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July 12, 2024
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CRE Trends for California Expected to Continue


The Summer/Fall 2018 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that despite tax cuts and incentives, tariffs, higher interest rates, higher cap rates, and slowing employment growth, the outlook for California commercial real estate looks much the same as it did 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, Office markets remain topped out but are not tumbling, Retail is still tumbling, and Multi-Family housing and Industrial space remain hot.

Office Space Markets Top Out
As previous analyses of the Office market have predicted, the latest survey has confirmed that the apex of the market has been reached for this cycle. This is true in both the Bay Area and the three Southern California markets, where survey participants say that office rental rates are as high as they will be for the foreseeable future on an inflation adjusted basis. In the Bay Area, sentiment has returned to neutral and rates are expected to remain unchanged over the next three years, while a slight decrease in building is expected by 2021. Similarly, Southern California market rates are as high as they will get for some time due to rising cap rates and other factors, and two-thirds of the panelists will not be developing office projects in the coming year.

Warehouses Dominate Hot Industrial Markets
With the addition to the survey of San Joaquin and Sacramento counties—two of the fastest growing Industrial markets in the state— the Industrial market data is better than ever before. The trend has improved for Industrial in the East Bay, as its ports have benefited from the increased demand for online shopping, requiring distribution centers to serve Bay Area residents. With low vacancy rates and increasing freight movement, it is not a surprise that the survey's panelists are optimistic about the next three years, both in the East Bay and San Joaquin and Sacramento counties.

The same optimism applies to Southern California, where warehouse demand in the next three years is predicted to be just as strong as, if not better than, today. Despite rising cap and interest rates, very low vacancy rates are driving the development of new projects in Los Angeles, Orange County, and the Inland Empire. Driving this demand is an increase in both imports and online shopping, which could potentially be disrupted by future trade wars.

Retail Development Continues its Decline
As the survey results reflected last cycle, Retail continues to be the weakest sector in commercial real estate. Developer sentiment is the same or lower in five of the six markets studied as compared to one year ago, with the exception of Silicon Valley. This is perhaps due to the increasing disposable income in that region—payroll employment in Silicon Valley has grown at a rate more than double the rate of the rest of the U.S. in the past 12 months. But aside from this region, brick and mortar Retail will continue to decline over the next three years. Many current opportunities in this sector are found in the conversion of space into either experiential retail or mixed-use projects that feature housing and office space.

Multi-Family Remains Strong; Could Soften in the Bay Area
Developer expectations in the Multi-Family market have remained steady since the last report in January. In the Bay Area, even though the survey panel predicts that the market will be slightly softer in three years, approximately 80 percent of all developers have plans to start at least one new project this year—a 63 percent increase from last year. This predicted softening is considered a temporary phenomenon due to long-term demand, and that the market has been so hot for so long that conditions still warrant new construction for occupancy down the road.

Demand remains strong in Southern California, where three-fourths of the survey panelists are planning new projects. This is an increase of 11 percent over last year, and the panel expects rental rates to continue to rise faster than inflation, as occupancy rates remain high through 2021.

This survey summary was provided to us by Allen Matkins Leck Gamble Mallory & Natsis LLP. 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.

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