It certainly is turning out to be an interesting year. The ground under us seems to be shifting every day and what counts as a good opportunity is becoming a moving target. After seeing all the Q2 Voit Market Reports for LA, Mid-Counties, the Inland Empire, and Orange County, it is clear that the change in market psychology has not yet manifested in the metrics. Though we may see substantive change in measured market activity in the final two quarters. There is just no way around the fact that money has become far more expensive and inflation is eating away at the profitability of businesses around the Southland.
Anecdotal feedback points to a softening of the industrial owner/user market, longer time-on-market for new listings, and reduced competition for industrial product offered for lease. We may finally be at an industrial market peak or at least looking at a break in the current trajectory, given rising economic and C- suite uncertainty levels.
On the office side, we may be in for a protracted soft period, as office-using businesses are still struggling with how they will deploy their workforces in the future. Asking lease rates may potentially remain flat at best, but concessions might increase through the next couple of quarters, and we could see more companies reducing the size of their physical locations. Class A will continues to struggle, while low-rise Class B will fare better.
Institutional buyers have already tapped the brakes. We’re hearing about more re-trades on the investment side and declining interest in development opportunities, as the rising cost of capital is pinching Pro-forma returns and lenders are tightening up on underwriting. However, the big players are still active enough to keep supply from accumulating, at least for the time being, and leasing activity is still strong enough to move space in a reasonable time frame, if not overnight as it has been for a long time.
Hopefully, more property owners, who are sitting on unrealized equity, will see the writing on the wall and become sellers even if they have to realize their gains and pay their taxes. Thus far, most everyone who would otherwise sell has been hanging on and may find themselves on the wrong side of the bet if they hang on too long. But, we could have a lot more product on the market, and quality space would still be scarce. Sellers who are contemplating a move sometime in the next few years should get out as fast as possible because if borrowing costs keep moving higher, cap rates will have to go up and owner/user prices will have to fall to compensate for added interest expense.
Fortunately, Voit is poised for continued success. Throughout this uncertain time, we aim to foster our client relationships and help guide our clients to success. Reach out to a broker if you’re wondering what to do next.