances in communication and computing technologies in order to use less space. Markets with more active tech and healthcare sectors tend to see bigger rent gains, but energy markets are seeing rent declines, mainly to due to large blocks of sublease space. Slack in space utilization will take some time to tighten up. So, even when oil prices rebound significantly, energy-heavy office markets will be playing catch up for a while. LOOKING AHEAD The US office market has good momentum heading into 2017, but concerns over a slowdown in US employment growth has more industry experts wondering if the market expansion is getting in MARKET the tooth. Job growth in office-using sectors drive LEE OFFICES 1 LEE 2 NATIONAL 4 SIGNIFICANT OVERVIEW SNAPSHOTS TRANSACTIONS 3 KEY OVERVIEW long 5 NATIONWIDE lee-associates.com net absorption and the twelve month rolling average of jobs created each month has fallen from 229,000 to just 180,000 in the past year. Fortunately, office tenants are generating a good chunk of the new jobs, but other sectors that tend to hire more part time workers at the lower end of the pay scale are still accounting for too big a slice of the job creation pie. Wage growth has improved somewhat over the past few months, but an uptick in inflation is eating into those gains. Rent growth will continue, especially in major markets where big employers continue their efforts to upgrade their workplace designs to attract and retain good workers who are, as a group, getting younger each day. Owners with older properties not in proximity to preferred amenities and public transportation will be under pressure to upgrade their buildings or be forced to lower rents and boost concessions. That will get expensive either way and those owners unable or unwilling to meet the demands of the market may become sellers at add-value pricing levels that reflect the additional risk. As we reported last quarter, there is little risk of a substantial increase in the pace of construction in 2017, so vacancy should continue to decline in 10-20 basis-point quarterly increments. Markets more dependent on the energy sector will see vacancy move in the other direction as sublease inventory swells further.
2
National Economic Overview
2
US RETAIL MARKET RETAIL SECTOR STAYS ON COURSE IN Q US RETAIL MARKET US RETAIL MARKET National Economic Overview
2
National Economic
The US retail property market kept pace in Q4. Vacancy and construction activity were ECONO relatively unchanged, rents rose modestly and net absorption remained solidly in positive DRIV territory. Even though the numbers point to market consistency, the retail industry continues to experience significant change as traditional department stores struggle to adjust themodestly and The US retail property market kept pace in Q4. Vacancy and construction activity were relatively unchanged, rentstorose GR massive challenge by growth in online salespoint andto the demographic net absorption remained solidly inpresented positive territory. Even though the numbers market consistency, theshift retailfrom industry continues baby boomers to millennials. The US retailtoproperty market kept pace in an to experience significant change as traditional department stores struggle to adjust the massive challenge presented by Q4. growthVacancy in EMPLOY relatively rents andinnet absorptio online sales and the demographic shift from baby boomers to millennials. Macy’sunchanged, announced that it willrose closemodestly 68 more stores 2017, announced that will close 68 bemore stores inEven 2017, displacing thousands of market consistenc territory. though the numbers point to displacingMacy’s thousands of workers, and theitcompany will also selling off valuable real estate assets. MONETARY P workers, and the company will also be selling offtovaluable real significant estate assets. SearsasHolding experience change traditional department s massive challenge presented by growth in online sales GLOBALand ECO VACANCY RATES BY BUILDING TYPE 2006-2016 baby boomers to millennials. P GD
RETAIL SECTOR
Power Center
Specialty Center
General Retail
12%
Shopping Center
Mall
Total Retail T
BC CANADA
Macy’s announced that it will close 68 more stores in 20 workers, and the company will also be selling off valuable rea
11%
EAST
WEST
10%
SOUTH
9%
SOUTHWEST
VACANCY RATES BY BUILDING TYPE 2006-2016
8%
Power Center
7%
Specialty Center
General Retail
12%
6%
Shopping Center
A LOOK A
11%
5%
10%
4%
9%
3%
8%
2% 2007 Q1
MIDWEST
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
7% 2012 Q1 6%
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
2016 Q1
2016 Q3
5%
Millions SF
Millions SF
Sears Holding Corporation plans to close another 150 Sears and K-Mart stores due to lagging sales and it recently announced the 4% Corporation plans to close another 150 Sears and K-Ma sale of its iconic Craftsman tool brand to Stanley Black & Decker. Walmart is making big moves to compete more effectively with NET ABSORPTION 3% stores due to lagging sales and it recently announced th e-commerce behemoth, Amazon, which continues to expand at amazing speed. In 2016, Walmart acquired Jet.com to enhance its 2% sale of its iconic Craftsman tool brand to Stanley Black 42 Markets 40 and* For 2007 to 2009 efficiency. 2010 In2011 2013 2007country 2008 2008 2009 mile” 2010 2012 the 2012 online capabilities it isTop leasing major distribution facilities around the increase “last recent2011weeks, Q3 Q3 Q3 moves Q1 Q1 Q1 Decker. Q1 Walmart Q3 Q1 is making Q1 Q3to compete Q1 Q3 big mo 34.9 world’s largest retailer also announced further job cuts 35 effectively with e-commerce behemoth, Amazon, whic 33.5 on the administrative side as part of its ongoing efforts to continues to expand at amazing speed. In 2016,Corpora Walma 30 improve operating efficiency. Office Depot is also feeling 26.2 acquired Jet.com to enhance its online capabilities and NET ABSORPTION stores d the pinch from increased online competition. The office 25 is leasing major distribution facilities around the count sale of i * For Top 42 Markets 40 products giant decided in 2016 to consolidate opera21.2 to increase “last mile” efficiency. In recent weeks, th 20 Decker. tions by closing 300 more locations across the country. 35 world’s largest retailer34.9 also announced furthereffective job cu 16.0 33.5 Other national 15retailers called it quits by the end of on the administrative side as part of its ongoing efforts continut 30 the year. Sporting goods operators Sport Chalet and improve feelin 26.2 operating efficiency. Office Depot is also 0 acquired Sport’s Authority shuttered all their stores in2016 2016, as2016 did 25 2016 2015 2016 the pinch from increased online competition. The offic is leasin Q2 remainQ3 Q4 Q1 which will women’s apparel giant,Q4The Limited, in 21.2 products giant decided in 2016 to consolidate operation to incre 20 business as an online-only retailer.
