Developers Largely Optimistic About California Commercial Real Estate

Apartment Building Under Construction

Despite a potential slowdown this year, California commercial real estate developers are largely optimistic about the future, the Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey found.

“[California developers] reflect an eagerness to get in on the ground floor of the next commercial real estate expansionary cycle,” the report said.

The biannual survey projects a three-year outlook for California commercial real estate and forecasts potential opportunities and challenges affecting the office, multifamily, retail and industrial sectors.

Overall, survey panelists for each property type except retail think 2022 will be “as good or better than” 2019. “Panelists are optimistic about industrial and multifamily projects, while office markets are neutral, and retail space sentiment remains generally pessimistic,” the report said.

Recent surveys had indicated the office market has peaked in the current cycle, but the latest survey indicated a return to confidence by 2022. “For the East Bay, Orange County and San Diego, the panelists were optimistic that rental rates would increase faster than inflation while vacancy rates would be lower than today,” the report said. “In the San Francisco, Silicon Valley and Los Angeles markets, this optimism is confined to rental rates, with only a slight decline in occupancy. These views are consistent with the perspective of most economists that the California economy will return to faster growth in 2022, and will generate new jobs requiring additional office space.”

Developers surveyed do not see the red-hot industrial market pulling back any time between now and 2022. “Activity throughout northern California and the Inland Empire is expected to remain at the same level of strength as today, while the Los Angeles market is projected to continue to improve,” the report said. “The improvement is due to a shortage of space close to the ports and a sense that the current downturn in trade is temporary.”

Multifamily market expectations continued the optimistic trends seen in recent years. “The southern California markets anticipate a continued [apartment] building boom,” the report said. “There is uniform optimism in Los Angeles, Orange County and San Diego as interest rates have lowered and lending conditions are not changing in any significant way.”

The report noted one potential impediment to the multifamily market: a lack of qualified labor, which increases construction costs. While the Summer 2019 survey saw a “glimmer” of hope for a moderate retail rebound, developer sentiment in this space returned to pessimism; panelists gave retail its lowest values since the survey began collecting retail predictions four years ago.