Can a Record-Setting Year Continue in 2019?

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Economists are united in predicting the economic recovery will remain on course in 2019, making it the longest expansion in U.S. history. Yet, it is expected the pace of recovery will diminish, given the challenge of sustaining double-digit growth over the long term. The coming year looks to be one where a flattening occurs, despite the robust year of growth in 2018, and following an upward trajectory that commenced in June 2009.

U.S. economic growth is projected be 2.9% this year and roughly 2.4% next year, according to the latest Chapman University Forecast. That is an increase from a June 2018 forecast of 2.7%. Though slowing growth is expected, Chapman economists also predict a recession will be avoided, even though one typically follows weakness in residential construction and investment.

Economists foresee higher interest rates will cool the housing market, job growth will slow, and the stock market will correct from its 2018 ascent. The Tax Cuts and Jobs Act is credited for averting a worse scenario. “We believe (the tax act) supported this higher investment spending that will keep the economy going longer than maybe otherwise,” said Chapman President Emeritus Jim Doti. “I personally believe if we didn’t have that tax cut, we’d be talking about recession this year.”

Still, the housing downturn that began in 2016 is expected to quicken in 2019, with residential building investments dropping by 6% to 8%. Offsetting that decline will be a 4% growth in non-residential construction, including commercial buildings, hospitals, and schools. Chapman researchers point out the fastest growing job sector in 2018 was construction, and that momentum is expected to continue. California will also experience slower job growth in 2019, a condition that will be driven by the state’s already low unemployment rates and a population exodus – most often to Arizona, followed by Texas, Oregon, Washington, Nevada, and Utah.

Although the potential trade war with China grabbed headlines and raised eyebrows for good reason, economists such as Doti are optimistic that it won’t escalate. “I think it will be resolved,” he said. “Both countries have a lot to lose if they don’t settle things. Especially China.”

A review of the major West Coast markets reveals a host of bright spots across the main property types. We’ll take a quick peek into the key markets and include links to the corresponding Kidder Mathews fourth quarter 2018 reports for deeper study of those areas. These include:

Office: Seattle, Portland, Los Angeles, Oakland East Bay, Orange County, Peninsula South Bay, Sacramento, San Diego, San Francisco, Silicon Valley, Phoenix

Industrial: Seattle, Inland Empire, Los Angeles, Oakland East Bay

Retail: Seattle

Multifamily: Bay Area



The Seattle office market continued to experience positive absorption, falling vacancy rates, and continued rent growth nationally in 2018. There are a few regional exceptions, but the Puget Sound is definitely not one of those. The fourth quarter is typically slow in terms of leasing activity as companies are preoccupied with the holidays and year-end accounting. Not this year. The fourth quarter of 2018 saw regional absorption of 1.37 million square feet; more than 2017’s annual total. Nearly 8 million square feet of under construction space was pre-leased representing 52% in announced deals. Regional vacancy ended 2018 at 6.10%, down 164 bps year over year. Q4 rental rates were increasing, especially in new projects, and recently in suburban markets given their comparatively attractive rates.


The Portland office market experienced a banner year in 2018 for development with 2,053,389 square feet delivered. That number is more than any other year in the last decade. This staggering amount of development grew office inventory by 2.17% in just one year. Despite so much space coming on the market, direct vacancy only rose by 50 basis points (bps) year-over-year. Furthermore, despite the slight increase in vacancy, rental rates grew 4.23% year-over-year and are now higher than at any other time in the last 15 years.

The immense amount of deliveries of high-end office space in 2018 was a big driver of the rental increase. Class A inventory increased by more than 1.1 million square feet year-over-year, but the asking rental rate still increased 5.6% year-over-year. The year has shown that in spite of all the recent increases in Class A office market supply, tenant demand for Class A office space remains strong and shows no signs of subsiding. With a development pipeline containing in excess of two million square feet of primarily Class A product, the market seems poised to continue this trend well into 2019.

Los Angeles

The market forces propelling the rebirth of the Los Angeles office sector did not wane in any way in 2018; instead, they only quickened and further galvanized throughout the year. Net absorption was positive for the sixth consecutive quarter, driven in part by Google, City National Bank, and ACCO Engineered Systems occupying a combined 640,000 square feet at year-end.

Although most traditional occupiers optimized by right-sizing, tech, media, and coworking companies expanded their footprint in L.A. as more than $4.5 billion of venture capital poured into these sectors in the first nine months of 2018. With a severe under-supply of creative space in the market, these new media, tech, and creative firms fiercely jockeyed with each other for the space that is under construction. Spurred by this competition, asking rents reached the highest they have ever been in the recorded history of the sector. How new office buildings and workspaces are built and designed, and how employees work within them has been unmistakably transformed. The influx and emergence of a progressive-minded set of tenants often demand “creative new office spaces” to house their workers.

