California residents who enter into commercial real estate deals should understand that they have different terms compared to residential transactions. For instance, individuals may see a term called usable square footage (USF). The USF number lets them know how much space they can use to meet clients or produce goods. Examples of unusable space include hallways or exits.
Commercial real estate investors in California and around the country should not expect returns in 2018 to be as robust as they have been in recent years according to a report from the Mortgage Bankers Association released on June 12. The trade group believes that the combined effects of a multi-year building boom, slowing economic growth and rising interest rates will likely impact returns for the next five years. The MBA says that commercial property returns in recent years were boosted by supply shortages that have now been addressed.
Higher interest rates and increased volatility in the stock market may signal the beginning of the end to the current bull run. Therefore, some analysts suggest that California entrepreneurs should reduce exposure to stocks and put their money into other investment classes. One potential investment alternative is the commercial real estate debt and equities markets within the United States. Doing so could provide stable returns while providing income at the same time.
California commercial real estate investors and owners might be interested in learning that Los Angeles has again made a strong showing in the commercial real estate market. For the third year in a row, L.A. has been ranked as the most attractive commercial real estate market in the U.S. and the Western Hemisphere.
According to Collier International, 2017 was the peak for the U.S. commercial real estate market. However, it is likely that growth will continue into 2018 and beyond. California residents and others who are investing in commercial properties may be able to earn a positive return on their capital. Over the past 20 years, the average return has been 10.1 percent per year. However, it is thought that the average return will be about 6 percent in 2018 and 2019.
In 1978, California voters passed a ballot measure that caps property taxes at 1 percent of the property's original purchase price and limits increases to 2 percent per year. Proposition 13 applies to both residential and commercial properties, but a new ballot initiative would change the state's constitution to tax industrial properties, commercial real estate and land that will not be used for residential development based on their current market values.
California residents or others who own commercial real estate may get a tax break under the proposed GOP tax bill. Those who hold property in pass-through entities may receive a 20 percent tax reduction if they make less than $157,500 per year. If a couple files jointly, that limit is increased to $315,000. There are also provisions to help private firms with large holdings that may make too much to qualify for the deduction.
Stakeholders in the California commercial real estate market might be interested in learning that Orange County has enjoyed the highest national growth in office rentals over the last two years. Much of the growth in office rentals has resulted from the drive of tech companies to find spaces in submarkets.
Commercial real estate investors in California and around the country can expect returns to remain steady in the months ahead, according to a recent report from NAI Global. The brokerage firm made the prediction after studying industrial, office and retail vacancy rates and rents in 21 key markets. Based on the report, vacancy rates are already at or near 10- or 20-year lows. The resulting shortage of space has pushed rents higher in most parts of the country.
For commercial real estate investors in California who are considering properties to buy, due diligence is an important part of the process. It allows prospective buyers to make sure that that the property in question will be a wise investment for them.