LOS ANGELES—The broad segments of the California real estate market will be slowing down in the coming years, according to the Summer/Fall 2017 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.
The biannual survey projects a three-year-ahead outlook for California’s commercial real estate industry and forecasts potential opportunities and challenges affecting office, multi-family, retail and industrial sectors. Though unemployment has dropped and income and spending are increasing, there is an ebbing of market optimism about the future from developers, which should lead to a slowing of development.
Office Space Markets Continue to Trend Down
Developer sentiment for all northern California markets has been declining since at least June of 2016, and the latest survey provides continued evidence of a downturn in the office market space. Office developers in San Diego and Orange County have now entered the negative zone from the recent survey, partly due to panelists’ less than confident outlook on the ability of rents to keep up with inflation, and for occupancy to remain at its current high level. Though slightly more Bay Area projects were started in the last 12 months than the panel anticipated last June, only 38 percent are looking at starting new projects in the next year. In Orange County, the expectation is for rental rates to hold their inflation adjusted values, while occupancy rates fall. To keep occupancy rates up, landlords would need to push down rental rates further. In San Diego, the expectation is for both to fall along with inflation adjusted land prices. Thus, as with the Bay Area, the index predicts a downturn in office construction in all but the Los Angeles market over the forecast horizon.
The outlook in Los Angeles is decidedly more optimistic, although less so than two years ago. The difference between L.A. and the other California cities is Hollywood and Silicon Beach. The entertainment and tech industries continue to grow in the Los Angeles region in response to robust demand for gaming, streamed content, television programming and critical mass being achieved in Silicon Beach. The L.A. panel does not view the office products in the pipeline as sufficient to meet all of this demand. Consequently, their expectation is for rents and occupancy to increase through 2020.
Scorching Industrial Markets Now Just ‘Hot’
Sentiment about the next three years in industrial markets has abated somewhat, but only because this has been the hottest market and building-gone-wild has been seen throughout the state. E-commerce will continue to drive a hot market for warehouse space, just not quite as searing hot as before.
Bay Area industrial sentiment for markets in 2020 as compared to today turned negative in the current survey. The component of the sentiment index most responsible for this downturn was industrial space vacancy rates, though today’s vacancies are still extremely low—87 percent of the panel started new projects last year and all of the panel will again this year.
In Southern California, the long run of optimism remains. In spite of talk in Washington about trade restrictions, double-digit growth in online sales during the holiday season coupled with increasing imports from Asia are generating an ever-increasing demand for warehouse space. Southern California panelists expect continued tight industrial space markets over the next three years.
Retail Market Hanging On to Redevelopment and Mixed-Use
In virtually every market in California, panelists see 2020 as worse than today, and this comes on top of the recent increase in vacancies. In the Bay Area, a little over a third of the panelists did some retail development last year and just over half are planning on developing some this year. In Southern California, 40 percent of retail developers are opting not to start a new project in the coming 12 months. The few retail development projects planned will most likely be redeveloping existing space or be a component of mixed-use projects.
Job Growth Continues to Fuel Multi-Family Housing
Six months ago, it looked as though multi-family development at the mid- to high-end had reached a peak and that land and building prices had edged out lower end projects. This still seems to be the case, at least for more modestly priced apartments, but sentiment reversed itself in the current survey. California continues to be a leader in job and income gains which allows for an increase in rents and a stronger outlook for occupancy rates. Multi-family developers now see opportunities in new projects for the coming three years in every market.