by closing 30016.0 more locations across the country. world’s
15 According to a recent report from the National Retail on the a Federation, holiday retail sales numbers for NovemOther national retailers called it quits by the end of the 0year. Sporting goods operators Sport Chalet and Sport improve ber andAuthority December shuttered exceeded expectations with a in 4%2016, as did women’s 2016 2015 2016 2016giant,2016 all their stores apparel The Limited, which will remain the pinc Q2 Q4 Q4 Q3 Q1 year-over-year increase $658 Billion. retailer. business as antoonline-only product
by closin The increase came despite a 7% decline in department According to a recent report from the National Retail Federation, holiday retail sales numbers for November an store sales, but better than expected e-commerce sales offset the falloff. US retail sales picked up late in the year. December’s rise was December exceeded expectations with a 4% year-over-year increase to $658 Billion. retailers it quits byyear, thebodes end well of the .6%, bringing year-over-year growth to 4.1%. That, combined withOther strongernational wage growth in the called final quarter of the for year. S Authority shuttered allbytheir stores 2016, as did women’s overall retail sales in 2017. The vacancy rate was unchanged in Q4 at 4.9%, but it has fallen 50 basis pointsinsince the end of Q1. businessGeneral as an online-only retailer. As reported last quarter, vacancy is sharply higher in secondary submarkets. retail (freestanding, general purpose properties) posted the lowest vacancy of all retail property types at 2.9%, down 10 basis points quarter, followed closely by Power Centers 1 LEE OVERVIEW 2 NATIONAL 4 SIGNIFICANT KEYthe MARKET SNAPSHOTS TRANSACTIONS 3 in OVERVIEW 5 LEE NETWORK lee-associates.com According a recent from the National Retail Federatio at 4.8%, up another 10 basis points in Q4, in part due to more store closures intothe sporting report goods category.
December exceeded expectations with a 4% year-over-year inc
2
2
National Economic Overvi
National Economic Overview The increase came despite a 7% decline in department store sales, bu
offset the falloff. US retail sales picked up late in the year. Decemb growth to 4.1%. That, combined with stronger wage growth in the overall retail sales in 2017.
RETAIL SECTOR STAYS ON COURSE IN Q4
Millions SF
The vacancy rate was unchanged in Q4 at 4.9%, but it has fallen by reported last quarter, vacancy is sharply higher in secondary submar purpose properties) posted the lowest vacancy of all retail propert Shopping Center (neighborhood, community and strip centers combined) rates are still highest at 7.9% despite another 10 basis point the quarter, followed closely by Power Centers at 4.8%, up another 1 decline in Q4. Excess supply in this category remains concentrated in traditional suburban submarkets that have more turnover due store closures in the sporting goods category. Shopping Center (neig to a higher concentration of mom & pop tenants. Urban areas continue to account for a greater share of net absorption as retailers combined) rates are still highest at 7.9% despite another 10 basis p continue to shift their marketing focus onto millennial consumers. This group prefersconcentrated multifamily housing near public transportation, category remains in traditional suburban submarkets hip restaurants, cool bars and entertainment venues over the sprawling “burbs� they were raised in. They are more inclined to rent than c own their homes, prefer Uber to owning their own cars and like theHISTORICAL idea of walking to work, restaurants and entertainment venues. DELIVERIES 1994 - 2016 As a result, mixed use projects near public transportation U tend to have the lowest retail vacancy. Q4 net absorpAverage Delivered SF a Deliveries 300 tion totaled 26.9 million square feet in the final quarter r of 2016, bringing the net gain in occupied space up to f 250 g 137.2 million square feet. The General Retail category p accounted for almost 78 million of that total, followed by 200 c 51 million square feet in the Shopping Center category t and 5 million square feet in Malls. Power Centers posted a 150 T slight decline in occupied space of 110,000 square feet. t 100 These numbers clearly reflect the current trends in retailo ing: department stores closing, big-box retailers reducing 50 w store size and count and the shift to urbanized areas with v the most millennial population growth. The overall aver0 n 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 age asking rate moved up another $.15 to $15.84 per t square foot in Q4.
net absorption totaled million inare the final Over the past four quarters, retail rents across all product typesQ4 and locations moved up by 26.9 just over 3%, square but rentfeet gains morequarter space up to 137.2 million square feet. The General Retail category acc robust in urban locales. Suburban retail centers continue to see weaker growth and higher vacancy. The rate of rent growth suffers as followed by 51 million square feet in the Shopping Center category distance from an urbanized core increases, which reflects the ongoing shift in lifestyle priorities. New deliveries for the quarter totaled Centers posted a slighttodecline in occupied space 110,000 20.8 million square feet, bringing the total of completed inventory in the past four quarters 84.1 million square feet. The of total of all squar current trends in retailing: department stores closing, big-box retaile retail space nationwide stands at 13.1 billion square feet, with another 80 million square feet currently under construction.
