Colliers Forecasts Strong Performance for Commercial Real Estate but Climate Remains Unpredictable

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By Jacob Bourne

On February 7, Jeff Fredericks, executive managing director at Colliers International, hosted the firm’s eighteenth commercial real estate forecast conference, Trends2017, at San Jose’s California Theatre. The featured topics extended beyond the anticipated overview of real estate market trends for Silicon Valley and the San Francisco Peninsula. Guest presenters, Gregory Valliere, chief global strategist at Horizon Investments, and Christopher Thornberg, founding partner of Beacon Economics, LLC, also explored the opaque territory of the nation’s current political climate and what may be ahead both locally and globally. Discussion was moderated by Matthew Mahood, president & CEO of The Silicon Valley Organization.

“After the biggest year on record back in 2015, we sort of had nowhere to go in 2016 but down, and that’s the direction we went — but 2015 had spoiled us,” Fredericks said.

Considering Fredericks’ perspective, commercial real estate markets in Silicon Valley and the Peninsula remain healthy with a reasonable expectation of favorable near-term performance. In the Valley, prices rose for both commercial and residential properties with job growth helping things along. Demand for office space is expected to be high in 2017 though R&D will slow down due to evolving expectations on the part of tech companies for more collaborative and transit-oriented spaces. This quarter is marked by more than three times more un-leased office space in Silicon Valley compared to Q1 2016, which could either be a foreshadowing of many transactions ahead or an indicator of overbuilding. On the industrial end, availability is still at a historically low rate with few transactions because of inadequate inventory. Colliers’ research team predicts industrial rental rates to be on an upward trajectory of about five to ten percent in 2017. Demand for warehouse space will remain steady following a strong 2016, especially in Fremont, which experienced new construction met by high occupancy. In the retail sector, brick and mortar spaces are expected to perform well as a fusion is trending between companies’ cyber presence and smaller physical floor plans.

In San Mateo County a stellar job market boasting a 2.8-percent unemployment rate and a remarkably high participation rate has paralleled constant real estate activity. Across the Peninsula, the year began with low vacancy rates, rising absorption and rents, with an abundance of projects in the pipeline, especially for office product. The present quarter shows overall vacancy at 4.06 percent, down from 4.11 percent in Q4 2016. The northern end the County is especially hot with booming biotech driving R&D vacancies down to 1.96 percent. In terms of transactions, the year is off to a vigorous start with 29 deals so far for R&D product.

The promising prognosis however, may be dimmed by other concerning factors including the Bay Area’s seemingly intractable housing crisis and the reality that the local economy is heavily influenced by global economic conditions and national politics. While last year’s global economy experienced the slowest growth rate since 2009 in part due to natural disasters and events contributing to increased geopolitical risk, in terms of the relative prosperity in the U.S., Thornberg described a devolution of our national discourse into one of unwarranted pessimism, spearheaded by certain media outlets, elected politicians and Wall Street.

“The reality is that things ain’t that bad,” stated Thornberg. “For me the scariest thing of all is the increasing disconnect between economic realities and political conversation. I have never in my years seen Congress so unattached to the truth.” As one of the illustrations, he cited California, the nation’s largest state economy as having a higher unemployment rate than Wisconsin, which was recently touted on the Presidential campaign trail as suffering in the modern labor market.

Valliere raised concerns about political priorities, saying that with the deficit as a percentage of GDP on the upswing, coupled with aging demographics who will have to manage unknown territories regarding social security and medicare, President Trump appears to be disinterested in the issue. He’s also wary about the administration’s fixation with Iran as potentially leading to unnecessary conflict, which would impact economic conditions. Depending on the outcome of policy making around trade and immigration, the Bay Area’s status as the world’s leader in technology and innovation could be affected, but Mahood asserted that the Region faces more immediate hurdles.

“Here’s the challenge that we face: it’s our cost of living and our cost of housing,” said Mahood. “Renters are paying 41-percent of their income on rent. If you’re a homeowner you’re paying nearly four times, at least three times the national average, to live in a house — with a downpayment that you make here in Silicon Valley you can buy a home in most places across the country.”

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