The average sale price in 2018 for office assets was $352.79-per-square-foot, up from $346.24-per-square-foot over the previous year. With a year-over-year decline of 23 basis points, the average cap rate settled at 5.16% by the end of the fourth quarter, and total dollar volume for office asset sales exceeded $6.6 billion from more than 1,000 transactions. To what extent sale prices will continue to rise is a matter of dispute, but that investors remain bullish about L.A.’s office assets for 2019 is not.

Oakland East Bay

The inner East Bay Office real estate market had a stellar 2018, finishing the year with the lowest vacancy rate the area has seen in 20 years. Rental rates increased for the sixth straight year and set a new 20-year high for the second consecutive year. New deliveries for 2018 totaled more than 700,000 square feet, which is the highest amount of annual deliveries since 2001. The development pipeline remains robust with more than 1.1 million square feet still under construction. The East Bay set decade highs in direct asking rental rate, occupancy rate, and average sales price (psf) in 2018. The East Bay market has experienced an impressive run up since the recession ended, and by all indications will continue this run in 2019.

Orange County

The Orange County office market remained strong in 4Q18, as office demand continued to increase in lock-step with the heavy inflow of new supply. Direct vacancies settled at 9.5% for the quarter with average rental rates increasing to $2.68-per-square-foot fully serviced, a year-over-year growth of 4.69%. The supply-demand fundamentals of the Orange County office market were such that even with more than 1 million square feet of high-quality product arriving onto the market, landlords were still able to command higher asking rates. Overall market economy and job growth remained positive as the unemployment rate sits at 2.8%, 110 basis points (bps) lower than the state’s average of 3.1%. Steady demand from the tech field, financial and business services, and now the life science industry has provided stability that was not present during the last cycle. With healthy fundamentals in place, consistent growth in the Orange County office market is expected to remain robust moving into 2019.

Peninsula South Bay

San Francisco’s Peninsula office market closed out 2018 with rising direct rental rates, positive net absorption and increased tenant demand, particularly within the technology sector. Direct vacancy rates increased slightly to 8.9%, with average direct asking rental rates standing at $5.05-per-square-foot fully serviced.

The office market had a strong fourth quarter, as more than 1.1 million square feet was leased in San Mateo County, adding to a yearly total of over 3.6 million square feet. Despite a quarter over quarter increase of 34%, activity decreased 13% year-over-year. The technology sector continues to drive demand for market-ready spaces, especially near transportation corridors such as Caltrain and BART. Construction activity on the Peninsula remained active, with roughly 2.8 million square feet of office space under construction, of which 67% was pre-leased. Sales activity slowed down in the fourth quarter as dollar volume reached $192.2 million, compared to the previous quarter’s $474.7 million, a 60% decrease.


The greater Sacramento area office market ended 2018 with more than 3.6 million square feet in leasing activity. With the uninterrupted decline in direct and overall vacancy, the minor increases in lease rates are to be expected considering the ongoing tenant demand for quality office space market-wide. Supported by 681,467 square feet of positive net absorption, overall vacancy in the greater Sacramento area declined to 9.8%.

San Diego

The San Diego office market ended the year with continued signs of tightening, as asking rental rates climbed to a new all-time record high coupled with vacancy rates hovering just slightly above the record low from year end 2017 at 10.6%. Vacancies in the county held steady, bolstered by the market’s prime location on California’s southern coast, its geographic constraints and steady demand. Although net absorption posted at a modest positive 101,000 square feet for the year, the foundation of San Diego’s office market is still set on firm footing backed by a diverse employment base buoyed by tech, life sciences, and healthcare in a city that boasts one of the top high-tech and life science clusters in the country.

San Francisco

San Francisco’s office market finished 2018 performing strongly, with tech giants leading the way once again. Google and Facebook signed deals to take more than one million square feet of space combined. San Francisco experienced more than 3.2 million square feet of new deliveries, representing the largest amount of newly constructed space in more than 20 years. Demand continued to keep pace with deliveries, as direct vacancy ended the year at 3.95%. The year was particularly remarkable in this current bull market, finishing with decade highs in occupancy, net absorption, new deliveries, and direct rental rates.

