LOS ANGELES-The twice-a-year Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows developers expressing optimism regarding commercial real estate market conditions. The survey projects a three-year ahead outlook for the state’s commercial real estate industry and highlights potential challenges.
The May 2013 results signify a continued recovery with an acceleration of growth in non-residential building until 2016 or 2017. After that, growth will continue, but likely at a somewhat decelerated rate, the survey says. Surveyed industry leaders anticipate a stabilization to occur between vacancy and rental rates as new office space is absorbed into the market. Multifamily markets will experience increases in development and demand, especially with those located near transportation hubs. Industrial markets are expected to remain healthy, but with limited growth due to lack of increased exports.
Optimism remains strongest in the Bay Area, with surveyed real estate developers viewing 2016 as a year in which rental rates are expected to be superior to 2013. Though vacancy rates may dip slightly relative to today, sentiment remains positive for non-residential construction in 2016 and 2017, as the expectation is for new office space to be absorbed.
In the Bay Area, half of the surveyed developers responded that they will begin a new project in the coming year, and in Southern California, one third of those expected to do the same. The survey points to continued growth in office space construction at the same or higher rates as today over the next three years.
In the Los Angeles, San Francisco and Silicon Valley markets, survey participants continued to be confident about the outlook for multifamily housing between now and 2016. More than half of the developers surveyed expect to begin new multifamily projects in the coming 12 months.
Double-digit rent increases and declining vacancies in San Francisco have driven a number of new building projects currently under construction. Development activity is also strong in Los Angeles in response to declining vacancy rates in the downtown area and the opening of a new light rail line that promises to spur a building boom in the county.
These projects, along with the survey results, support continued growth in multifamily housing through the Survey horizon of 2016. Survey results show that the pace of new additions for industrial space has moderated over the past six months. The survey panel judged that from last summer’s survey, the pace of new additions to industrial space was met and absorbed by the market. While conditions are expected to improve through 2016, an acceleration of new development is less likely.
Consequently, only one third of those surveyed in Southern California and two-thirds from the Bay Area expect to be engaged in developing projects during the next year, with planned additions expecting to meet demand by 2016.
John Tipton, the operating partner of Allen Matkins, tells GlobeSt.com that there are several reasons for the optimism. “Clearly we had a mad downward cycle in ’08, ’09 and parts of ’10, but certain sentiments were turning. Now you have a US economy that’s growing, not robustly, but steadily. You have very cheap money and you didn’t have massive overbuilding at the end of the last cycle, like we did in the early ‘90s. The US markets have recovered, demand has reignited, money is cheap, and there’s a continued sense of optimism.”
Tipton acknowledges that the uptick in the economy still has lagging employment and slow growth. “On a macro level, are we in a “new normal” of higher unemployment and slower growth of the US economy? Possibly, yes. Interest rates have been at a low level from an awful long time. If you asked me three years ago, do I think that would have ignited more growth, I’d say yes. But it gives insight to the severity of the downturn we were in.”
Real estate is starting to see a steady increase in growth, but Tipton says we “don’t see anything super-dramatic.” He pointed out that San Francisco has started to see some steadying of growth, which augers well that a recovery isn’t in an artificial bubble. “What I was pleased to see is continued optimism in Orange Co. and San Diego, because those areas got badly hurt in the downturn. Seeing a level of optimism there is encouraging.”
For a copy of the latest Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index Research Project, visit www.allenmatkins.com or www.uclaforecast.com. Video highlights of the report are available here.
As previously reported by GlobeSt.com, Allen Matkins has named five new partners,