Commercial property developers in California may now be thinking twice before starting projects that would have been carried out without hesitation a few years ago. Potentially huge changes on the horizon, including tax reform and inflation, are uncertain and likely to have serious implications in the debt-heavy world of commercial real estate financing. A look at the market in New York offers insights into why some investors are moving ahead despite the uncertainty and others are choosing to forego profits and play it safe.
There are several reasons why real estate investors in California and around the country may be drawn to commercial rather than residential properties, and this may be especially true when they are landlords. Residential renters often complain belligerently about relatively minor issues, and they may ask their landlords to intervene when they become embroiled in petty disputes with their neighbors. However, commercial tenants rarely bother their landlords unless the situation is pressing and their options are limited.
California commercial real estate investors and developers might be aware that interest rates are rising and expected go up twice more before the end of 2017. This could create a slowdown in the sector because borrowing money will become more costly. On the other hand, the higher interest rates means a stronger economy, and this could be good for commercial real estate. Overall, property prices are expected to decrease as cap rates rise.
The demand for office space has leveled off in most California markets, and vacant stores are a familiar sight in many parts of the state. While rents may be flat across the Golden State as a whole, they have risen by 25 percent in Pasadena over the last 12 months according to real estate brokers. Industry experts say that the demand for space is being fueled by Asian investment, and reports indicate that land in the city is being snapped up by developers sensing an opportunity.
According to the recently released America's Investor Intentions Survey 2017, investor confidence in the commercial real estate market in California and the rest of the United States is slightly more positive than it was in 2016. This comes in spite of the expectation of an interest rate increase. Some attribute the positive sentiment to an increase in economic growth and the reduction of regulation.
According to a Wall Street Journal report, commercial real estate deal volume dropped 11 percent in 2016. For investors in California or elsewhere, it may be a signal to start looking for other places to put their money. One reason why this may be a good idea is because of the new supply coming online now and in the near future. Extra inventory may place pressure on both vacancy rates and lease rates.
California investors who are interested in commercial real estate may benefit from learning how the technology industry is affecting the segment. The manner in which professionals in the industry conduct their business depends significantly on the advancements made in technology.
Commercial real estate markets in California and around the country will provide investors with steady returns in 2017 according to the National Association of Realtors. Some industry experts feel that the current market cycle is nearing its peak, but the real estate trade association does not foresee any major setbacks in the year ahead. The group says that smaller markets were particularly active in late 2016, which compensated for falling prices in some of the nation's larger cities.
While California boasts a prosperous economy, several states in the Southeastern part of the country have also been experiencing strong growth, largely due to the area's industrial expansion and its rapid employment and population increases. As an economic powerhouse, the region has had a growth rate that, if it were a country, could surpass the top five largest countries in the world.
In February 2016, the price of oil reached a 12-year low of $26 per barrel. About a year later, the prices at the oil pump dropped to a low of $2.05. California investors and developers may be interested to know how falling oil prices have affected the commercial real estate market.