Investment sentiment for California office product is soaring, according to the latest survey from Allen Matkins and the UCLA Anderson Forecast. While investors are becoming bullish on office product in all of the major submarkets, developers aren't as bullish on new product in some markets. Overall, new construction this year will stay neutral, with activity healthier in some areas than others.

“In Northern California, more developers are staying on the sidelines when it comes to construction,” John Tipton, a partner at Allen Matkins, tells GlobeSt.com. “In Los Angeles, however, developers have been more bullish.” This isn't surprising considering that sentiment in Northern California only recently rebounded, driven largely by the new tax plan. In the last survey, taken six months ago, investment sentiment was down in Northern California. As demand increases, development could rebound as well. In Los Angeles, sentiment remained positive.

While new construction isn't ramping up, developers that do have new projects under construction are comfortable building speculative developments in dense urban areas, where demand is highest. While pre-leasing efforts won't go away on new construction, pre-leasing is not going to as prevalent in dense urban areas. In those markets, developers are willing to build spec without an anchor tenant attached to the project, according to Tony Natsis, a partner at Allen Matkins, in a commentary video about the survey results.

The tax plan is likely the reason why development sentiment might not have turned positive as investment sentiment has. The new tax plan drove the shift in sentiment, but there aren't any incentives that make new development more attractive. “When you think about the tax cut, it doesn't just favor real estate investment. When you have a more than a trillion dollars in tax cuts, it is going to be generally stimulative for the economy,” explains Tipton. “That should in the short-term—and by that I mean the next year to three years—lead to increased growth. Of course, when you cut taxes, you could have longer-term problems that could lead to a deficit. At least in the short-term, it is a stimulative act.”

Instant Insights /

Office Construction Stays Neutral in 2018

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