Unusual Economic Recession Shows Mixed CRE Outlook through 2023, Says Allen Matkins/UCLA Anderson Forecast California CRE Survey
Industrial space remains strong, multi-family housing is mixed, while pessimism continues for office and retail
Press Release
1.27.21
LOS ANGELES (January 27, 2021) — The Winter 2021 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that the current pandemic-related economic recession is having a mixed effect on California commercial real estate sectors, as this particular downturn is not characterized by a slackening in housing markets or a stock market crash. While office space markets are in a holding pattern and retail markets are on a downward trajectory, multi-family housing and industrial space instead 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 forecasts potential opportunities and challenges affecting the office, multi-family, retail, and industrial sectors.
Office Developers Take a “Wait-and-See” Approach
With the pandemic shifting the use of traditional office space, there is much uncertainty as to what the future of development in this sector will look like. Though panelists are confident about the growth in demand for office space between 2020 and 2023, they are pessimistic about the return on investment in new space today. In both Northern and Southern California, panelists believe that newly built space, in addition to that freed by companies reducing their existing space, will outstrip any near-term increased demand for office space. This leads to the overall conclusion that the end of the latest office building boom is at hand, though there will be demand for office reconstruction and low-rise office building construction. Across the board, there is a wait-and-see sentiment in the office space market, and that portends a downturn in the rate of new development.
Industrial Comes Roaring Back to Record High Optimism
In the June 2020 Survey, industrial space sentiment dropped slightly but was logical, given that the state was in the midst of a pandemic. However, vacancy rates have remained extremely low across all regions surveyed and sentiment about the coming three years has come roaring back to levels of optimism that have not been seen for many years. The dramatic shift in buying habits to online shopping during the pandemic has most likely changed household purchasing for the unforeseen future.
Although panelists are very optimistic about the next three years, their current building plans are only marginally greater than their already ambitious pre-pandemic plans. In both Northern and Southern California, approximately 30 percent of the panelists stated that the experience of the recession has caused them to consider increasing the amount of development they will undertake. Therefore, the expectation is for a new wave of warehouse building over the coming three years.
Current Recession Creates More Challenges for Retail
During the previous economic expansion, retail faced an uphill battle. The current recession tripled down on that struggle. First, the loss of household income and the shelter-in-place policies reduced current demand for brick-and-mortar retail. Second, the inability to physically frequent many retail establishments created a new set of online shoppers. And third, increases in the savings rate on the part of households in response to the recession portends less individual consumption. This all results in more marginal properties not finding tenants who are willing to pay sufficient rent. The current pessimistic view among panelists is that retail properties will be generating significantly lower, if any, returns in 2023 compared to the end of 2020. Overall, the level of new retail property construction is expected to significantly decline from 2020 through 2023; and some existing space, lacking sufficient demand, will be converted to other uses.
Multi-Family Market Sentiment Continues to Be Mixed
Multi-family market expectations have improved in Silicon Valley, Orange County, and San Diego, while in the other markets surveyed, panelists do not see 2023 as having higher occupancy and rental rates compared to today. The markets that have not seen improved sentiment are either urban areas that have had dramatic declines in rental rates because of an exodus to more suburban areas (San Francisco and Los Angeles) or are generally home to more lower-income workers (the East Bay and Sacramento regions), hard hit by the recession. Overall, though the pandemic has changed the nature of the demand for apartments — both geographically and in their footprint — multi-family development is still expected to grow in California as the economy rebounds and housing demand grows again.
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. 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 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, 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.