Industrial Space Remains Hot, Multi-family Housing Still a Sure Bet, Office Has a Promising Future, and Retail Slumps Again
LOS ANGELES, February 5, 2020 – The Winter 2020 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that although the economy is predicted to slow in 2020, developers’ views on most California commercial real estate in 2022 are optimistic, and they reflect an eagerness to get in on the ground floor of the next commercial real estate expansionary cycle. The biannual survey projects a three-year-ahead outlook for California’s commercial real estate industry and forecasts potential opportunities and challenges impacting the office, multi-family, retail, and industrial sectors.
Overall, survey panelists for each market, with the exception of retail, predict that 2022 will be as good or better than 2019. Panelists are optimistic about industrial and multi-family projects, while office markets are neutral, and retail space sentiment remains generally pessimistic.
After Signs of Slowing, Office Space Market Outlook Improves
While recent surveys indicated that the peak of the office market had been reached in the current cycle, the latest survey indicates a beginning of a return to confidence by 2022. For the East Bay, Orange County, and San Diego, the panelists were optimistic that rental rates would increase faster than inflation while vacancy rates would be lower than today. In the San Francisco, Silicon Valley, and Los Angeles markets, this optimism is confined to rental rates, with only a slight decline in occupancy. These views are consistent with the perspective of most economists that the California economy will return to faster growth in 2022, and will generate new jobs requiring additional office space.
Industrial Continues Hot Streak Due to Warehouse Demand
With the industrial market currently dominated by warehouses serving continued growth in e-commerce, survey panelists don’t see the red-hot industrial market pulling back any time between now and 2022. Activity throughout Northern California and the Inland Empire is expected to remain at the same level of strength as today, while the Los Angeles market is projected to continue to improve. The improvement is due to a shortage of space close to the ports and a sense that the current downturn in trade is temporary.
An expansion of the Los Angeles industrial market will ultimately be driven by the implementation of multi-story edifices with productivity enhanced by robotics and new technologies to manage the high-rise warehouses. While the timing of these technologies is still unknown, they are expected to help drive Los Angeles industrial property values when rolled out in the years to come.
Retail Sentiment Resumes its Downward Spiral
While the last survey saw a glimmer of hope for a moderate retail rebound, sentiment in this space has returned to pessimism—panelists have given retail its lowest values since this survey began collecting retail predictions four years ago. This pessimism is likely fueled by the constant shift to online shopping and the weaker-than-expected start to the 2019 holiday shopping season. A weakness in the demand for the revitalization of existing retail space is also driving this pessimism.
Though new retail construction is expected to fall from now through 2022, there does remain some activity. Some of the Bay Area and Southern California panelists began new retail development or re-development projects in the last year – more than anticipated – and an equivalent percentage of panelists expect to start at least one new project this year.
Multi-Family Market Sentiment Continues to Be Bullish
Multi-family market expectations this time around continue the trends seen in previous recent surveys. The Southern California markets anticipate a continued building boom. In the Bay Area, where rent control now has more certainty to it with AB 1482, panelists predict an increase in the amount of new multi-family construction. There is uniform optimism in Los Angeles, Orange County, and San Diego, as interest rates have lowered and lending conditions are not changing in any significant way.
The only impediment to the multi-family market continues to be the lack of qualified labor and the resulting increase in construction costs. California’s construction workforce has reached levels close to that experienced during the housing boom of 2004-2006.
About the Survey
The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index Research Project polled a panel of California real estate professionals in the development and investment markets, on various aspects of the commercial real estate market. The survey is designed to capture incipient activity by commercial real estate developers. To achieve this goal, the panel looks at the markets three years in the future, and building conditions over the three-year period. The survey was initiated by Allen Matkins and the UCLA Anderson Forecast in 2006, in furtherance of their interest in improving the quality of current information and forecasts of commercial real estate.
About Allen Matkins
Allen Matkins, founded in 1977, is a California-based law firm with more than 200 attorneys in four major metropolitan areas of California: Los Angeles, Orange County, San Diego, and San Francisco. The firm’s areas of focus include real estate, construction, land use, environmental, and natural resources; corporate and securities, real estate and commercial finance, bankruptcy, restructurings and creditors’ rights, joint ventures, and tax; labor and employment; and trials, litigation, risk management, and alternative dispute resolution in all of these areas. Allen Matkins is located on the web at www.allenmatkins.com.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast on the Web at http://www.uclaforecast.com.
About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA for Asia Pacific, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school’s Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.