shift to urbanized areas with the most millennial population growth
The overall average asking rate moved up another $.15 to $15.84 p
quarters, rents across concentrated all product types locations moved up LOOKING AHEAD The US retail market will keep growing, but thatretail growth will remain in moreand densely
robustprocess. in urban Suburban retailupcenters populated areas that have been or are undergoing the gentrification GDPlocales. and wage growth picked late lastcontinue year and to see wea of rent growth suffers as distance from an urbanized core increases, w that may give retail sales a welcome boost. But, consumer spending and retail sales growth have been uneven and the monthly priorities. rate of job creation has slowed from 229,000 a year ago, to just 180,000. If post-election optimism becomes reality in the form of stronger job growth, retail sales could gain momentum. Amazon recently announced that it would be adding another 100,000 New deliveries for the quarter totaled 20.8 million square feet, brin full time employees to its ranks by 2018. Other large US corporations have also announced new investment in plant and equipthe past four quarters to 84.1 million square feet. The total of all reta ment that will create more jobs.
square feet, with another 80 million square feet currently under con
Imported goods will remain cheap due to the strength of the US dollar, and that will keep the discounters busy expanding their footprints. Central banks around the world have resorted to negative interest rate policies to reduce the risk of a deflationary cycle, but Europe and Asia are showing signs of increasing stability. The US central bank made a move to raise rates In December, but the cost of capital is still relatively low. Further rate hikes are likely and they may impact business expansion later in 2017 and into 2018. Low oil prices, with us for more than two years now, did not produce the boost in retail sales that was hoped for, and oil prices rebounded somewhat in the last half of the year, which may help energy market economies in 2017. Job growth will need to pick back up again to expect further increases in retail sales. For the time being, vacancy, net absorption and rental rates trends 2 NATIONAL OVERVIEW LEE OVERVIEW are unlikely to change significantly. Demand for retail investment lee-associates.com properties continues to run well 1ahead of demand. Cap rates are compressed to record lows, but there is a lot more talk about an investment market that is getting long in the tooth. Through the first nine months of 2016, cap rates for retail investment properties fell another 11 basis points to 7.06%. However, well-located, prime retail properties are trading at cap rates under 5%. Foreign investors will keep giving demand a boost, as they continue to move capital to US markets for safety.
3 KEY MARKET
2 National Economic Overview
SANTA BARBARA SANTA BARBARA 5.00% 4.00%
3.63%
3.92%
3.00% 2.00%
1.17%
0.93%
2.75%
2.49%
2.10%
1.94%
1.00%
4.46%
4.41%
1.28%
1.10%
0.00% Q1 2016Q
2 2016 Retail
SANTA BARBARA SALES PRICE/SF - HIGH $1,866.00 SALES PRICE/SF - AVG RETAIL $772.00 INDUSTRIAL $459.37 OFFICE $570.42 AVG ASKING RENTS (GROSS) RETAIL $4.10 INDUSTRIAL $1.90 OFFICE $2.95 SALES PRICE/UNIT - AVG (MULTI-FAMILY) $311,521.64 LARGEST LEASE (AVAILABLE) 32,000 SF 600 Ward Dr. LARGEST LEASE (LEASED) 27 E COTA ST. - 23,000 SF - OFFICE ASKING RATE (HIGH)15.63 NNN 42 HELENA AVE. - 800 SF - RETAIL ASKING RATE (LOW).95 MG 1 1W CANON PERDIDO - 7306 SF - RETAIL
Q3 2016Q
4 2016
Industrial
Q4
VACANCY RATE
RETAIL
INDUSTRIAL VACANCY RATE
OFFICE VACANCY RATE
2.75%
1.28%
4.46%
3 Key Market Snapshots
SANTA BARBARA MARKET HIGHLIGHTS
Investors of all types have been extremely active in the market. Total commercial sales volume, while not matching the incredible year we saw in 2015, reached almost $300 million in Santa Barbara proper. Mixed-use development activity is on the rise, with several projects underway that include multi-family, office and retail components. The steady influx of new residents is fueling a housing shortage, which is boosting residential development throughout the region. The Kor Group has completed Phase I on the 89-unit luxury apartment complex, The MARC, located near La Cumbre Plaza. The project was designed under the City’s Average Unit Density (AUD) program, which allowed the developer to add more units per acre with fewer parking spaces. This has given the Upper State Street area a boost, reinvigorating nearby shopping centers and attracting national credit tenants. Smart & Final Extra! leased the 35,000 square foot space in Five Points Shopping Center and Blaze Pizza moved into the centers retail pad. Despite the positive signs, landlords are becoming more concerned with an increase in store closings and the depth of new prospects to backfill vacated space. Retail space in heavy tourist areas like the Funk Zone and Waterfront district are still in high demand, whereas the State Street corridor continues to see further vacancies. Vacancy in the downtown core seems to be an issue of changing consumer dynamics rather than the local economy, which continues to improve. While online retailers have weakened the success of brick-and-mortar stores, it has done little to hamper the areas growing success of hospitality, restaurants, and night life. This was visible in the City’s reported transient occupancy tax which was up 4.6% YOY. Overall, retail vacancy increased 26 basis points in Q4 to 2.75%, after slight upticks throughout the year. With industrial property vacancy rate running below 2% in recent quarters, the focus has turned to the redevelopment of the aging industrial stock. Any industrial space offered for sale is in high demand. Landlords who choose not to re-invest in their property have the option of selling to any number of eager owner/users. Much of the industrial inventory has been repurposed for creative office, retail, restaurant and other users. By the end of Q4, the overall office vacancy rate had risen by 5 basis points to 4.46%. Vacancy is up by 83 basis points in the past four quarters, but most of that increase came in Q3. Momentum in activity for large office requirements has slowed, fortunately, smaller users are remaining active. Collaborative work environments are choosing downtown sites to grow their operations. A prime example of this trend is the 11,196 square foot lease to Impact Hub located at 1117 State Street and the 3,240 square foot lease to The Sandbox at 414 Olive Street. Creative co-working sites are in expansion mode, meeting the demands for the smaller office user.
