Optimistic Outlook Predicted Across All Commercial Real Estate Sectors – Los Angeles


The Winter 2022 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows that the current recovery from the recent pandemic-related economic recession has had a positive effect on all California commercial real estate sectors. In large part, this is because, unlike other recessions, the most recent was not characterized by downturns in the purchase of goods and slackening housing markets. The opposite in fact occurred, and this has led to a continued growth of multi-family housing development and industrial space construction, while the ongoing pessimism for retail and office construction has reversed, beginning a new growth period for both sectors.

The semiannual 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.

POST-PANDEMIC OFFICE REMODELING NEEDS
As the pandemic has progressed over the last two years, uncertainty over the future of office space has diminished. Companies have realized the value of having a team in the office in order to establish culture, create loyalty, induce creativity, and mentor young employees. This return to the office will come with new flexibility, allowing employees to work in the office part time, and will require shifting office space configurations to suit the post-pandemic work environment. This means that there will be a need for new office development in order to remodel existing offices, build satellite offices to limit employees’ commutes and create new mixed-use office complexes. The latest survey confirms that, overall, the developer panels see a turn in office markets and are planning for it. Office development and rental and occupancy rates are forecast to improve across all markets, with the sole exception being the Sacramento market, a market highly dependent on the demand for space by state government.

INDUSTRIAL OPTIMISM CONTINUES TO GROW
Driven by the rise of e-commerce, industrial space markets continue to be the outstanding performers in California, as has been shown in almost all of the recent surveys (the May 2020 survey was the exception). In the latest survey, overall optimism about industrial space over the coming three years has reached the highest level for a Winter Survey since 2015. This surge is being driven by a forecast of significant increases in demand outrunning planned and projected supply over the coming three years, and stems from the current rise in demand that has driven vacancy rates to astonishingly low levels. Los Angeles and the Inland Empire vacancy rates are now below 2.0%, and Sacramento and the East Bay Area are now between 3.0% and 4.5%. Regardless of the actual three-year outcome, it’s clear that the construction of new industrial space has years to go before it hits its zenith.

MULTI-FAMILY MARKET OPTIMISM ROARS BACK
Despite the increased demand for single-family detached homes in the suburbs, a continued work-from-home culture and falling rental rates, the multi-family panels are more bullish about the coming three years than they have been at any time since 2016. This is largely  an anticipated return of younger workers to the city core as vaccines have allowed city amenities to come back online and downtown offices plan to welcome workers back. Fully 45% of both the Bay Area and Southern California developers on the panels plan to launch multiple developments in the coming 12 months, and another 23% in Southern California and 14% in the Bay Area anticipate a single new project. For all eight markets surveyed, demand is expected to outstrip supply through 2024.

PROLONGED RETAIL PESSIMISM TURNS TO OPTIMISM
Over the course of the last four surveys, pessimism about retail occupancy and rental rates three years in the future has declined. In the latest survey, pessimism turned to optimism in four of the markets surveyed, all of which feature low unemployment rates. In these markets, a growth in income generates a growth in consumption and, therefore, an increased demand for retail. There are three forces at work in creating this optimism. First, a limited return to the office has increased the demand for retail in the core of each city. Second, the construction of new housing throughout the state has created a demand for new retail close to that housing, and will continue to generate this demand. Third, panelists expect a demand for reconfiguration of retail establishments to a more open-air, post-COVID concept in order to attract consumers back to stores.

Learn more at allenmatkins.com or uclaforecast.com.

 

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