A Need for Post-Pandemic Office Remodeling Signals Newfound Market Optimism
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, our 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, Reaching Highest Level in Years
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 our recent surveys (the May 2020 survey was the exception). In the latest survey, overall optimism about industrial space over the coming three years reached the highest level for a Winter Survey since 2015. This surge is being driven by a forecast for 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 from Pandemic-Related Demand Drop
Despite the increased demand for single-family detached homes in the suburbs, a continued work-from-home culture and falling rental rates, our multi-family panels are more bullish about the coming three years than they have been at any time since 2016. This is largely because of 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 our 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 Finally 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, our 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.
About the Survey
The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index polls a panel of California real estate professionals in the development and investment markets on various aspects of the commercial real estate market. The survey is designed to capture incipient activity by commercial real estate developers. To achieve this goal, the panel looks at the markets three years in the future, and at building conditions over the three-year period. The survey was initiated by Allen Matkins and the UCLA Anderson Forecast in 2006, in furtherance of their interest in improving the quality of current information and forecasts of commercial real estate.
About Allen Matkins
Allen Matkins, founded in 1977, is a California-based law firm with more than 200 attorneys in four major metropolitan areas of California: Los Angeles, Orange County, San Diego and San Francisco. The firm’s areas of focus include real estate, construction, land use, and environmental and natural resources; corporate and securities, real estate and commercial finance, bankruptcy, restructurings, and creditors’ rights, joint ventures and tax; labor and employment; and trials, litigation, risk management and alternative dispute resolution in all of these areas. Allen Matkins is located on the web at www.allenmatkins.com.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state’s rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to call the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun. Visit UCLA Anderson Forecast at uclaforecast.com.
About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson’s MBA, Fully Employed MBA, Executive MBA, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics, doctoral and executive education programs embody the school’s Think in the Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow.
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