Top 10 California Commercial Real Estate Trends in Q4

The annual Allen Matkins View From the Top brings together the top economists, investors, developers, and leasing pros in California commercial real estate. Now in its 12^th year, the standing-room-only event is a key source for up-to-the-minute market information.

Here are the top takeaways from this year’s CRE brain trust:

1. Too Much Focus on Cycle? Michael Van Konynenburg (“VK”) of Eastdil Secured gave his trademark rapid-fire economic analysis. His take: Is the view that “we are late in the cycle” becoming too much of a focus? The next recession is predicted to be mild. U.S. GDP growth is “slowing but decent,” with real unemployment versus headline unemployment at 50-year historic lows. In fact, the number of job openings exceeds the number of available candidates, wages are increasing, and consumer confidence is near its 18-year high. “When you step back from the noise, Twitter feeds, Fox and MSNBC, things look strong.”
2. U.S. Remains the Preferred Destination for Capital. “There is a lot of free money floating around the world,” VK noted, and with Germany tipping toward recession, it continues to find its way to U.S. investments across the board. Kevin Shannon of Newmark Knight Frank noted that in many deals, the top bidders are international. “We are seeing a lot of activity from Europe, the Middle East, and Asia, primarily the Koreans and the Japanese.” Foreign capital is looking beyond the West Coast, and is active in the Phoenix and Denver markets, for example.
3. This Market Loves Industrial. Industrial properties of any stripe are highly desirable. Also attractive: manufactured housing, life science, and MOB—what VK calls “the alternatives.” Additional strong assets: tech and media-driven industries, value-add multifamily, and new, long-term leased office space. One panelist said life sciences tenants in particular are “very sticky. They move in and they don’t move out.”
4. Amenities in Demand. Prospective tenants are now bringing their head of HR, in addition to the CFO and real estate director, to deal meetings. Companies now look at costs in terms of cost-per-person rather than purely cost per square foot. Tenants want large floor plates, contiguous space that can be accessed in multiple ways, such as the elevated walkways connecting buildings at the Coleman Highline in San Jose, being developed by Hunter Properties, as well as cafes and copious roof decks. Perhaps most importantly: walkability from transit.
5. “We Space v. Me Space” There is some backlash to the completely open office, and developers and employers are paying attention, working to balance space for collaboration (“we space”) with more private areas for coding, for example (“me space.”) Either typically requires large floor plates. Some companies, like Roku, are opting for a fitness facility as opposed to a cafeteria, and a conference center that can accommodate large meetings. New tenants are making better use of lobby space as well.
6. What are the Tough Sells? Except for marquee properties, retail continues to try to figure things out on the fly. “People really want to have an experience,” noted Allen Matkins partner John Tipton as he shared details from the Spring/Summer 2019 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey (Download the Survey). The survey reveals a relatively optimistic outlook for retail than has been observed the last couple of years, but still some ways to go. Though the economy may weaken in 2020 and construction is expected to slow over the next 18 months, there are positive predictions for 2022, with developers already gearing up for the next CRE expansionary cycle.
7. Techtainment Rules. It might not roll off the tongue, but techtainment, the merging of the technology and entertainment industries, is creating new venues and opportunities, particularly in Southern California. Netflix continues to swallow up significant real estate in Hollywood, having signed a long-term lease with Kilroy Realty for 355,000 square feet at the Academy on Vine site. Another example is the rehabbed Colorado Center in Santa Monica, now owned by Boston Properties, which Hulu calls home. Once struggling with a 35% vacancy rate, it now is 100% leased, and is outperforming relative to underwriting, according to Jonathan Lange of BXP.
8. The Sporting Life. Sports facilities continue to include mixed-use in their projects, and some large mixed-use projects, like the Coleman Highline across from the Norm Mineta San Jose International Airport, are leading groundbreaking with a sports venue. The first project completed in that development was an 18,000-seat stadium for the Major League Soccer team San Jose Earthquakes. This year also saw the successful opening of the Chase Center in San Francisco, the new home of the Golden State Warriors. The Los Angeles Stadium and Entertainment District (LASED) at Hollywood Park will host both the Los Angeles Rams and the Los Angeles Chargers in 2020, along with the NFL’s Media Campus, which will offer a glass studio and a “Today Show”-style experience for fans. Lastly, the Oakland Athletics are looking at a new ballpark at the Port of Oakland’s Howard Terminal in West Oakland. While there are still some legislative hurdles, plans call for a more intimate park designed for younger fans and an “access pass” that will allow fans to wander the park, restaurants, and bars and experience game day without an assigned seat, which could become a new model for baseball, according to Lydia Tan, Managing Director of Real Estate for the Oakland Athletics.
9. Focus on Community Partnerships. Tan noted that the A’s are committed to improving air quality and other environmental factors near their proposed Howard Terminal site, which has heavy truck traffic. “How can we alleviate the systemic issues caused by growth? We are committed to reducing our own greenhouse gas emissions, and want to green some systems in the neighborhood,” says Tan. Similarly, Brookfield’s Pier 70 project in San Francisco set a record for the shortest period of time (six months) between entitlement to groundbreaking, in part due to its commitment to conversation and community involvement in the process.
10. On the Horizon? Rent Control & Prop. 13. Tony Natsis asked each member of the event's Investment Sales Panel “what could stop the party?” China’s tensions with Hong Kong were mentioned, but bigger issues loomed closer to home, including a proposed state rent cap and various local rent control measures, a possible repeal of California’s Prop. 13 as it applies to commercial buildings, and increasing construction costs, both for labor and materials. Scott Stafford of Strada Investment Group noted, “the people building these new [Bay Area] buildings are driving in from Sacramento and Tracy.” That, along with housing pressures for new workers who will occupy those buildings, does not seem sustainable, he said. But if there is a downturn, look for some players to turn into aggressive acquirers.

2019 View From the Top Overview