In 2018, the South Financial District submarket experienced the most deliveries, with 1,832,000 square feet of office property constructed. The top delivery for the year was Salesforce Tower, which added 1.4 million square feet to the South Financial District’s office inventory. The South Financial District will continue to deliver the bulk of new space in the coming years as 42.8% of the development pipeline will be delivered in this vibrant submarket. Looking ahead to 2019, there is more than 4.7 million square feet of office property in the construction pipeline with nearly half of the space expected to deliver during the year.

Overall direct asking rents closed 2018 at $63.26, which represents an 8.98% increase from the close of 2017. San Francisco office property sales ended 2018 with a 22.68% drop in sales volume to $2,362,943,200, which accounted for just shy of 4.8 million square feet. Furthermore, average price per-square-foot dropped 4.15% year-over-year to $622.63. These numbers represent a significant drop year-over-year, which in large part can be attributed to capital controls imposed by China.

Silicon Valley

The Silicon Valley office property market was strong in 2018, with direct asking lease rates rising 7.35%, and average sales price-per-square-foot rising 18.9% year-over-year. Average sales price (psf), direct lease rates, leasing activity, and occupancy rates finished 2018 at or very near their highest points in a decade. 2018 was another strong year for development in the Silicon Valley, as the year ended with more than 2.96 million square feet of new construction delivered, and over 4.8 million square feet still under construction. The year closed with more than four million square feet of positive net absorption, which represented the ninth straight year of positive net absorption, and the sixth straight year that positive net absorption eclipsed 1.5 million square feet.

The Silicon Valley office market tightened in 2018 as direct vacancy declined 110 basis points (bps) and total vacancy declined 120 bps year-over-year. The drop in vacancy is especially impressive given that over the last two years over ten million square feet of office space has been delivered to the valley. Silicon Valley office properties were a hot commodity for investors in 2018. The year saw average sales prices-per-square-foot jump to a new high of $577.21. Cap rates dropped to 5.37%, which is the lowest annual level in over 30 years. Despite dollar volume and building square footage sold decreasing year-over-year, investors traded assets that were far more valuable on average in 2018. This indicates an investment market that is more focused on quality assets over quantity of assets.


The Phoenix office market also experienced a banner year in 2018. By any measure, the sector is thriving and performing at peak condition. Even without including sublet space, occupancy demand exceeded 3.3 million square feet in 2018; in terms of leasing activity, although slightly below the 10 million square feet averaged over the past decade, 8.5 million square feet of space came off the market in 2018; direct vacancy declined more than 10% from the same time last year, reaching a market wide rate of 12.5%, and, at $26.04-per-square-foot on an annualized basis, asking rental rates are the highest they have ever been in the recorded history of the market.



The Q4 2018 Puget Sound region’s industrial market continued to reflect positive conditions. On the leasing front, the region absorbed a positive 1.4 million square feet, while 2.05 million square feet of product was delivered in the quarter. With supply outpacing absorption, the vacancy rate inched upward to 3.6% from 3.5%, though it was still an exceptionally tight market. Construction activity remained strong at nearly 5.5 million square feet, encompassing 36 buildings, with Pierce County the most active market at just more than 3 million square feet. Roughly 16% of the speculative construction is pre-leased.

During the quarter there were more than 2.6 million square feet of leases signed, though most of these tenants will not be occupying their new spaces for several months, thus the vacancy rate is expected to remain in the 3% to 4% range. Another 20.6 million square feet is in the pipeline, with the bulk in Pierce, Snohomish, and Thurston Counties. Given the availability of land to develop in these counties, additional growth is likely, assuming the Puget Sound economy continues to expand.

Year-to-date, nearly $2.1 billion in industrial property has sold with an average cap rate of 6.07%. Cap rates on high-profile product have been lower in the 4% to 4.5% range. Regionwide, average asking rents rose in most submarkets.

Inland Empire

The Inland Empire industrial market experienced another record-setting year in 2018. Market asking rents were the highest on record, and overall demand for industrial space did not wane in the least. In fact, not only was net absorption positive for the thirty-eighth consecutive quarter, net absorption for the year set a new record with over 24.6 million square feet coming off the market. While nearly 24 million square feet of industrial space was completed and delivered to the market year to date, an additional 23.7 million square feet of industrial space remains under construction. Despite this high level of development activity, net absorption is on par with occupier demand.

Consequently, there are very few concerns about overdevelopment. Notwithstanding the potential ill effects of the recently commenced trade wars, with the U.S. economy continuing to grow, unemployment rates at historic lows, and the U.S. consumer continuing to spend, expect very little to no slowdown in the Inland Empire industrial market in 2019. Perhaps a surprise to some, the Inland Empire has emerged as one of the leading economies in California.

