Commercial Real Estate: Industrial leads among property types in the West, but Situs RERC survey respondents worry about the future of retail

The industrial sector rated highest among all property types in the West region of the U.S. for its value vs. price and its return vs. risk. The retail sector fared the worst in both metrics among the property types. That’s according to a survey of regional respondents conducted for the May 2019 Situs RERC Real Estate Report, “Defensive Positioning.”

Respondents from the West expressed concern about future prospects for retail, as it faces pressure from more consumers buying products online. As a result, they were more enthusiastic about the industrial sector, especially in parts of the region facing a low supply of industrial space. In addition, a lack of affordable housing supply continues to fuel high demand for apartments, resulting in anticipated increased returns and reduced risk for apartment investors. In general, respondents noted the increasing risk for all of commercial real estate (CRE) due to a possible recession.

Here’s a closer look at some of the major metro areas in the West:

SAN DIEGO
San Diego’s employment grew 1.4% over the last 12 months through 1Q 2019, adding 20,100 jobs. At 3.4%, its unemployment rate is below the national average of 3.8%.

The hotel sector is expected to benefit from the booming tourism industry. About 35.7 million people visited San Diego in 2018, compared to 34.9 million in 2017. The San Diego Tourism Authority estimates 3,879 new rooms in the next two years.

DENVER
Denver added 23,000 jobs in the last 12 months through 1Q 2019 as employment grew 1.6%. The unemployment rate of 3.5% is below the national average of 3.8%.

Denver is one of the hottest CRE markets in the nation and has become an attractive metro for tech workers. More than 20 tech companies have either opened satellite offices or moved their headquarters to the metro area in the last couple of years. While the population boom has created concerns about housing affordability, the metro remains affordable compared to other cities in the West region.

LOS ANGELES
Los Angeles’ employment grew 0.8% over the last 12 months through 1Q 2019, adding 51,900 jobs. The metro’s unemployment rate is 4.6%, which is above the national average of 3.8%.

Industrial continues to be the darling of CRE in Southern California. The Greater Los Angeles area has seen an uptick in investments from foreign investors in industrial assets whereas most foreign investment into the market had been traditionally in office and multifamily.

In future Newswatches, we’ll look at the Situs RERC survey results for the Midwest, South and East regions of the U.S.

The Situs RERC Real Estate Report is the commercial real estate industry’s most respected and relied-upon survey-based resource of CRE investment criteria for risk analysis for over 45 years. This quarterly report is packed with a variety of valuation metrics, including cap rates, pre-tax yield/discount rates, and investor insights on the institutional, regional, and 47 major markets. The next quarterly RERC Real Estate Report is scheduled to be released at the end of the month. To subscribe to the report, go to store.rerc.com or call 319.352.1500.

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