Optimism Soars Among Property Developers, Financial Backers

By Sharon Simonson

A new survey that queries office property developers and financiers who do business in California shows continued strong optimism about the Bay Area’s economic future and tenant demand, despite the nation’s stop-and-start recovery and ongoing concerns about the global economy.

Office developers and those providing equity and debt to support their projects express strong belief that tenant demand in 2015 will be better than today’s, not only in the currently bustling San Francisco and Silicon Valley markets but also in the still-reviving East Bay.

Of six California markets addressed, developers and financiers are most optimistic about Silicon Valley and that its prospects three years from now will be better than at present, according to the research. At the same time, they are somewhat less optimistic about Silicon Valley’s future office vacancy rates than they were in December.

Participants were least optimistic about the Los Angeles office market, though the survey indicates that they still believe conditions in that city will be better in 2015 than they are today.

“Not surprisingly, [the survey findings correlate] with job growth [in each market] in office-using employment over the past three years,” a summary of the survey’s findings says.

Overall, survey participants express optimism about all six major California markets: Silicon Valley, San Francisco, San Diego, Orange County, the East Bay and Los Angeles.

The survey, which is intended to tap sentiment among participants about business conditions three years out, is an attempt to unearth early plans for development before they are expressed in more traditional measures such as initial applications to cities for building entitlements or actual building permits, said Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast at the University of California, Los Angeles Anderson School of Management.

Nickelsburg oversees the survey, the Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index. Allen Matkins is a California law firm that specializes in the real estate industry. The survey looks at sentiment surrounding office, industrial and, for the first time, apartment development, including views about construction costs. The survey on expectations for the multifamily sector included only Los Angeles, San Francisco and Silicon Valley.

“The survey indicates that the market outlook is sufficiently bright for 70 percent of our panel or their associates to begin new multifamily projects in the coming months,” according to a summary of the survey’s findings. Los Angeles multifamily developers were the most bullish about their market’s prospects of the three markets addressed.

Thirty-two Bay Area firms participated in the overall survey, Nickelsburg said. Of those, 27 answered questions about San Francisco, 23 responded to queries about Silicon Valley and 19 responded to questions about conditions in Oakland. The survey was completed in June and is the latest in a series of biannual surveys by UCLA and Allen Matkins begun in 2008 just before the start of the recent national recession.

“When we decided to add more information to this space of nonresidential real estate activity, we knew there was plenty [of data] about what is happening today,” Nickelsburg said. “What we don’t know is what is going to happen tomorrow, so we decided to create a forecasting tool.”

The three-year horizon reflected in the survey questions is intended to mirror the horizon for new development. So a developer who started a project today could, on average, hope to gain entitlements, prepare design documents and gain financial backing with an eye on occupancy in 2015.

“Since the end of the recession we have seen developer optimism spread to all of the markets and types of commercial space we survey, yet the new building potentially implied by that optimism has not yet come to fruition,” the survey summary says. “The current survey … shows a consistent pattern coming out of this recession of two-and-a-half years between a change in sentiment, and a willingness to go forward with new development.”

In both Southern California and the Bay Area, 16 percent of the panel of survey participants said that they would begin or had an associate who would begin a new office project in the next 12 months. Nine percent said that they would begin more than one project in the same timeframe.

While optimism about Bay Area commercial property markets continues to be strong, the survey reveals a slight pullback in confidence about the direction of office vacancy rates across all three of the region’s major submarkets. The change in attitude compared to six months ago reflects a “weakening of demand pressures,” Nickelsburg concludes in his prepared summary of the survey’s results.

“The optimism about 2015 in the [s]urvey is an important indicator of both the probability of new additions to stock being started over the next two years and of opportunities for new investment in office and industrial space,” the summary says.

On the industrial front, nearly half—45 percent—of Southern California participants expect to begin new industrial space development in the next year, while 28 percent of the Bay Area participants do.

Tony Natsis, a partner with Allen Matkins Leck Gamble Mallory & Natsis who specializes in advising on office leasing, investment sales and development, says among his clients, those in Southern California are focused intently on the northern part of the state and are notably less optimistic about their local markets’ anticipated performance than they are about Northern California. That relates directly back to the perception that the tenant base in the northern region of the state is much strong, broader and more vibrant. That said, he too says he sees little speculative development on the horizon, even in Northern California.

Among emerging markets drawing his clients’ attention, Northern San Diego County comes to mind as do locations outside of California including Seattle and Bellevue, Wash., and even Portland, he said.

“A lot of people have broken into the Seattle market in the last 12 months who never went there before,” he said.

West Coast Commercial Real Estate News