THE MARC. LOCATED NEAR LA CUMBRE PLAZA. THE KOR GROUP HAS COMPLETED PHASE I ON THE 89-UNIT LUXURY APARTMENT COMPLEX. RETAIL SPACE AVAILABLE AS OF 2/1/17.
3 Key Market Snapshots
SAN LUIS OBISPO SAN LUIS OBISPO 6.00% 4.85%
5.00%
3.00%
3.28%
3.28% 2.27%
2.72%
2.00%
4.70%
3.86%
3.71%
4.00%
3.22% 1.80%
1.80%
1.52%
1.00% 0.00%
Q1 2016
Q2 2016
Retail
SAN LUIS OBISPO SALES PRICE/SF - HIGH $907.00 SALES PRICE/SF - AVG RETAIL $344.78 INDUSTRIAL $281.86 OFFICE $345.38 AVG ASKING RENTS (GROSS) RETAIL $2.31 INDUSTRIAL $1.15 OFFICE $1.82 SALES PRICE/UNIT - AVG (MULTI-FAMILY) $255,066.67 LARGEST LEASE (AVAILABLE) 108,000 SF 317 Madonna Rd. (SLO Promenade) LARGEST LEASE (LEASED) 97,949 SF 125 VENTURE DR. 97,949 SF - INDUSTRIAL ASKING RATE (HIGH) 4.50 MG 774 MARSH ST. - 375 SF - OFFICE ASKING RATE (LOW) .70 NNN 733 MARSH ST. - 3557 SF - OFFICE
leecentralcoast.com
Q3 2016
Q4 2016
Industrial
Q4
RETAIL
VACANCY RATE
4.70%
INDUSTRIAL OFFICE VACANCY RATE VACANCY RATE 1.80%
4.85%
3 Key Market Snapshots
SAN LUIS OBISPO MARKET HIGHLIGHTS
Area development is definitely focused on mixed-use projects, with a total of twelve projects underway, adding an estimated 290,000 square feet to the market. Mixed-use developments in the downtown core like Pacific Courtyards, a nine residential unit complex with 10,000 square feet of office space, alongside the Chinatown project on Monterey Street, owned by Atlanta-based real estate investment firm, Jamestown, all offer the live-work-play lifestyle that has become so popular with millennials. The Industrial vacancy rate for warehouse and manufacturing space has been falling steadily, a trend that continued through Q4 to finish the year at 1.80%. Diminishing industrial inventory also has average asking lease rates moving higher.The 19.6 acre undeveloped land parcel on Tank Farm Road, sold for $6.4 million ($7.50 per square foot). The new owners intend to subdivide and sell the parcel into seven lots, capitalizing on a market that has historically been in short supply of development ready land. Lockheed Martin renewed their 97,000 square foot R&D space located at 125 Venture Drive. The original tenant, Aeromech was purchased by Lockheed shortly after their occupancy. Since then, Lockheed utilizes the space for its Unmanned Aerial System technology.
AN ARCHITECTURAL RENDERING SHOWING THE MONTEREY STREET PORTION OF COPELAND PROPERTIES’ CHINATOWN PROJECT. CHINATOWN - LIVE-WORK-PLAY MIXED-USE PROJECT.
Significant new deliveries for 2016 include the stand-alone industrial buildings on Buckley Road totaling 28,000 square feet delivered thus far. Construction has finalized on two of three buildings, alleviating some of the pent up demand. The office sector remains the most active, and that activity is focused on spaces larger than 10,000 square feet. Developers are responding to the shortage of functional space by ramping up construction. The East Airport district dominates growth, with several approved projects now under building review. Various projects on Aerovista Place will bring new deliveries totaling 80,000 square feet of office space to market. TAMI (technology, advertising, media and information) sector companies are among the most active office users, however this trend has meant that high-quality buildings suitable for mid-size companies are hard to come by. The overall retail vacancy rate in Q4 rose 90 basis points, to 4.7%. The sharp increase is due to the 108,000 square foot vacancy in San Luis Obispo Promenade, the former site of Forever 21. Landlords are becoming more concerned with an increase in store closings among chain retailers, and the depth of new prospects to backfill vacated space. The departure of Forever 21 and Sports Authority has heavily impacted the SLO Promenade, while Grocery stores and fitness centers remain in expansion mode. Smart & Final Extra! moved into the market in early Q1 adding two new locations, with Sprouts Market closing out the year by absorbing approximately 30,000 square foot of the former Forever 21 space. In 2016, major area sales were marked by the 95,000 sq. ft. ($144 PSF) Forever 21 space sold at the beginning of the year for 13,650,000 and the $13.3 million sale for a 40,000 SF multi-tenant office building located at 100 Cross Street. The exchange sale for $13.3 million traded at an estimated 6% cap rate. Cap rates remain compressed and demand continues to run well ahead of supply. Cap rates on big box retail buildings may see an uptick as the retail sector adjusts to major shopping trend changes.
19.6-ACRE LAND PARCEL LOCATED AT 265 MEISSNER LN. SOLD FOR $6.4M.
LOCKHEED MARTIN RENEWED THEIR 97,000 SF R&D SPACE LOCATED AT 125 VENTURE DRIVE.
