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Despite Economic Uncertainties, Tempered Optimism Prevails for California Commercial Real Estate

8/09/22

The Summer 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that there is much more optimism about the next three years than the barrage of negative news about the economy might suggest. The current Survey reveals that the optimism shown in last Winter’s Survey for office and retail markets turning positive in the near-term was premature, but that the prevailing sentiment for those markets remains one of confidence in the longer-term. Meanwhile, optimism for industrial and multi-family markets remains, though at a more tempered pitch than was shown six months ago.

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.

Continued Uncertainty Dampens Office Market Sentiment

The continued persistence of the COVID-19 pandemic has reversed the previously optimistic trajectory of the office market as a return to the workplace for many employees continues to be delayed. With investors becoming more cautious due to the increased uncertainty about near-term economic prospects, the optimism for the office market in the previous Survey shifts to a downturn in Southern California, with a more neutral view in Northern California. Office development sentiment has remained slightly optimistic in the Bay Area, though there are not yet plans in place to increase the rate of development. Though the return to the office has been delayed, there are signs that this pessimism is temporary—companies will ultimately put into place plans to return their workforce to the office, and there will eventually be a need for new office development that will provide for this new office landscape.

Multi-Year Optimism Continues for Growing Industrial Market

With industrial markets seeing consistently high occupancy rates and superior lease rate growth over the past few years, sentiment for new industrial projects has been consistently positive, including in the latest survey. This is in large part due to the fact that rapid industrial development has barely kept up with absorption, leaving plenty of demand for additional supply. Consistently high occupancy rates and superior lease rate growth have kept the optimism high for all industrial markets. The current survey predicts more of the same—that significant future increases in demand will outstrip planned and projected 2025 supply. This view of an even tighter market stems in part from the fact that demand in the last few years has driven vacancy rates to their astonishingly low levels.

Multiple Factors Fuel Continued Multi-Family Market Optimism

Despite the pandemic-induced demand for homes in the suburbs and a continued work-from-home culture, optimism continues about the coming three years, though it is slightly less than a year ago. In this Survey, it is forecast for every market that rental rates will increase faster than the rate of inflation and vacancy rates will fall between now and 2025. Although the continued waves of the pandemic delayed some return to the office, the reopening of city amenities and the creative and social value derived from urban experiences are attractors that are expected to prompt increased multi-family living in urban areas, particularly among younger workers.

Two other factors are also driving new multi-family development—the inland parts of California are experiencing growth in logistics and infrastructure construction and a series of state laws—SB8, SB9 and SB10—have superseded some local building approval processes, opened land currently zoned for single-family homes to the construction of small multi-family structures, and reduced barriers to multi-family construction in transit corridors.

Retail Outlook Continues Slow Rebound

Despite a looming recession and continued economic uncertainty, retail sentiment continues to rebound from the bottom of the cycle. The latest Survey indicates optimism in most markets aside from San Francisco and Los Angeles, where pessimism continues due to continues due to many people continuing to work from home and a lack of foreign tourism. In the other markets, a limited return to the office has increased the demand for retail in the core of each city, while the building of new housing throughout California has created a demand for new retail close to that housing. There is also expected to be a demand for the reconfiguration of retail establishments to a more open-air, post-COVID concept that will attract consumers back to stores. The booming housing market will continue to generate demand for retail throughout the state, leading to a turnaround in retail development and a new retail building cycle that should begin before the end of 2025.


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.





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