Recent Market Uncertainties Had Little Sway on Real Estate Outlook, Says Allen Matkins/UCLA Anderson Forecast California CRE Survey
Industrial Space Continues its Upwards Trend, Multi-Family Is Mixed, Office Shows Signs of Topping, and Retail Still Lags
Press Release
2.13.19
LOS ANGELES – February 13, 2019 – The Winter/Spring 2019 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that despite the recent uncertainty in the stock market, increasing cap rates, and slower economic growth, developers’ views on California commercial real estate markets have not changed much from six months ago. The biannual survey projects a three-year-ahead outlook for California's commercial real estate industry and forecasts potential opportunities and challenges affecting the office, multi-family, retail, and industrial sectors. Following the trends of the past two years, industrial space remains hot despite the economy’s fluctuations, multi-family housing remains strong in most markets, office has reached its peak, and retail markets continue to struggle.
Office Space Market Sentiment Weakens
Sentiment for all six office markets in California surveyed – including the Bay Area, Silicon Valley, and Southern California – has dropped as of late. Results indicate these markets have peaked and are entering a more moderate part of the cycle over the next two years. In the Bay Area, although developers are not suggesting an immediate cut-back in their development activity, predictions for the next two years see a cooling down of the market. Similarly, Southern California panelists indicate an increase in weakness between now and 2021. While actual and planned building is currently higher, developers see rental rates being eroded by inflation and vacancy rates increasing from today.
Online Sales Keep Retail Development On a Decline
The current survey extends the recent stretch of pessimism about future retail markets—panelists indicate that occupancy rates are expected to continue to deteriorate through 2021. This has occurred in spite of good job growth, rising incomes, and more than three percent GDP growth. While new retail for housing, office, and hospitality projects provides niche opportunities in this space, there is just too much capital in brick-and-mortar retail. Overall retail sales in the U.S. have increased at a 5.3 percent annual rate over the past year, but net store closings and traditional shopping mall stress remain prevalent due to the shift from brick-and-mortar to online shopping, resulting in too much aggregate space in retail markets. Between the last two surveys, internet sales have grown at a 10.7 percent rate, twice that of total retail sales growth. As such, a net 2,900 store closings nationwide occurred in 2018. This is a phenomenon likely to continue for at least the next three years.
Fueled by E-Commerce and Imports, Industrial Remains Hot
Of the three major non-residential real estate markets, industrial space is the only market still trending upward. This is caused by the same online shopping trends that are hurting the retail market, as well as a continued increase in imports. In 2019, real personal income growth in California is expected to hold up and support the current industrial space expansion, which is dominated by warehousing and distribution centers.
In the East Bay, panelists have been optimistic about rental rates and vacancy rates for the past 18 months. In addition to increasing demand for online shopping requiring distribution centers to serve seven million Bay Area residents, both seaport traffic and air cargo in the region have increased in the past six months. With low vacancy rates and increasing freight movement, it is no surprise that panelists are optimistic about the next three years in the East Bay, San Joaquin, and Sacramento —80 percent of them started a new industrial project in this area last year and 80 percent will begin at least one new project this year.
Southern California markets are seeing the same optimism— there has been a rise in new projects started by our panelists since last year. Over the last three years, the panelists have viewed these markets as playing catch-up with demand, and the expectation is that this will continue through 2021. Continued growth at the ports and strong consumer demand nationwide is adding to the increased demand, particularly in the Inland Empire. It is estimated that 15 million square feet of new industrial space is under construction in the Inland Empire and that absorption will take it off the market rapidly.
Multi-Family Market Sentiment is Mixed
The multi-family market sentiment is decidedly mixed. In the Bay Area over the next three years, occupancy rates are expected to creep down and rental rates are expected to outpace inflation. Three quarters of our panelists plan on starting new Bay Area projects in 2019 and over half expect to start multiple projects. However, the expected slowing of job growth coupled with new building signals the end of increasingly tight Bay Area housing markets.
In Southern California, three quarters of the panelists are once again planning new projects, with about half expecting to begin more than one multi-family development. The panel’s expectations are that rental rates will continue to rise faster than inflation and that occupancy rates will remain high. The implication is that even though job growth in Southern California is expected to slow, the building process will not keep up with the growth in demand. This is consistent with a separate analysis by Fannie Mae economists.
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, 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 approximately 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.
Follow UCLA Anderson on Twitter at http://twitter.com/UCLAAnderson or on Facebook at http://www.facebook.com/uclaanderson.
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