3 Key Market Snapshots
SANTA MARIA SANTA MARIA 8.00% 7.00% 6.00%
6.79%
6.63% 6.34%
6.02%
5.73% 5.40%
5.00%
6.77%
5.91%
5.28%
5.07%
5.24%
4.13%
4.00% Q1 2016
Q2 2016 Retail
SANTA MARIA SALES PRICE/SF - HIGH $468.00 SALES PRICE/SF - AVG RETAIL $195.54 INDUSTRIAL $123.73 OFFICE $146.37 AVG ASKING RENTS (GROSS) RETAIL $1.78 INDUSTRIAL $0.75 OFFICE $1.46 SALES PRICE/UNIT - AVG (MULTI-FAMILY) $163,064.90 LARGEST LEASE (AVAILABLE) 50,000 SF 1351-1447 Fairway Dr. LARGEST LEASE (LEASED) 62,000 SF 2800 INDUSTRIAL PKWY - 62,000 SF - INDUSTRIAL ASKING RATE (HIGH) 2.95 NNN 1839 N BROADWAY- 3500 SF - RETAIL ASKING RATE (LOW) .37 MG 319 N DEPOT ST. - 5000 SF - INDUSTRIAL
leecentralcoast.com
Q3 2016
Q4 2016
Industrial
Q4
VACANCY RATE
RETAIL
INDUSTRIAL VACANCY RATE
OFFICE VACANCY RATE
6.63%
4.13%
6.34%
3 Key Market Snapshots
SANTA MARIA MARKET HIGHLIGHTS
Santa Maria Investment activity remained strong across all sectors, driven by several large portfolio-level transactions. Real Estate Investment firm, Benedict Canyon Equities (BCE), acquired Country Oaks Apartments, a 208-unit multi-family complex, for $37 million or $177,884 per unit. This marks the company’s second acquisition in the area after purchasing the Carmen Apartments, a 128-unit a complex purchased in 2015 for $15 million. Phillips Edison, a Grocery Center REIT, acquired Broadway Pavilion Shopping Center, 142,000 square foot grocery anchored center for $28 million ($128 PSF). Demand from investors for value add opportunities remain strong as Santa Maria continues to attract yield-seeking institutional investors who are looking to capitalize on the area’s upside potential. The Santa Maria retail market remains relatively positive. While the construction of major retail projects will continue to put upward pressure on vacancies, there is growing demand from retail users and investors alike. Rents have spiked in power centers anchored by the area’s most popular discount retailers, while rates in traditional strip centers remain relatively flat. The most significant new development, Santa Maria Ranch, a 500,000 square foot retail project located on a 48 acre site on Betteravia Road, is well underway. The project is under construction and is purportedly 80% preleased with anchor tenants including Costco, Lowes, Dicks Sporting Goods and Home Goods. The center is leading the way with asking rates, commanding premium rents some upwards of $4.00 PSF (NNN). Costco plans on relocating to their new site in early 2017, leaving a sizeable vacancy at their former location on Bradley Road. Power centers are still the focus of national retailers as they continue to expand into well-located developments. Industrial leasing slowed slightly in Q4, but strong demand from tenants and low inventory has left vacancy rates compressed. The Santa Maria Valley has traditionally offered tenants competitively low lease rates compared to that of surrounding sub-markets attracting a host of industrial users, however vacancy declines have average asking rates moving higher. The vacancy rate for industrial space has been falling steadily, and that trend continued in Q4 with another 94 basis point drop to finish the year at 4.13%. The largest leases signed this year include a 50,000 square foot lease on Fairway Drive to Wine Direct, a Direct-To-Consumer wine fulfillment provider, and Cool-pak, a produce packaging supplier, renewing their 62,000 square foot lease at 2800 Industrial Parkway. Istorage PO purchased the 140,000 square foot Self-Storage development on 330 Roemer Way for $21 million, and Santa Maria based Healing Rooms purchased the 48,000 square foot property at 3010 Skyway Drive for $5.2 million or $109 PSF. COOL-PAK RENEWING THEIR 62,000 SQUARE FOOT LEASE AT 2800 INDUSTRIAL PARKWAY.
Santa Maria Ranch - 500,000 SQUARE FOOT RETAIL PROJECT LOCATED ON A 48 ACRE SITE ON BETTERAVIA RD.
3
PASO ROBLES
Key Market Snapshots
RETAIL
INDUSTRIAL VACANCY RATE
OFFICE VACANCY RATE
4.59%
6.63%
2.82%
PASO ROBLES 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%
Q4
VACANCY RATE
8.88%
9.22%
6.63%
3.39% 3.28%
4.61%
4.93%
4.16%
3.47%
4.59% 2.82%
1.95% Q1 2016
Q2 2016Q Retail
3 2016 Industrial
PASO ROBLES SALES PRICE/SF - HIGH $903.00 SALES PRICE/SF - AVG RETAIL $336.35 INDUSTRIAL $134.40 OFFICE $192.67 AVG ASKING RENTS (GROSS) RETAIL $1.41 INDUSTRIAL $0.75 OFFICE $1.79 SALES PRICE/UNIT - AVG (MULTI-FAMILY) $155,035.71 LARGEST LEASE (AVAILABLE) 156,488 SF 1650 RAMADA DR. LARGEST LEASE (LEASED) 1650 RAMADA DR. - 29,267 SF - INDUSTRIAL ASKING RATE (HIGH) 4.63 GROSS 1244 PINE ST. - 97 SF - OFFICE ASKING RATE (LOW) .46 NNN 2005-2305 THEATRE DR. - 12,000 SF - RETAIL
leecentralcoast.com
Q4 2016
PASO ROBLES MARKET HIGHLIGHTS
Located halfway between San Francisco and Los Angeles, Paso Robles is one of California’s fastest growing wine regions, encompassing more than 40,000 vineyard acres and over 200 wineries. The Paso Robles AVA and the greater San Luis Obispo County wine industry have an annual economic impact of $1.9 billion dollars to the regional economy. The area continues to draw new residents, fueling a housing shortage, which is boosting development interest throughout the region. Irvine based developer, MBK Rental Living, purchased a fully entitled 12.5 acre parcel located adjacent to Highway 46, just east of the downtown area for $5.8 million. The 142-unit multi-family project known as Buena Vista Apartments will be the newest development in the area. With a multifamily vacancy rate hovering under 2%, the entitled project is expected to provide a nice boost to the existing housing stock as the market hasn’t seen new multi-family development in over ten years. Industrial vacancy rates spiked mid-year to 9.22% due to the considerable vacancy at 1650 Ramada Drive. The exit of Paris Precision, a Paso Robles based sheet metal fabricator which employed more than 100 workers, vacated their 220,000 square foot facility in Q2. Despite the mid-year increase, the industrial vacancy rate for warehouse and flex space saw a dramatic decline in Q4 to finish the year at 6.63%. The swift drop was due to Century Park LLC’s acquisition of the 220,000 square facility for $15 million.
