While the commercial property market in California and around the country has performed well overall in recent years, the retail sector continues to struggle to cope with the nation's evolving shopping habits. The popularity of online operations like Amazon has prompted several prominent brick-and-mortar retailers to file for bankruptcy over the last few years, and abandoned malls and deserted big-box stores are becoming familiar sights on the American landscape. However, the consumer shift toward online buying has created a new and thriving commercial property segment in certain strategically placed communities.
California commercial real estate developers have likely heard about a looming tranche of commercial mortgage-backed securities that must be paid off or refinanced in 2017. About $2.4 billion of these loans became delinquent in June, and experts believe that this may have prompted the delinquency rate on secured commercial property loans to surge by 28 basis points to 5.75 percent. The increase marks the biggest increase in five years on a month-over-month basis. The delinquency rate stood at 4.6 percent at the end of June 2016.
California residents who own residential property may be interested in accommodating a growing tenant market. An app launching in the fall of 2017 is planning on pairing up young people, like millennials and college students, with older homeowners. In addition to helping the owners find new tenants to fill their available rooms, the app is combating rising home prices that are excluding many younger individuals from ownership.
Commercial property values have climbed steadily in recent years, and developers in California cities like Los Angeles and San Francisco have enjoyed particularly healthy returns. However, investors tend to become anxious after several years of sustained growth, and this uncertainty may soon begin to influence prices according to industry experts. More than half of the respondents to Knight, Dorin & Rountrey's 2016 market survey said that they were optimistic, but less than a third feel that way now according to the Virginia-based appraisal and consulting firm.
California residents may be aware that the U.S. Federal Reserve announced the latest in a series of interest rate increases on June 14, and the nation's central bank has braced markets for further rate hikes in late 2017 and 2018. Higher interest rates allow the economy to continue to grow while reining in inflation, but they also have an impact on lending. While most experts agree that banks should be active, many of them have raised concerns about a possible asset bubble developing in the commercial real estate sector.
Filing predatory lawsuits over alleged violations of the Americans with Disabilities Act has become so prevalent that the weekly news show '60 Minutes" recently ran a segment on the practice, and more of this litigation is filed in California than in any other state. One reason for the disproportionate amount of serial litigation in the Golden State is a law that increases the amount that plaintiffs can recover in ADA lawsuits from the $1,000 per violation allowed by the 1990 statute to $4,000. The defendants in ADA cases in California are also required to cover the legal costs of both sides.
Lawmakers in California introduced reforms in 2016 that were designed to reduce the number of predatory lawsuits filed against business owners for violations of the 1990 Americans with Disabilities Act, but the data suggests that more needs to be done. The disability litigation problem is an especially thorny one in California due to the state's Unruh Civil Rights Act. The federal penalty for ADA violations is $1,000, but this rises to $4,000 in the Golden State. Defendants must also pay the plaintiffs' legal fees in these cases under the Unruh Civil Rights Act.
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.