California Commercial Real Estate Continues Its Boom, but Signs of Boom Topping out

By George Bao   Aug. 4, 2016

New houses on the market in Southern California (photo by George Bao).
New houses on the market in Southern California (photo by George Bao).

LOS ANGELES – California Commercial Real Estate Survey signals that California commercial real estate continues its boom, but as U.S. economic growth slows, there are signs of this boom topping out, according to the Allen Matkins/UCLA Anderson Forecast released Thursday.

The survey shows that Commercial real estate fundamentals improve with increases in employment and income and a slowing of the growth of these is potentially of concern.

The biannual survey projects a three-year-ahead outlook for California’s commercial real estate industry and forecasts potential opportunities and challenges affecting office, multi-family, retail and industrial sectors.

The Survey, taken by commercial real estate industry leaders in June 2016, “provides the first indication of a topping out in office and retail markets,” says Jerry Nickelsburg, adjunct professor of economics at UCLA Anderson School of Management and senior economist with the UCLA Anderson Forecast.

In the two other markets surveyed, industrial and multi-family housing, the optimism of the past few years continued through the June survey period. 

The latest Survey presages a new topping out of the market for office space in the future. For each of the six markets surveyed (San Francisco, the East Bay, Silicon Valley, Los Angeles, Orange County and San Diego), the trend in office developer sentiment since its peak in 2014 has declined. This downward trend occurs as developers become more pessimistic about the growth of real rental rates and vacancy rates.

For the Southern California panels, sentiment has slowly weakened, with the Survey indicating that markets will remain the same three years from now.

In the Bay Area, the outlook is slightly different. The San Francisco, Silicon Valley and East Bay panels all think that by 2019 real rental rates and vacancy rates will be worse than today. Panelists were most pessimistic about the San Francisco market, in spite of propositions that limit both new building and the conversion of existing B and C office space in the city.

Multi-family developer optimism has remained strong and consistent over the previous four years it has been included in the Survey.

The demand for multi-family housing tends to follow job growth in the more densely populated regions of California. Hence, one would expect the Silicon Valley, San Diego and San Francisco markets to tighten over the coming three years, relative to Orange County.

The Los Angeles market is different with Survey panelists in that region expecting vacancy rates to increase over the next three years even as real rental rates continue to rise.

The building of new apartments in Los Angeles is therefore expected to ease some of the shortfall in housing units, even while higher rental rates permit lessees to tolerate somewhat higher vacancies.

The current economic expansion reflects a shift in tastes from primarily single-family housing to a balanced mix between single-family and multi-family housing.

Though overall residential construction has remained at depressed levels in the State, multi-family construction has rebounded sharply. The Survey anticipates a 25-year high in multi-family construction during the next three years. Unlike office space, there is no evidence of a slowdown in new multi-family development.

 

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