3 Key Market Snapshots
LOMPOC LOMPOC 12.00% 9.88%
10.00%
8.07%
6.00%
2.00%
RETAIL
INDUSTRIAL VACANCY RATE
OFFICE VACANCY RATE
9.71%
3.68%
4.23%
9.71%
8.00%
4.00%
Q4
VACANCY RATE
4.60% 3.01%
8.23% 4.39%
3.68%
2.27%
2.64%
4.23%
1.52%
0.00% Q1 2016
Q2 2016Q Retail
3 2016
Q4 2016
Industrial
LOMPOC SALES PRICE/SF - HIGH $243.00 SALES PRICE/SF - AVG RETAIL $130.2 INDUSTRIAL $114.25 OFFICE $124.25 AVG ASKING RENTS (GROSS) RETAIL $1.51 INDUSTRIAL $1.00 OFFICE $0.99 SALES PRICE/UNIT - AVG (MULTI-FAMILY) $147,081.05 LARGEST LEASE (AVAILABLE) 62,523 SF 1600 N H Street LARGEST LEASE (LEASED) 700 N H ST. - 15,971 SF - RETAIL ASKING RATE (HIGH) 3.00 NNN 1405 N H ST. - 1,900 SF - RETAIL ASKING RATE (LOW) .65 NNN 1600 N H ST. - 62,523 SF - RETAIL
LOMPOC MARKET HIGHLIGHTS
Industrial vacancy rates actually rose over 200 basis points in Q4 to settle at 3.68%. The exit of Custom Cabinets, Etc., which occupied 20,000 square feet of industrial space, has vacated their west Central Avenue location. The general vacancy rate does not accurately reflect the degree of tightness in the market. Overall, demand for industrial space remains high. Areas like the Wine Ghetto, with its unique collection of wineries, tasting rooms, and production facilities, continues to be a prime target for the local wine industry, absorbing all available space almost immediately. Deliveries in Lompoc remain light, with just over 28,000 square feet of new product added this year. Significant vacancies during the period include the former Fallas Discount Store, a 26,000 square foot space located in the Palm Plaza Shopping Center, and the stagnant 62,000 square foot vacancy at Mission Plaza. The overall retail vacancy rate in Q4 rose to 9.71%, but that is still 17 basis points lower than it was at the beginning of 2016. Lompoc’s general retail category posted one of the highest vacancy rates in the County. The national discounters are still among the most active retailers in the Lompoc area. However, fast-food chains are stepping up activity. In 2016, new retail openings include the 1,900 square foot space to The Habit Burger alongside Chipotle Mexican Grill at 1413 N H Street, with Blaze Pizza joining the market at 1405 North H Street.
3 Key Market Snapshots
WINE COUNTRY
The wine industry showed improved growth in 2016, particularly in the premium wine market, dominating sales and accountable for nearly all the growth in the trade. Existing Wineries focused on brand expansion and acquisitions, as established wineries sought out land for vineyard development. Institutional players also expressed interest in vineyard holdings as a play to diversify their portfolio. As predicted, average land prices continued to see sustained growth as large to mid-sized wine companies focused on acquiring land that can produce premium quality wine. Mergers & Acquisitions (M&A) remained active throughout the year, with several notable sales seen along the Central Coast. San Francisco based real estate investment firm, Jay Paul Company, purchased 1,134 acres located in the easternmost part of the Santa Ynez Valley for $26 million. In mid-August, Sea Smoke purchased the 201-acre State-of-the-Art, high density Rita’s Crown Vineyard for $3,290,000. The cool-climate site located in the Santa Rita Hills AVA is best suited for its production of world-class Pinot Noir and Chardonnay. Following suit was the sale of Robert Hall Winery purchased by California bulk wine producer, O’Neill Vintners & Distillers. The $16 million sale included the 160-acre vineyard, hospitality center and existing inventory exceeding 60,000 cases per year. Escalating municipal regulations continued to be controversial, particularly true in Santa Barbara County, where a proposed ordinance would further restrict the small wineries ability to sell direct. In late 2016, Santa Barbara County Supervisors rejected a proposed ordinance, which included updates to the county’s permitting process for winery tasting rooms, the number of daily visitors allowed, and special events rules. The outcome was met with mixed emotions as Santa Barbara County continues to demonstrate a highly restrictive regulatory climate making it difficult for small wineries to operate. Overall, California harvest came in at 3.9 million tons, slightly higher than the historical average. Area growers reported a slightly larger than normal yield with excellent harvest quality. As in previous years, 2012, 2013 and 2014, California’s drought brought healthy growing conditions, producing quality crops. While the bottle pricing in the $11 to $14.99 sector reflects the greatest overall growth, it’s the red blends in $8 to $10.99 bracket that are triggering a healthy appetite among the cost-conscious millennials**. Varietals topping the sales include Cabernet, red blends and Pinot Noir with Merlot, Syrah, Riesling and Zinfandel falling short.
