Mid-Year CRE Review: So Far, So Good


by Chuck Schreiber

Mid-Year CRE Review: So Far, So Good

We have crossed the mid-year mark and results point to very significant trends that positively impacted the national commercial real estate market and have set the stage for the balance of the year.

In looking at the past two quarters, U.S. commercial real estate was stable, and in many cases experienced tremendous momentum, yielding impressive returns in some markets for nearly all property types. Albeit experiencing moderate growth, the low interest rate environment, solid economy, limited new supply from development, growing workforce and expanding demographics have kept the office market thriving.

From the KBS perspective, we were in a prime position to maximize our portfolio performance and shop for quality assets in prolific markets. Year to date, we have made seven acquisitions, bringing our total portfolio to 523 properties in key markets across the U.S.  The KBS portfolio is performing strongly at approximately 90 percent occupied, and as of May 31, 2016, our total gross leasing was 1.98 million square feet with more than 1 million square feet in new and expansion leasing for the year.

Vacancies Trending Down
The national unemployment rate reached 4.9 percent and drove positive office absorption, bringing the national office vacancy down to around 16 percent — some data even touting as low as 13 percent for Class A and Class B properties. CBRE Group Inc. research shows that 38 of 63 office markets saw vacancies inch down this past quarter, especially throughout the Midwest. This trend is consistent with the national vacancy declining 10 to 30 basis points each quarter since 2013.

Primary vs. Secondary
Primary markets such as New York, Atlanta, Chicago and the Bay Area have been some of the best performers this year. The Sun Belt and tech-driven markets also rose to the top as solid contenders. However, secondary markets by comparison have also done exceptionally well due to limited new supply, increased tenant demand and the high cost of living in the CBDs that are prompting residents and tenants to set roots in secondary markets. Employers have been tapping into these alternative locations for talent, which has helped diversify the office market.  Oakland and San Jose are great examples of these trends as the San Francisco Bay Area poses a financial challenge for many.

 

“Whether it’s a primary or secondary market, location continued to be the key factor for successful investments.”

 

Location
Whether it’s a primary or secondary market, location continued to be the key factor for successful investments. Buildings located in close proximity to restaurants, retail and other lifestyle amenities performed very well compared to most of their non-amenitized counterparts. While mass transit is a critical factor in specific markets, in general, we find that employees are willing to drive to the office, but like the convenience of walking to a local café for a quick lunch, to patronize a few stores or handle day-to-day business. KBS’ portfolio encompasses a large percentage of properties in areas that demonstrate the work, live and play lifestyle.  In fact, in July 2016, we acquired 353 Sacramento adjacent to San Francisco’s Embarcadero Center, which has more than 100 restaurants and shops. Additionally, our June 2016 acquisition — Commonwealth Building in Portland, Oregon — is less than a mile from Pearl District and four blocks from the new Pine Street Market, which features a number of gourmet dining options. From an investment and performance standpoint, these types of assets are very valuable and have seen strong activity from investors this year.

Asset Class
In looking at property class, Class A really designates the quality of an asset and tenants, and historically Class A tenants are typically more financially sound — making this type of investment high on investors’ lists. The returns are stable and the risk is low which compliments most of our strategies, even during the recent recession. However, now that the economy has regained its footing, we have seen a lot more investors show renewed interest in Class B product which potentially could offer higher returns with the acceptance of higher risks.

Looking at this mid-year review, we are pleased with the progress the office market and the commercial real estate sector as a whole have made.  Every quarter seems to bring forth new opportunity supported by healthy fundamentals. This upward trajectory may be moderate, but it is significant. We look forward to what the back-end of 2016 will bring.

 

Mid Year CRE Review: So Far, So Good Chuck Schreiber website A2 240x300
Mr. Schreiber serves as chief executive officer of KBS Realty Advisors and its affiliate KBS Capital Advisors. Both are nationally recognized real estate investment management firms with transactional volume in excess of $31.0 billion. 

 

 

This release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to KBS’s ability to invest in and manage a diverse portfolio, and the performance of the overall real estate market. These statements are subject to known and unknown risks, uncertainties and other factors which may cause KBS’ actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.