Study Finds Office Space Tops Out and Retail Still Ailing in SoCal

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The forecast for California commercial real estate looks like it did six months ago, according to a recent biannual survey, but that doesn’t mean it’s sunny skies for all sectors.

SEE ALSO: SoCal Office Market Weakens While Multifamily Development Continues to Grow: Survey

Despite major changes, like a Congress-approved tax overhaul and stimulus package designed to spur faster economic growth and investment, including in commercial real estate, a three-year projection for CRE found little change in the state and factors impacting the office, retail, multifamily and industrial sectors, according to the Summer/Fall 2018 Allen Matkins/UCLA Anderson Forecast California Real Estate Survey, which goes out to California real estate professionals in the development and investment markets.

The survey found that office space markets have topped out in both the Bay area and the three Southern California markets, which includes Los Angeles, Orange County and San Diego. Survey participants from SoCal said office rental rates are as high as they will be for the foreseeable future on an inflation-adjusted basis. Two-thirds of panelists surveyed sat out this past year; the same percentage will also abstain in the coming year.

Retail continues to be the weakest commercial real estate sector in the state. Developer sentiment about the sector was the same or lower in five of the six markets studied as compared to a year ago, apart from Silicon Valley. (The  difference  in  sentiment  there  may  be  related  to  sampling  error,  the survey contends, or potentially the run-up  in  disposable  income  and  concomitant  consumption  in  the  fastest-growing  region  of  the  State.)

Panelists  reported that  today,  two-thirds  of  their  space  is  occupied  by  tenuous  leases,  and  that  they  are  not  increasing  the  number  of  projects  they  will  be  developing  over  the  next  year.

Those surveyed expect brick-and-mortar retail to continue to decline over the next three years. Current opportunities in the sector, however, are found in the conversion of space into either experiential retail or mixed-use projects that feature housing and office space. “Experiential retail is up, but experiential retail takes a lot of effort. You have to have the right kind of mix, and it’s a challenge,” Pete Roth, a partner at Allen Matkins, said about the survey findings.

Demands for multifamily remain strong for SoCal, where three-fourths of those surveyed were planning new projects—and increase of 11 percent over last year. Rental rates are expected to continue to rise faster than inflation as occupancy rates remain high through 2021. Steve Etheridge, a partner at Allen Matkins, attributed the sector growth to an ongoing demand for housing in the state and to aspects of the new tax plan that “incentivizes multifamily use over single-family ownership.”

Industrial markets continue to be where the action is in nonresidential commercial real estate development. Through all three Southern California regions, 2021 is judged to be as good in terms of rental and occupancy rates as they are currently and likely better. Increasing imports and online shopping continue to be the fundamental drivers with the potential of trade tariffs resulting in trade wars obviously being an area to watch.