California commercial real estate bouncing back, expert says

While the commercial real estate markets appear to be improving, there is no shortage of distressed properties.

The status of commercial real estate markets in the nation, California and San Diego County was the topic of a California Commercial Alliance meeting Friday at the Manchester Grand Hyatt in San Diego.

Lou Lollio, commercial issues chairman for the California Association of Realtors, said he can gauge how well the economy is doing by the number of cranes he sees.

"We are even seeing this happen in the San Diego area," Lollio said.

Lollio, who said he has been through three recessions, cited a CoStar Group (Nasdaq: CSGP) report that said in a general sense, commercial markets should continue to strengthen for the next five to eight years.

Lollio said that while office properties tend to lag the other asset classes, they are becoming a very good buy.

"Institutional monies are significantly underinvested in these properties," Lollio said.

Oscar Wei, a California Association of Realtors economist, said that although office markets are improving, investors need to be aware of the shrinking amount of required space per employee.

Wei, who said the average amount of space per employee was 225 square feet in 2005, said this had dropped to 150 square feet by 2010 and will be about 100 square feet in 2015.

Although submarkets such as Otay Mesa are still experiencing a very slow recovery, Lollio said, he expects a major improvement in the industrial markets generally.

Wei agrees.

"Industrial space is what's up and coming," Wei said.

Wei said apartment sales have continued to boom -- climbing by about 14 percent year over year.

"There's a lot of pent-up demand in multifamily," he said, adding that the national apartment vacancy is about 4.1 percent, about the same as San Diego's, depending on the survey.

As for retail, Wei said leasing is strong in the high end and the low end of the spectrum, but those in between have continued to suffer.

"The middle has just been stagnant," Wei said.

Commercial real estate markets may have improved generally, and the number of lender-owned properties may be significantly less than a couple of years ago, but Ray Mclaine, CEO of the Commercial REO Brokers Association, warns that these numbers are going to climb again.

While it might sound troubling that REO sales will increase, Mclaine likened it to what has been happening on the residential side.

"Banks didn't follow the rules," he said, adding that he saw markets where there would be 500 lender-owned homes for sale one year and 125 bank-owned homes the next.

"They just pulled these homes off the market," Mclaine said.

He said despite all the concerns about Commercial Mortgage-Backed Securities, "commercial REOs never came to market as anticipated."

Mclaine said the commercial properties "will get caught up in 2015-2018. 2014 will be one of the largest REO sale years for a while."

He said along with a pent-up supply of REO properties the activity will be boosted by the fact that at least $300 billion in troubled CMBS loans that are scheduled to mature the next three years.

"About 40 percent of these are underwater," McLaine added.

Jon Coupal, CEO of the Howard Jarvis Taxpayers Association, came to the session to blast any type of split roll tax. An example of such a tax is AB 59, by Democratic Oakland Assemblyman Rob Bonta, which would allow a school district to impose different parcel tax rates depending on whether a property is residential, commercial or industrial.

SCA 3 by state Sen. Mark Leno, D-San Francisco, would allow school districts, community college districts and county offices of education to impose, increase or extend parcel taxes with a 55 percent threshold rather than the two-thirds requirement under the current statute.

Coupal, who contends that California would be in worse shape if Proposition 13 weren't approved in 1978, argues that split-roll proposals such as these are the greatest threat to Howard Jarvis' tax measure since its inception.

"The public was asked whether the protections provided to residential properties should be extended to commercial, and the voters said ‘yes,’” Coupal said.

Coupal added that since Democrats have a supermajority in the California Legislature, it also would be easy for them to lower required threshold for a tax from the current two-thirds majority to 55 percent.

"This would be a real sock to commercial properties," Coupal said. "It would also be an administrative nightmare."