As we approach the end of 2016 we still see the market trending upwards. But for how long? Well, for as long as we can hope. The general consensus is make deals now and lock in lease terms for as long as both parties can stand it. This market feels familiar, like 1999. Back then the market peaked by 2000 and we were heading into a mild recession; of course commercial real estate didn’t know it yet.
In the short run this is what we expect:
Class A rents in Walnut Creek are going to go up again. Especially since several Class A projects have traded hands: California Plaza, Ygnacio Center, 500 Ygnacio Plaza. Expect a pick-up in Class B office demand in the local market and migration up-market from Downtown Walnut Creek to Shadelands and Concord.
Concord Class A rents have gone up faster this last quarter than any time in the last 7 years. As leases roll, expect some of those tenants to look into the Shadelands for rent relief. Class B Vacancy is very low in Concord but we have seen modest rent growth. This is when the Class A rent growth out paces B’s.
If you are a Shadelands owner, early 2017 should have brisk leasing activity. Be prepared to make deals, any deals that make sense. Shadelands vacancy peaked at 34% in 2015 and it is now about 21%. In the long run we expect the zoning changes and new developments in the Shadelands to reduce structural vacancy, but for now we want to see the Shadelands market absorb the current supply of office space.
Construction costs are through the roof. We are advising many of our clients to engage a construction manager to evaluate current (unknown) conditions and comparison price sub trades while pricing significant tenant improvements. The new Title 24 energy requirements increase costs easily by $10.00 per sqft. Electricians are in high demand. While the cost to do improvements are up, many landlords are able to justify spending the higher dollars if they can amortize the improvements over longer terms, which goes back to our first point: Make deals now and lock in lease terms for as long as both parties can stand it.