Top 10 Takeaways from the 2018 Allen Matkins View From the Top

Allen Matkins annual View From the Top brings together the top economists, investors, developers and leasing pros in California commercial real estate. Together, they provide an insider take on this dynamic market, and share thoughtful insight into future trends.

Here are the Top 10 Takeaways from some of the smartest minds in the business:

1. Longest Recovery Ever? D. Michael Van Konynenburg (“VK”) of Eastdil Secured shared his comprehensive economic analysis. The bottom line: the U.S. is on its way to the longest recovery ever. U.S. GDP is the highest in four years. Weekly unemployment claims are the lowest in 50 years, even with the increase in population. Consumer confidence is at an 18-year high, despite an “exploding” deficit. The downside? There is a growing labor shortage, which will likely increase as the labor market ages and we experience the pressures of decreased immigration. Other data points to watch: the S&P is up 10%, but other world indexes are much lower. There continues to be concern about emerging market currencies, such as Brazil, Turkey and Argentina.
2. Despite Turmoil, Politics Are a Win-Win. If the Democrats take over Congress in the mid-term elections, we could see additional investigations of the Trump Administration and possible impeachment proceedings. This means gridlock, which markets tend to like. If the Republicans continue to control government, this means a steady supply of pro-business judges.
3. West Coast Rules. The West Coast commercial real estate market is the strongest in the country. There are more tower cranes in Seattle—65 at one point this year—than anywhere else in the country. There are more cranes in Bellevue alone than Boston, Phoenix, or Honolulu. Vacancy rates are in the low single digits, and panelists report that employers are willing to make larger commitments for space much earlier in the cycle than previously seen.
4. Investing in Hubs and Buying to Hold. Developers are creating intentional business communities, such as the life science development Kilroy plans for Oyster Point in South San Francisco. A $3 billion project, it will be the country’s second largest life science “cluster.” Like Kilroy, nearly all speakers agreed they are buying to hold.
5. Sustainability Rules. Increasingly, tech companies are boosting sustainability to the top of their corporate mission list, and their landlords are following suit. With 40% of our carbon footprint coming from real estate, Kilroy, for example, has pledged to get carbon neutral by 2020, and uses it as a selling point with prospective tenants and employees. Currently, 58% of its portfolio is LEED-certified.
6. The Lure of Sports, E-sports, and Gaming. Two of the state’s largest multi-use developments include sports arenas: the Golden State Warrior’s new Chase Center in San Francisco, which comes online August 2019 and includes two office towers, and Hollywood Park in Inglewood, a mix of residential, office and entertainment, already set to host the 2022 Superbowl and the 2028 Olympics. Chase Center will be the first privately financed NBA arena in decades (selling the 20-year naming rights to JP Morgan Chase for a reported record-setting $300 million certainly helped make that possible). Additionally, several developers cite the rise of e-sports, currently a $700 million industry that is expected to grow exponentially. There are 330 gaming companies in Los Angeles alone.
7. Construction Costs, Especially in San Francisco, Are on the Rise. A tight labor market, the effect of Trump tariffs, rising interest rates, and escalating labor costs mean construction costs are on the rise, though not to a point to keep developers out of the market. Panelists at the conference suggest that it is impossible to build a new unit of housing in San Francisco, where entitlements are particularly tight and Prop. M imposes limits on growth, for less than $1K per square foot, or $1million per unit. Impact fees on commercial properties alone are north of $80 per square foot.
8. Welcome to Upzoning. And Downzoning. In San Francisco’s Central SOMA (the only real available area for growth in SF, other than in-fill development), the city is upzoning some land, taking industrial lots and converting them to commercial and residential. In other areas, developers are finding success taking older-generation office and industrial properties in San Mateo, on the San Francisco Peninsula, and converting them to housing, which cities find more attractive, as it will add minimal traffic stress, as compared to commercial redevelopment.
9. Co-Working Comes to Retail. Retail is dragging, though some mixed-use retail properties are thriving, especially where the addition of co-working spaces is pumping new life and traffic into select properties. The Los Angeles co-working market, in malls or elsewhere, is second only to New York.
10. Banking on the Last Mile. Light industrial properties geared toward e-commerce companies focusing on the “last mile” of delivery to customers (including groceries and meal delivery) continues to be a hot market. The “reverse supply chain,” designed to accommodate product returns, is so far an untapped market.