Economy Reawakening Tentatively Signals the Beginning of a New CRE Cycle, Says Allen Matkins/UCLA Anderson Forecast California CRE Survey
Continued growth expected for industrial and multi-family housing; possible turn-around predicted for office and retail
Press Release
7.21.21
LOS ANGELES (July 21, 2021) — The Summer 2021 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that Californians have a palpable urge to return to normal, as expectations for the next three years among Survey respondents are decidedly less pessimistic than in the last Survey. Although both office and retail development plans have been cut back, panelists predict that the current pessimistic cycles for both sectors have hit their respective bottoms and that those markets will soon turn due to increasing demand. Meanwhile, multi-family housing and industrial space remain in the growth portion of their business cycles.
The biannual Survey polls a panel of California real estate professionals to project a three-year-ahead outlook for California’s commercial real estate industry and forecast potential opportunities and challenges affecting the office, multi-family, retail, and industrial sectors.
Office Developers Signal an Upward Turn in the Market
While the question, “what is the future of the office building?” is still on the minds of everyone who owns or develops office space, it has become clear that the latest return-to-office activity has our panelists becoming less pessimistic. In Northern California, our panelists forecast that by 2024 demand will have grown at least as fast as the new supply, in part because fully one-third of the panelists have cut back on their plans for new development. In Southern California, panelists’ views are similar and 40% have cut back on development plans for the coming three years. Although the office sector sentiment in the most recent Survey remains negative, it is becoming less so and it appears that this sector has bottomed and is ready for a possible upturn. The current lull in office construction could be short-lived as the demand for office refitting, low-rise office buildings, and growth in employment increase over the coming year. The Survey reflects that developers are taking less of a wait-and-see approach providing an early signal of a turn in the market. As workers return to the office, the demand for the amenity-rich office should push construction activity higher than the sentiment indicates.
Pandemic Fuels Continued Growth of Industrial Market
Industrial markets over the past several years have seen consistently high occupancy rates and superior rental rate growth. While sentiment in the June 2020 Survey dropped precipitously, it immediately rebounded and has continued to improve. In the latest Survey, overall sentiment about the coming three years soared to its highest level since December 2015. In both Northern and Southern California, developer sentiment indicated the current increase in rental rates would continue to exceed the rate of inflation, and the already low vacancy rates of 4 to 7 percent are expected to be even lower by 2024. Behind this sentiment is a view by the panelists about online shopping induced demand for industrial space, and the expected increase in the supply of that space.
Multi-Family Market Optimism Prevails Despite Pandemic-Related Disruptions
Despite the move to the suburbs and falling rental rates, panelists are bullish about the coming three years in the multi-family housing space. Rental rates are forecast across the board to increase faster than the rate of inflation and vacancy rates are expected to fall between now and 2024. This optimism is caused by both the re-opening of city amenities attracting people back to city apartments and the beginning of the return to the office. Multi-family housing close to employment centers is an attractive alternative to a long commute from the outlying suburbs for many.
Declining rents in the last year have not had much impact on the actual level of building for multi-family developers, as they have declined from very high levels. While nearly 70 percent of Southern California panelists will begin one or more multi-family projects this year, the number is just under 50 percent for panelists in Northern California, where lower rents and higher vacancy rates in the Bay Area have panelists waiting to see how the return to the office translates into core city demand.
While Still Pessimistic, Retail Outlook Begins to Rebound
Following a continued decline into pessimism, retail may be coming back from the bottom of the cycle. The employment data reflects a rebound in retail employment, particularly in the inland regions of the Inland Empire and Sacramento. The Bay Area and coastal Southern California regions, impacted more by work-from-home orders, have seen substantial employment gains in spite of pandemic restrictions, but have further to go.
The current view is that retail properties will be generating lower returns in 2024 compared to the end of 2021, but it does not mean the absence of solid targeted opportunities. New housing developments, whether they are multi-family or single family, generally require nearby retail. The booming housing market will continue to generate this demand. Though the Survey responses on the surface suggest a continued decline in new retail property construction, the trend has indicated a possible turnaround and a new cycle beginning before the end of 2024.
About the Survey
The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index 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. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun. Visit UCLA Anderson Forecast at 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, 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. Visit UCLA Anderson School of Management at anderson.ucla.edu.