SoCal Office Market Weakens While Multifamily Development Continues to Grow: Survey
Despite the flurry of coworking company expansions, the office market in Southern California shows signs of increased weakness between now and 2021, according to the winter-spring 2019 Allen Matkins and UCLA Anderson Forecast California real estate survey.
The biannual survey of commercial developers and financiers of commercial real estate, charts their expectations and plans for the next three years in major Southern California and Bay Area markets for office, industrial, retail and multifamily. Over the last six months, sentiment among office building developers has dropped in all six markets studied—San Francisco, East Bay, Silicon Valley, Los Angeles, Orange County and San Diego. In the Southern California markets of Los Angeles, San Diego and Orange County, in particular, developers foresee office rents being eroded by inflation and vacancy rates increasing from where they are today over the next three years. According to CBRE’s fourth-quarter 2018 Greater L.A. office market report, office asking rent rates stood at $3.37 per square foot with overall vacancy at 14.2 percent.
The multifamily picture, however, is somewhat flipped between north and south. In the Bay Area, developers expect occupancy rates to drop with rents still expected to outpace inflation. According to CBRE’s fourth quarter 2018 report on the multifamily sector in the San Francisco Bay Area, the overall vacancy rate is 3.9 percent with monthly rent per unit averaging $2,872.
Three quarters of those surveyed plan on starting new Bay Area projects this year, with more than half anticipating to start multiple projects. However, the anticipated slowing of job growth coupled with new building may signal the end of increasingly tight Bay Area housing markets, but not an end to the relatively high cost of building housing. According to the U.S. Bureau of Labor Statistics, the unemployment rate in the San Francisco Bay area is 2.7 percent as of December 2018 as compared to 2.5 the previous year. In addition, residents in the area spent an average of $32,656 per year on housing—41.2 percent of their average annual expenditures in 2016-17.
In SoCal, three-fourths of those surveyed are once again planning new projects, with about half expecting to begin more than one multifamily development in the next three years. Though job growth is also expected to slow in the Southland apartment rents will remain high. According to Fannie Mae’s multifamily metro outlook report on the Los Angeles region from Fall 2018, job growth expanded by just 1 percent (year over year), below the national rate of 1.6 percent during the second quarter of 2018. Building is not expected to keep up with the growth in demand. Though the high costs for housing in the region have caused a negative net migration from the L.A. metro area, as cited by Fannie Mae, the “prime-renter cohort” drawn to jobs in Los Angeles’ tech scene is expanding at one of the fastest rates in the nation, absorbing incoming supply.
Overall, the Allen Matkins and UCLA study found that of the three non-residential real estate markets studied—retail, office and industrial—only industrial space is still trending upward largely due to the rise in e-commerce. The survey found that internet sales grew at a 10.7 percent rate, twice that of retail sales between the time of the last two biannual surveys.