65%
CENTRAL COAST
17.3%
Sources & Credits *Predictions based on SVN State of the Wine Industry Report **Techonomic data suggest that growth in the lower price tier is driven by frugal-minded millennials. - SVN Wine Industry Report USDA National Agriculture Statistics Service
leecentralcoast.com
3 Key Market Snapshots
Looking ahead, the Central Coast region, including Santa Barbara and San Luis Obispo counties, will remain a primary target for vineyard development. With diminishing land suitable for premium wine production, land will be the principal demand causing upward pressure on values.
2017 OUTLOOK: • Sales growth range of 10 to 14 percent for premium wine, up from 9 to 13 percent in 2016.* • Federal, State and Local regulations will bring continued challenges to the trade. • Demand for land will drive land prices higher.
SVN State of the Wine Industry Report
“
2016 WAS AGAIN EXCELLENT ACROSS ALL WEST COAST REGIONS. THE U.S. WINE BUSINESS IS REALLY ON A HOT STREAK IN PRODUCING GREAT VINTAGES.
”
4 Significant Transactions
NOTABLE SALES Q4
NOTABLE LEASES Q4
ROEMER WAY SANTA MARIA
6300 LINDMAR DR. GOLETA
Property: Industrial Size: 140,000 SF Sale Price: $21,240,000 Sale Price/SF: $151.71 Sale Date: 10/2016
Tenant: Pacific Design Technologies
Property: Industrial Size: 38,000 SF Lease Date: 11/2016
1
2100 BROADWAY SANTA MARIA
325 MADONNA RD. SAN LUIS OBISPO
Property: Hospitality Size: 191,644 SF Sale Price: $19,232,000 Sale Price/SF: $97.13 Sale Date: 11/2016
Tenant: Sprouts Market Property: Retail Size: 30,816 SF Lease Date: 11/2016
2
1650 RAMADA DR. PASO ROBLES
1650 RAMADA DR., STE 7 PASO ROBLES
Property: Industrial Size: 220,000 SF Sale Price: $15,750,000 Sale Price/SF: $71.59 Sale Date: 12/2016
Property: Industrial Size: 29,267 SF Lease Date: 12/2016
3 1650 RAMADA DR., STE 1 PASO ROBLES
Property: Office Size: 156,590 SF Sale Price: $13,300,000 Sale Price/SF: $327.70 Sale Date: 12/2016
Property: Industrial Size: 26,827 SF Lease Date: 12/2016
NUMBER OF SALES 92 SALES VOLUME ±$287M
2 3
100 CROSS ST. SAN LUIS OBISPO
SANTA BARBARA
1
4
4
Q4 SAN LUIS OBISPO
LOMPOC
NUMBER OF SALES 46 SALES VOLUME ± $93
NUMBER OF SALES 23 SALES VOLUME ±$27M
SANTA MARIA
PASO ROBLES
NUMBER OF SALES 47 SALES VOLUME ±$176M
NUMBER OF SALES 28 SALES VOLUME ±$71M
4 Significant Transactions
NOTABLE SALES 2016
NOTABLE LEASES 2016
1
125 VENTURE DR. SAN LUIS OBISPO
Property: Retail 5182 HOLLISTER AVE. GOLETA Size: 116,000 SF Sale Price: $39,200,000 Sale Price/SF: $337.93 Sale Date: 03/2016
1000 CASITAS PASS CARPINTERIA Size: 97,407 SF Sale Price: $24,900,000 Sale Price/SF: $255.63 Sale Date: 03/2016
333 E. ENOS DR. SANTA MARIA Property: Multi-Family Size: 156,590 SF Sale Price: $37,000,000 Sale Price/SF: $236.29 Sale Date: 08/2016
2
2
1351-1447 FAIRWAY DR. SANTA MARIA Tenant: WineDirect Property: Industrial Size: 50,000 SF Lease Date: 09/2016
3
3
6300 LINDMAR DR. GOLETA
POSITANO APTS. SANTA BARBARA Property: Multi-Family Units #: 118 Sale Price: $22,640,000 Price per Unit: $191,644 Sale Date: 10/2016
1
2800 INDUSTRIAL PKY. SANTA MARIA Tenant: Cool-Pak, LLC Property: Industrial Size: 62,000 SF Lease Date: 06/2016
2528-2530 S. BROADWAY SANTA MARIA Property: Retail Size: 144,000 SF Sale Price: $28,600,000 Sale Price/SF: $198.61 Sale Date: 08/2016
Tenant: Lockheed Martin Corp Property: Industrial Size: 97,949 SF Lease Date: 03/2016
Tenant: Pacific Design Technologies Property: Industrial Size: 38,000 SF Lease Date: 11/2016
4
4
SANTA BARBARA
SAN LUIS OBISPO
LOMPOC
NUMBER OF LEASES 188 SF LEASED 442,068
NUMBER OF LEASES 97 SF LEASED 381,515
NUMBER OF LEASES 9 SF LEASED 29,191
SANTA MARIA
PASO ROBLES
NUMBER OF LEASES 28 SF LEASED 263,555
NUMBER OF LEASES 38 SF LEASED 94,795
5 Lee Offices
THE LEE & ASSOCIATES CENTRAL COAST TEAM PRINCIPAL TEAM
STEVE LEIDER
CLARICE CLARKE
MARTY INDVIK
BROKER TEAM
ALLEN SEGAL
ANTHONY KUHNS
TOM DAVIDSON
ROB ADAMS
CHRISTI VIOR
NATALIE V. WAGNER
JEFF ALLEN
PAUL DAVIES
OFFICE SUPPORT TEAM
SHARIF ELSEIFY Research Analyst
KAREN HELTON Administrative Director
ANA STORK Marketing Manager
