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Commercial real estate market running strong

By JOHN COX, Californian staff writer
e-mail: jcox@bakersfield.com | Friday, Mar 14 2008 7:46 PM

Last Updated: Friday, Mar 14 2008 8:57 PM

The captain of Bakersfield’s roller derby team, a woman who goes by the name Spider Cricket, has spent two years searching the city for a vacant building — nothing special, just something affordable with a flat floor and 10,000 square feet of emptiness.

Frustrated by time constraints at the skating rinks they use now, team leader JoAnn Divers and her Bakersfield Rollergirls simply want to lease a space where they can practice, store their equipment and host competitions.

Perhaps ironically, their inability to find a suitable building hints at stability within the local economy.

Unlike the tough times facing Bakersfield’s housing market, the city’s commercial real estate market remains relatively strong. Demand from local businesses — especially those in oil and agriculture — continues to fill or nearly fill commercial space around town.

“You always need ag and you always need oil, so we’ve been somewhat sheltered” from the slowing U.S. economy, said Kym Moore, senior vice president and market manager in Rabobank’s Stockdale Highway business loan center. “I think investors (in commercial real estate) still look at Bakersfield as being somewhat a good buy.”

There has been some cooling in recent months as retail and office leasing activity slows along with the overall economy. But local commercial brokers describe this downtick as only “leveling off” after years of historically low vacancy rates.

And the slowing does not extend across the board. Several factors are combining to make the area a prime location for industrial development. That’s expected to produce large numbers of relatively good-paying jobs in logistics and distribution.

A region’s commercial real estate market can be a good bottom-line gauge of its economic health. It reflects activity not only among businesses needing room for their employees and operations, but also among developers, investors and even bankers willing to bet the local economy will continue to grow.

INDUSTRIAL SEGMENT STRONGEST

The strongest segment of Bakersfield’s commercial market is its industrial real estate. Vacancy rates there dropped from 7.5 percent in 2003 to 3.7 percent in 2006, then edged up to about 4 percent last year, according to NAI Capital, a worldwide real estate services company.

Industrial brokers say two main factors are driving the low vacancies: A shortage of space in Los Angeles County and the Inland Empire has pushed industrial users into Kern County, and the surging oil and agriculture industries have more than made up for the slowdown in business tied to the housing market.

“Activity is still there and still constant,” NAI Capital Vice President Graham Harrison said. “It’s just the business that is driving it now has changed.”

Several projects are under construction or proposed in and around Bakersfield, Harrison said. Perhaps the hottest spot for industrial development these days, he said, is north of town near the airport, where a lot of land is available with easy freeway access.

Demand for office space in Bakersfield has slipped more noticeably from last year’s highs, but still remains well below the hard times of 1999 and 2000. That was when several large oil companies consolidated or left town, leaving behind large chunks of empty office space.

Early last year Bakersfield’s office vacancy rate fell to as low as 4.35 percent, a huge improvement from the 9.67 percent reported only four years before, according to Grubb & Ellis / ASU & Associates, a worldwide real estate services company.

More recently, the rate rose to nearly 6 percent late last year, largely because of offices vacated by mortgage lenders, title companies and other businesses tied to residential real estate, Grubb & Ellis Vice President Martin Starr said.

New office space has opened in Bakersfield over the last couple of years, Starr said, to meet demand by service providers such as attorneys and accountants moving in to serve the growing population. And with some new office construction temporarily on hold, he said the market remains “very tight.”

“I think we’ve sort of leveled off at this point,” Starr said.

RETAIL MARKET SNAPSHOT

The market for retail space is governed by factors different from those affecting office and industrial buildings, and not as much local data is available to provide a clear picture of recent leasing activity. But people familiar with Bakersfield’s retail market agree that some of the momentum gained over the last several years could give way to the uncertainty rocking residential real estate and the broader economy.

Between 2002 and 2006, Bakersfield’s retail vacancy rates declined from about 10 percent to 4 percent, according to CB Richard Ellis. The company has not yet released year-end 2007 figures, but Vincent Roche, a senior vice president at CB Richard Ellis in Bakersfield, estimated that the rate held steady last year at about 4 percent.

He said the larger retail buildings around town — the big boxes, the grocery store spaces — are mostly full. It’s the smaller storefronts that have become harder to lease, he said.

Aside from consumers’ hesitance to spend money on nonessentials lately, much of the reason for the small space vacancies is a shortage of home equity, which small business owners traditionally draw upon to finance their dreams of owning a business, Roche and other commercial real estate people said.

That has left some new shopping centers with conspicuous holes, sometimes where key “anchor” tenants were supposed to open.

Local commercial real estate developer Tom Carosella has noticed these vacancies of late, and responded by scaling back plans for Mustang Square, a retail center he has proposed near Stockdale High School. Instead of building 35,000 square feet of unleased, or “spec” retail there, he plans to build only 10,000 square feet, at least initially.

Still, Carosella said he’s not worried things will slow much.

“What I’m seeing is things are consistent,” he said. “They’re not getting really better, they’re not getting really worse.”