The Inland Empire’s unemployment rate beat the year-ago projected rate of 4.4% by ending 2018 at 3.9%. The fundamentals of the Inland Empire’s industrial market have never been stronger, and the sector is performing at the highest levels. There has never been a better time to be either a landlord or industrial broker in the Inland Empire. Tenants and occupiers, however, must prepare themselves for rental rates and sale prices not seen in the history of the market.

Los Angeles

2018 was another strong year for the Los Angeles Industrial market. Record-low vacancies and rising rents continued to dominate the sector throughout the year. Although 2018 experienced the highest level of new deliveries to the market at 5.4 million square feet, market wide vacancies did not budge upward at all. In fact, as absorption kept pace with demand, vacancies declined 10 basis points from the previous quarter. Newly completed facilities commanded a premium rate because of higher land prices; the desire of tenants to occupy quality Class A and B facilities resulted in record-high rents overall. Landlords of lower quality facilities pushed rents higher by requiring longer lease terms and extensions, and higher annual rent increases.

In some cases, the alternative use of industrial facilities as studios or creative offices increased rents and sales values in certain pockets. Consequently, due to limited availability, and the fierce competition amongst users for space, the average asking lease rate ended 2018 at $0.92-per-square-foot, the highest asking rents in the history of the sector. This marks a year-over-year increase of 9.5%, and over the last two years, overall asking rents grew by 19.4%. Expect rental rates to trend upward well into 2019, albeit at a slower pace.

Oakland East Bay

In 2018, the East Bay’s industrial property market, commonly known as the I-880 corridor, delivered more new product than at any time in more than fifteen years, with 1,645,901 square feet delivered in 2018. Demand for industrial property in the East Bay market was strong in 2018, as the direct vacancy rate ended the year at 3.8%, despite deliveries increasing more than 136% year-over-year. Furthermore, the strong demand and increased availability of high-quality industrial product led to average rental rates ending the year 8.26% higher than 2017. In the last decade vacancy has declined by 140 basis points and asking rental rates jumped 87.3%. The market has and continues to be undergoing massive change due to spillover demand from San Francisco and the Silicon Valley, and despite the East Bay’s massive run-up, the market is still a bargain for prospective tenants migrating from San Francisco and the South Bay.



The Seattle retail market is extremely challenging. Developers are challenged by rising construction costs. Owners are challenged by rising interest rates and tenant turnover. Tenants are challenged by e-commerce, increasing occupancy and employee costs. Retailers in strong trade areas have difficulty finding employees. Customers are challenged for time and disposable income with high housing costs. The market is strong in Seattle and the Eastside, where most employment growth is occurring. The balance of the market is stable to slightly soft. There is positive absorption, measured new construction and a strong investment climate for anchored centers and single tenant net leased properties. Like many coastal gateways, the Puget Sound region outperforms the national average with lower vacancy and better rent growth. Net absorption has been positive for the last eight years straight, with an annual average of 1.93 million square feet for the five-year period ending 2018. Absorption is slowing somewhat with the most recent 12 months at 1.53 million square feet.


Bay Area

Fueled by a high-performing economy, the Bay Area remains a dominant location for innovation and job growth. With this narrative comes the high cost of living that has affected thousands of people in the region. Average monthly rental rates stand at $2,726 across all nine counties, up 4.8% from a year ago. As demand remains steady, developers strive to deliver units near major transportation centers and amenities.

Asking rental rates fell slightly in 4Q2018 to $2,726, compared to the previous quarter’s rate of $2,729. San Francisco remains the most expensive county to reside in, with average asking rates at $3,610. San Mateo County rates experienced a 6.2% year-over-year rent growth, with asking rates standing at $3,044 in 4Q18. Over in the East Bay, Alameda County, rates increased 3.5% year over year, standing at an average of $2,462. Oakland, a popular city due to its easy accessibility to San Francisco, has an average rental rate of $2,721, a 3.8% increase from the previous year. Further down in Silicon Valley, Santa Clara County rates are $2,856, a 5.3% increase from the previous year. As increased demand continues to outpace new supply in the Bay Area, rents are forecasted by Yardi Matrix to grow by 4.3% in the coming year.

Deliveries picked up in the fourth quarter to 1,455 units, bringing a year-to- date total of 4,731 units completed in the Bay Area. A little more than 26,000 units are currently under construction, with the majority of them concentrated in Santa Clara and Alameda Counties. San Francisco in particular has more than 3,400 units under construction, bringing much need product to this submarket. Over 25,000 units are in the planning stages, including market rate and partially affordable units in the Bay Area. Sales activity in the fourth quarter included 11 transactions, totaling nearly $800 million in volume and bringing a year to date total of $2.79 billion.

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