July 26, 2024 – The Trend is Not Your Friend
June 2024 California labor market information was a couple of days late in coming due to a big glitch with the internet. It put off more bad news for the Bay Area as employment continues to drop and the labor force continues to shrink.
Employment is certainly subject to cyclical changes. But the trend is not a positive one with 18+ months of news of layoffs and business closures and companies pulling out of the Bay Area as shown graphically on the table that follows.
Has the commercial market started to rebound?
While working on a job recently a couple of real estate brokers proffered opinions that the multi-family market may have stabilized at year-end 2023 and has shown more activity of late.
Data on most commercial markets is still a little bleak. Some market areas or segments may be showing signs of life, but more broadly, the trend is not your friend.
Vacancy data from the real estate information company CoStar indicates vacancy continues to climb in the retail, office and industrial markets of San Francisco and
San Mateo Counties. The multi-family market is more stable, as is the hospitality market. Even with a more stable setting, the multi-family vacancy rate is above the long-term average and the occupancy rate in hotels is far below the peak set prior to the pandemic.
| San Francisco / San Mateo Co. Markets | |||
| CoStar Market Data | Q2-2024 | Q4-2023 | Q2-2023 |
| Vacancy Rates | Vacancy | Vacancy | Vacancy |
| Retail | 6.50% | 5.70% | 5.20% |
| Office | 22.28% | 21.61% | 18.64% |
| Industrial | 11.60% | 9.40% | 7.50% |
| Multi-Family | 6.10% | 6.40% | 6.70% |
| Occupancy Rates | Occupancy | Occupancy | Occupancy |
| Hospitality | 65.60% | 65.80% | 65.70% |
Most average rental prices also remain at or below peaks set prior to the pandemic. Office rents are the most affected with retail remaining soft. Industrial pricing has shown the most resilience and growth. Multi-family shows nominal growth from 2019 and hospitality remains below the pre-pandemic peak.
| San Francisco / San Mateo Co. Markets | |||
| CoStar Market Data | Q2-2024 | Q4-2023 | Q2-2023 |
| Market Rents | Market Rent | Market Rent | Market Rent |
| Retail | $42.76 | $43.61 | $43.92 |
| Office | $52.41 | $52.49 | $53.29 |
| Industrial | $27.45 | $27.58 | $27.38 |
| Multi-Family | $3,069 | $2,993 | $3,040 |
| Avg. Daily Rates | 12 Mo. ADR | 12 Mo. ADR | 12 Mo. ADR |
| Hospitality | $222.51 | $223.42 | $222.30 |
Much anticipation in the market is aimed at the Federal Reserve cutting interest rates in the future and, hopefully, seeing mortgage rates decline. While there may be some benefit from such a move, the Fed continues to slowly sell off its very significant MBS and Treasury holdings. This may continue to constrain mortgage lending as some banks are faced with significant holdings of loans on office properties that have seen declines in pricing.
The next six months may prove very interesting.
JN Real Estate Valuation Services 