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Expected 2018 commercial real estate trends

Developers, investors and buyers who are involved in the commercial real estate market in California might want to be aware of the trends that are expected during 2018. It is important to understand where the market might be headed in order to reap the most profits and negotiate the best deals.

According to the chief economist at Jones Lang LaSalle Inc., people should take the hype for and against tax reform with a grain of salt. While tax cuts might lead to a short-term boost in the economy, the drag that increased deficits cause is likely to prevent any meaningful long-term growth. The economist recommends that prospective business tenants might want to look at spaces that are located in the suburbs as opposed to the city centers for better deals.

Commercial real estate's hesitance to embrace technology

The availability of data analytics technology has the potential to transform the commercial real estate industry in California, but the industry has been famously slow to adopt it. Many CRE firms still rely on old methods of data-gathering and are reticent to share the information with others.

Some of the hesitance to embrace modern technology within the CRE industry likely stems from the past experiences that the firms have had. In the past, firms would give their data to companies such as CoStar and then be forced to pay money in order to access it.

Spirit Halloween grows and retail shrinks

California residents may be seeing a Spirit Halloween store in their local malls in the near future. The chain operates mostly online throughout the year, having a physical presence only two months out of 12. Stores such as Spirit Halloween appeal to malls or other retail landlords with vacant space because national chains may take months to sign leases. Therefore, companies like these can fill space and create revenue in the interim.

In 2017, Spirit Halloween will have 1,300 locations throughout the United States and Canada. It has added as many as 100 locations annually since 2002. In addition to malls, the company signs leases in open-air venues and wherever else space may be available for the right price. In recent years, traditional retailers have either closed locations or have gone out of business for good. This has made landlords more open to the idea of pop-up shops.

NAR economist expects commercial real estate prices to plateau

Commercial real estate investors in California might find good opportunities beyond big cities. The chief economist from the National Association of Realtors said that investors have curtailed their activities around Class A assets. Smaller markets, however, have been presenting buyers with chances to buy properties with the potential for stable and consistent profits.

Overall, the market for commercial properties across the country looked promising, the economist said. Vacancy rates should continue to decline because of economic growth. The forecast from the association predicts that the vacancy rate will go down to 11.9 percent during the year. This represents a decline of 1.1 percent across all sectors. Among industrial properties, available units stood at only 7.8 percent, and retail units should edge down 0.4 percent to an 11.4 percent vacancy rate. Multifamily housing will continue to fill up as vacancies decline by 0.5 percent to 6.1 percent of total units.

The importance of due diligence in commercial real estate

Before proceeding with the purchase of commercial real estate, California buyers should complete due diligence on the property to make certain that it is what has been represented to them and that it is worth the asking price. Conducting due diligence may take weeks or months. Sellers often want to negotiate shorter periods so that they can complete the transactions faster.

Buyers will need enough time to review the property's zoning and compliance, structural integrity, conduct title research and inspect the books. They will want to find out if the amount of money that the seller claims comes in every month really does. Finding out the actual occupancy and vacancy rates is also important to make certain that the property will provide the desired cash flow.

Commercial real estate investors see values at their peak

The value of commercial real estate varies greatly throughout California, and investors appear to be growing cautious according to the NREI/Marcus & Millichap Investor Sentiment Survey for the third quarter of 2017. A majority of respondents, 71 percent, believed that the price cycle for commercial properties had reached a peak.

Despite concerns that property values have crested, 49 percent of those surveyed possessed confidence that construction levels would increase. They believed that the Trump administration would have a positive effect. Confidence, however, has declined since the fourth quarter of 2016 when 56 percent of surveyed investors expected more construction.

The 2028 Olympics and commercial real estate

With the 2028 Olympics coming to Los Angeles, the city is poised to increase its rank among world cities. Global cities are those cities that lead the way economically and culturally. Business and innovation boom in these centers. Already, Los Angeles has a thriving real estate market, and this will only increase the health of it.

As cities climb the ranks among global centers, businesses are more likely to invest and locate their hubs in those places. More people move to the cities because there are more jobs. Hosting the Olympics also means money coming into the city in the form of overseas contracts, sales, licensing, broadcast rights and tourism.

Dollar threshold for appraisal requirement may increase

Banks in California may not be required to obtain a certified appraisal to approve loans for commercial properties valued at or under $400,000 if a new rule is approved. Currently, financial institutions that provide loans must have a certified appraisal for properties valued at more than $250,000. This increase could make it easier for commercial real estate buyers to be approved for loans. Federal banking agencies came together to propose the rule change since it would alleviate some of the regulatory burden placed on them under the current rule.

In 1989, banks became legally obligated to standardize their rules for appraisal internally. In 1992, an amendment to the law allowed federal banking agencies to set a dollar amount as the value at or above which properties must be evaluated by a professional appraiser in order to approve a loan. Two years later, federal banking agencies chose $250,000 as the minimum value. If the proposal goes through in 2017, the new minimum value for a property that would require a certified appraisal to be approved for a loan will be $400,000.

Uncertainty may be cooling the CRE market

Economic and political uncertainties are continuing to suppress commercial real estate values in California and around the country according to a growing number of industry experts. Commercial property prices dropped by 0.3 percent in June, and falls were observed in all five core property segments. The decline marks the second consecutive month that values on the online real estate company Ten-X's pricing index have fallen. However, commercial property prices remain near record highs and have more than doubled since 2010 according to Real Capital Analytics.

Industry analysts say that investors seeking solid and secure returns are turning to alternative assets like medical facilities and student housing, and projects in smaller markets such as Nashville and Atlanta are also gaining in popularity. Secondary and tertiary cities have been overlooked in recent years as developers focused their energies on major gateway markets, and this has sometimes led to severe supply shortages and fierce demand for space. However, many investors are still reluctant to act because of continuing doubts about the economy and the political climate in the nation's capital.

Performing due diligence before buying commercial property

Prospective purchasers of California commercial real estate most likely do not look forward to performing due diligence, but they make the effort because they know that taking shortcuts in this area can cast a long shadow. Poring over documents may not provide much in the way of excitement, but the information this kind of research can yield about the legal, financial and physical condition of a property could be crucial.

The information uncovered during due diligence can protect commercial property sellers as well as buyers. While the process provides buyers with what they need to make more prudent decisions, sellers are less likely to be sued over undisclosed defects or misrepresentation. The due diligence process generally begins in earnest when an initial offer is made, and buyers often have 30 days or less to gather the required financial and legal documents and have the property physically inspected.

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