This year may see flattening rents—or at least tenant affordability issues—in several asset classes. Significant rent growth in nearly all asset classes has been a theme of the last several years, but the extreme pricing may be hitting a ceiling for some tenants, according to Jeff Rinkov, CEO and president of Lee & Associates. While his outlook remains positive this year and for the foreseeable future, he says that plateauing rents may be around the corner.
“We have seen really substantial rent growth, and I think that we are going to reach a ceiling in certain product types on tenant affordability,” Rinkov tells GlobeSt.com. “In the next 18 to 36 months, rent growth may be more subdued as a result.”
In California, some corporate tenants have already left the state to look for more affordable office markets as well as a more affordable cost of living for employees. Despite the exits, there is still plenty of activity from a diverse group of employers. “It seems like California has done everything that it can to make it difficult to operate here, between operations and state and local taxes,” says Rinkov. “You have to drill down and look at where the economy comes from. We have tremendous technology opportunities; we've got huge port activity; we have tremendous diversity of industries. I don't see any of it going away.”
Companies, like Toyota, leaving the state are having an impact, but there have also been missed opportunities to attract new corporate tenants. “We are losing corporate headquarters. We are losing some big opportunities, like Tesla deciding to go to Nevada or Amazon will likely choose California for its second headquarters,” adds Rinkov. “I think we miss opportunities like that, but I think we gain more entrepreneurial opportunities.”
Some of these exits—along with the missed opportunities to sign major users—has left blankets of office space. Rinkov predicts that much of that office space will be converted into alternative uses and then absorbed. “I think that the space is absorbed, but it is repurposed as something totally different,” he explains. “As an example, in Pomona, there is an overlay zone in an industrial market three miles outside of the downtown area that requires developers of new industrial projects submit plans that would allow new industrial buildings to be converted to multifamily.”
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Kelsi Maree Borland
