As prices in Southern California continue to climb past peak levels and cap rates compress, some investors have begun to look elsewhere for opportunities. However, Radius Commercial Real Estate says that there are still strong reasons to remain active in the Southern California market, listing the strong economy—fifth largest in the world—a high ranking on the Opportunity Index, and population growth as a reason to buy in the market.
“You can’t underscore or underestimate the power of California’s robust economy. Southern California in particular is home to some of the best cities with the most attractive conditions for economic growth, particularly along the coast,” Steve Brown, principal and co-founder at Radius Commercial Real Estate, tells GlobeSt.com. “When you take into account key economic indicators, we remain in a healthy expansion with no real signs for concern for a real estate bubble. And with the consistent population growth, coupled with extremely low unemployment, we see a formula for continued demand on both the commercial and residential front.”
Population is a major reason for investors to continue to focus on Southern California, particularly compared to Norther California. “The majority of the population resides in SoCal, so that’s where investments should be concentrated,” says Brown. “Of course the Bay Area remains strong with a high concentration of tech industry employers, but we have seen the migration or at least healthy expansion of tech into Southern California with Silicon Beach now attracting a lot of investment, for example. You’re seeing Google leasing an entire Westside L.A. mall and that will have a positive impact on the entire neighborhood. Plus we continue to attract players like Amazon and Microsoft.”
In addition to the strong economy and population, Radius Commercial Real Estate lists tourism, foreign direct investment and opportunity—California ranks 23 on the Opportunity Index—as the remaining three of the top five reasons to buy in Southern California. However, there are certainly more than five reasons to buy in the market. “I would be remiss if I didn’t also mention Southern California’s mild climate and the allure of the Southern California coastal lifestyle,” adds Brown. “Today’s top industries realize attracting and keeping top talent requires incentivizing employees, and many of those coveted employees would rather live and work in a place where they can swap raincoats and umbrellas for sunny beaches and flip flops.”
There is clearly a long list of investment incentives in Southern California, but this is also a challenging market for investors. High barriers to entry and strong competition are among the top challenges, along with housing affordability and poor transportation infrastructure, both of which could serve to hinder future growth. “Housing followed by transportation infrastructure are probably the two most notable challenges to future growth, especially along the coastal communities,” says Brown. “Also water resources remain a concern until technology develops to make desalinization a more realistic option. But the state government appears to be making housing in particular one of its signature issues, putting more pressure on local municipalities to be more welcoming of development.”
The combination of strong fundamentals and high barriers-to-entry, however, will temper investment activity. This year, Brown expects investment volumes in Southern California to mirror activity in 2018. “Dollar volumes will be steady as well, but with some increase anticipated if interest rates remain the same,” he says. “That said, lenders are continuing to scrutinize every deal very closely, so there’s little margin for error in today’s financing world. That’s a good thing for economic stability as no one wants to see another bubble. Properties that have their act together will be much more attractive than some that are more pie in the sky.”