Annual Inland Empire Market Trends Seminar

Economic Update

  • Solid economic environment, some slowing occurring
  • Better-than-expected performance in multifamily from record-high demand
  • Vacancies will rise as supply ramps up
  • So-so demand for office space amid little supply
  • Retail is being challenged, and is in a supply pause
  • Continued out-performance the industrial market, driven by e-commerce

Retail Market

  • Overall, we are in a very positive environment
  • Development will be modest due to changes in the retail sector, concerns about the cycle, rising costs (construction, land, fees), and retailer caution
  • Expect continued challenges and opportunities as there are numerous retailers that are challenged by both technology and debt

New Home Sales Trends

  • Builders have adjusted to the slowdown in sales, pivoting toward more affordable concepts and locations, however, several more quarters are needed to realign sales and inventory
  • Builders reduced prices to maintain order backlogs that are closely watched by Wall Street
  • Lower mortgage rates are bringing a stream, but not a deluge of buyer traffic. However, buyer traffic is of good quality and internet leads are robust
  • The political outlook, the lack of a China trade deal and peaking consumer sentiment produced a good, but not great, spring selling season in Southern California.
  • High employment and rising wages haven’t convinced people that it is a good time to buy.

Apartment Market Overview and Trends

Industrial Market Trends

Key Tenant Decision and Cost Factors

  • Transportation, Labor and Rent
  • Labor: cost, availability, quality of labor are increasingly important
  • Increased emphasis on employee amenities and workplace environment (e.g., HVAC,
  • café/lockers)
  • Tenants are renewing more frequently due to major facility investments

Industrial Building Specifications

  • Increased capital expenditures going into building
  • Increased prevalence of mezzanine work areas
  • Increased need for trailer and auto parking (lower building-to-site coverage)
  • Separate and secured auto and trailer yards/entrances
  • On-site truck queuing lanes
  • Expansion / Flexibility
  • Clear Height – 36’ industry standard (going to 40’?)

Office Market Overview

Forecast 2019- What’s Ahead? 

  • Office market continues to tighten as strong economy and tenant expansion pushed vacancy rate lower.
  • Trump effect? Opportunity zones will stir activity in depressed areas in the market.
  • Two buildings currently under construction. Another two projects will announce in the next 12 months.
  • Lease rates will continue to increase across the board.  Class A property values should eclipse $250 psf as higher lease rates factor into rent rolls
  • Value add opportunities are still available
  • Low interest rates will continue to have an impact on small building activity and pricing – SBA

Hotel/Motel Market Overview and Trends

  • The U.S. lodging industry has been operating at peak levels for the past three years – 2018 played out somewhat better than expected.
  • Accelerated supply growth in recent years has been readily absorbed in most markets because of the expanding economy. This has however, contributed to weaker than normal ADR growth.
  • Despite rising salary and wage rates and slowing revenue growth, operators have controlled costs sufficiently to achieve increases in profit margins. GOP margins are at their highest levels since the 1960s.
  • While the fundamentals remain attractive across the vast majority of markets, elevated uncertainty (among other factors) has impaired management’s ADR pricing power. This has also contributed to weaker-than-expected NOI growth.
  • Watch for a Blip, and not a Dip!

Opportunity Zones

  • More transactions means more appraisals
    • Valuing land for development
    • Valuing existing properties for rehab or redevelopment
    • Valuing properties intended to be contributed as QOF funding in a mixed investment
    • Revaluing properties that have gone up in value as a result of surrounding community investment
  • The direct effect of the program is on tax attributes, which would not impact appraisal process.  However, investment could lead to economic changes in opportunity zones that would merit higher valuations, alter the comparable set for properties in OZs
  • The emergence of a new bidder pool for eligible investment properties could improve liquidity and alter relevant cap rate benchmarks

For further details, visit the Southern California Chapter of the Appraisal Institute.