The major markets on the West Coast have held up relatively well, for the most part, but some have fared better than others. One of the stronger economies in the region is San Francisco, driven by healthy employment growth in the technology and professional and business services sectors. Moody's Analytics forecast the city's economy would continue on its upward trajectory with employment expanding 2% in 2012 followed by growth accelerating in the mid-3% range through 2014 and 2015.
That bodes well for the office market, says Caroline Green, director of research for Northern California and the Pacific Northwest at Cushman & Wakefield. "Leasing activity, coupled with a lack of space returned to the market, resulted in overall net absorption reaching positive 2.3 million square feet, after three years of negative overall net absorption," she explains.
With employment growth expected to remain healthy through the next few years, C&W's forecast calls for market conditions to tighten further, exerting upward pressure on rental rates. The firm also expects the overall vacancy rate to fall into the single digits by 2014. "Class A rent growth is forecast to climb more than 30% during this period, surpassing the $50-per-square-foot mark by 2014," says Green. "Given strong market fundamentals, coupled with a positive outlook, especially relative to other markets across the country, investment is expected to remain healthy with institutional buyers competing aggressively for properties pushing down cap rates."
A recent Northern California report from Cassidy Turley says that for 2012, the San Francisco office market will record a total occupancy growth in the neighborhood of 1.6 to 1.7 million square feet. Based upon those growth numbers, the firm believes vacancy levels should fall to approximately 10.2% by the end of next year. By the end of 2012, Cassidy Turley expects office asking rents to average around $3.43 per square foot. Asking rents are currently averaging $3.03 per square foot.
On the retail side, according to Marcus & Millichap's Jeffrey Mishkin, a first VP and regional manager of the San Francisco office, storefronts citywide stand to benefit from the area's "vigorous tech revival," which "will generate strong tenant demand for the short supply of empty urban suites and push vacancy below prerecession levels." He adds, "In-city leasing activity in 2012 will build on last year's surge as both domestic and international retailers expand their local presence."
Similarly, in Seattle, expansion in Puget Sound's tech industry and retailers' growing preference for urban storefronts will elevate leasing activity Downtown, says Justin White, a VP of the Pacific Northwest at Marcus & Millichap. "The creation of thousands of tech jobs by Seattle firms—most notably Amazon—improved store traffic and earnings for Downtown retailers, stabilizing existing operations and attracting new tenants over the past two years," he observes.
According to White, in 2012, King County trade areas will remain the primary recipient of new retailers, resulting in further rent gains. Meanwhile, he adds, "high-traffic centers in Pierce and Snohomish counties will also secure replacement tenants, but vacancy in both areas will remain double pre-recession levels in 2012, diminishing prospects for meaningful rent hikes in these parts."
Payroll expansion among Puget Sound's tech heavyweights will fuel strong rent growth in urban areas, White says when looking at the apartment sector. "These gains will enable planned developments to pencil out and cultivate a new construction cycle," he states. "Although developers will increasingly push idled projects through the pipeline, new units slated for delivery this year will come on line in high-demand locations of King County, where tech-related employment is surging."
For the Las Vegas market, fundamentals remained a bit more fragile, as supply levels stayed elevated relative to demand, according to Voit Real Estate Services' Jerry Holdner, VP of research. The office sector there reported a vacancy rate of 25.3% at the end of the fourth quarter, a rise of 1.5 percentage points over the past 12 months. Holdner says that "pricing continues to slide downward under pressure from a supply-demand imbalance, and is now at a rate not seen in more than six years." And while it does spur opportunity in a tenant's market, he adds, limited demand among office users across all product classes remains a concern for both landlords and lenders.
On the retail side of the equation, Las Vegas is poised for a modest recovery in 2012, says Holdner. "While demand is expected to emerge in small pockets, pricing is likely to remain deeply discounted as distressed sales take place and retailers operate from a position of caution."
Yet demand for industrial space remains relatively weak. "The slowdown in construction-related activities, including the housing market, has put downward pressure on demand for industrial real estate," says Holdner. "Until in-migration or significant positive changes in the broader business environment take place, the market will experience elevated levels of supply amid deeply discounted pricing."
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