5 Nationwide Lee Offices
Arizona Fred Darche 602.956.7777 Phoenix, AZ 85018
New Jersey Rick Marchiso 973.475.7055 Elmwood Park, NJ 07407
California Clarice Clarke 805.898.4362 Santa Barbara, CA 93101 (Central Coast) Brian Ward 760.346.2521 Palm Desert, CA 92260 (Greater Palm Springs) John Hall 949.727.1200 Irvine, CA 92618 Mike Tingus 818.223.4380 LA North/Ventura, CA 91302 Craig Phillips 323.720.8484 Commerce, CA 90040 (LA Central) Robert Leveen 213.623.1305 Los Angeles, CA 90071 (LA ISG) Greg Gill 562.354.2500 Long Beach, CA 90815 (Los Angeles) Aleks Trifunovic 310.899.2700 Santa Monica, CA 90404 (LA West) Steve Jehorek 949.724.1000 Newport Beach, CA 92660 Craig Phillips 562.699.7500 City Of Industry, CA 91746 Craig Hagglund 510.903.7611 Oakland, CA 94607
New York Jim Wacht 212.776.1202 New York, NY 10022
California (cont’d) Craig Phillips 323.720.8484 Pasadena, CA 91101
Georgia Dick Bryant 404.442.2810 Atlanta, GA 30326
Mike Furay 925.737.4140 Pleasanton, CA 94588
Victor Segrest 404.781.2140 Atlanta, GA 30328 (Appraisal)
Dave Illsley 951.276.3626 Riverside, CA 92507
Idaho Matt Mahoney 208.343.2300 Boise, ID 83703
Dave Howard 760.929.9700 Carlsbad, CA 92008 (San Diego North)
Illinois James Planey 773.355.3014 Rosemont, IL 60018 (Chicago)
Steve Malley 858.642.2354 San Diego, CA 92121 (San Diego UTC)
Indiana Scot Courtney 317.218.1038 Indianapolis, IN 46240
Tom Davis 209.983.1111 Stockton, CA 95206
Maryland J. Allan Riorda 443.741.4040 Columbia, MD 21046
Dave Illsley 951.276.3626 Murrieta, CA 92562 (Temecula Valley)
Michigan Jon Savoy 248.351.3500 Southfield, MI 48034
Don Brown 760.241.5211 Victorville, CA 92392
Minnesota Chris Garcia 952.955.4400 Minneapolis, MN 55401
Denver John Bitzer 303.296.8770 Denver, CO 80202
Don Kazanjian 909.989.7771 Ontario, CA 91764
Florida Jerry Messonnier 239.210.7610 Ft. Myers, FL 33966 (Naples)
Bob Sattler 714.564.7166 Orange, CA 92865
Tom McFadden 321.281.8501 Orlando, FL 32839
lee-associates.com
Ohio Brad Coven 216.282.0101 Pepper Pike, OH 44124 (Cleveland)
1 LEE OVERVIEW
2 NATIONAL OVERVIEW
Missouri Thomas Homco 314.400.4003 St. Louis, MO 63114 Nevada Lyle Chamberlain 775.851.5300 Reno, NV 89501 3 KEY MARKET SNAPSHOTS
Tim Kelton 614.923.3300 Dublin, OH 43017 (Columbus) Pennsylvania John Van Buskirk 717.695.3840 Camp Hill, PA 17011 South Carolina Bob Nuttall 843.747.1200 Charleston, SC 29492 Randall Bentley 864.704.1040 Greenville, SC 29601 Texas Trey Fricke 972.934.4000 Addison, TX 75001 (Dallas/Fort Worth) Chris Lewis 713.660.1160 Houston, TX 77027 Wisconsin Todd Waller 608.327.4000 Madison, WI 53713 Canada Chris Anderson 604.684.7117 Vancouver, British Columbia Gerald Eve James Southey +44 (0) 20 7333 6226 www.geraldeve.com
*Please contact individual managers for information in specific markets. 4 SIGNIFICANT TRANSACTIONS
5 LEE NETWORK
The Lee Central Coast Brief
Q4 leecentralcoast.com
2016
The information and details contained herein have been obtained from third-party sources believed to be reliable; however, Lee & Associates has not independently verified its accuracy. Lee & Associates makes no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of the information and details provided herein, including but not limited to the implied warranty of suitability and fitness for a particular purpose. Interested parties should perform their own due diligence regarding the accuracy of the information. The information provided herein, including any sale or lease terms, is being provided subject to errors, omissions, changes of price or conditions, prior sale or lease, and withdrawal without notice. Third-party data sources: CoStar Group, Inc., The Economist, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Congressional Budget Office, European Central Bank, GlobeSt.com, SVN State of the Wine Industry Report, California Agricultural Statistics Service Grape Acre age report; The Correia Company, CoStar Property and Lee Proprietary Data, Paso Robles City Alliance. Š Copyright 2017 Lee & Associates all rights reserved.