Multifamily demand rebounds; office shows early
signs of stabilization; retail is poised for expansion; industrial
finds market balance
The Summer 2024 Allen Matkins/UCLA Anderson Forecast California
Commercial Real Estate Survey released today reveals that a
majority of California’s commercial real estate industry
participants (71%) anticipate distress levels to rise in the coming
months, with 53% predicting that new development will decrease over
the next three years. As interest rates remain the primary concern
for the industry, these findings signal ongoing challenges for
stakeholders across the commercial real estate spectrum, as well as
emerging opportunities.
The Allen Matkins/UCLA Anderson Forecast is a bi-annual survey
that polls a panel of California’s real estate professionals to
project a three-year ahead outlook for commercial real estate and
the macroeconomic trends impacting industry participants across the
multifamily, office, retail and industrial markets.
Allen Matkins partner John Tipton said: “Consumer behavior is
changing, and that will transform how traditional real estate is
used. We are working closely with our clients to recalibrate their
development and investment strategies, embracing adaptive reuse,
digital integration and sustainable practices to create the
infrastructure of our future economy.”
Multifamily’s great move in
Following a tempered outlook earlier in the year, when plans for
new development significantly slowed, the multifamily market is
experiencing a resurgence despite expectations of distress in the
broader market. Optimism in the sector is improving compared to the
previous survey, with 65% of Northern California respondents and
57% of Southern California respondents expecting demand to grow
faster than supply in the coming years.
New multifamily development in Southern California is expected
to pick up, with two-thirds (66%) of respondents planning at least
one new project in the next year, compared to 55% in the Winter
2024 Forecast. However, the majority of Northern California
respondents do not have new multifamily development plans in the
next 12 months.
Given this limited development in Northern California, 44% of
respondents project that rents in San Francisco will increase
faster than the rate of inflation, compared to 20% from the
previous survey. Fifty-six percent believe that Silicon Valley
rents will increase faster than the rate of inflation, compared to
27% in the previous survey.
“At the outset of the year, developers approached California’s
multifamily sector cautiously as interest rates and concerns about
recent overdevelopment impacted valuations,” said Timothy Hutter, a
partner in Allen Matkins’ Land Use Group. “The industry’s rebound
indicated in the Summer 2024 Forecast highlights surging confidence
in the market driven by regulatory improvements and an expanding
demographic of renters and remote-ready housing. As California
navigates its critical housing shortage, we anticipate a renewed
wave of development presenting fresh opportunities in the
market.”
Office shape shifts
New office development remains at a standstill, with 95% of
Northern California and 90% of Southern California respondents
reporting no new developments in the next 12 months.
However, the Summer 2024 Forecast reveals vacancy rates are
expected to improve in existing properties. Seventy-three percent
of Northern California respondents expect vacancy rates to stay the
same or decrease, up from 50% in the previous Forecast, and
signaling a plateau if not a rebound on the horizon.
Still, 64% of respondents anticipate that it will take longer
than through 2027 for the office market to recover. With continued
uncertainty, nearly a quarter (24%) of Forecast respondents are
exploring the adaptive reuse of existing office spaces.
"We have seen clients, who were waiting for distressed sale
opportunities, start to close on those deals, whether through a
note sale or foreclosure, or just trading directly with the
existing owner in an off-market transaction," said Anthony Burney,
a partner in Allen Matkins' Real Estate Group. "Our expectation is
that this initial activity will lead to a larger wave of
transaction volume, bringing more potential buyers off the
sidelines to start acquiring properties."
Retail continues slow rebound
The Summer 2024 Forecast indicates that Southern California’s
retail market is poised for more development in the coming years,
with 65% of respondents expecting that demand will grow faster than
supply. Further, respondents’ three-year forecast shows that
vacancy rates for retail space are expected to fall across Los
Angeles, Inland Empire, Orange County and San Diego, with rents in
these markets projected to increase faster than inflation.
While retail outlook is improving, Forecast respondents are
focused on filling existing spaces over new development. More than
half (53%) of respondents do not expect retail to enter a new
development cycle by 2027. Mixed sentiment across the state
highlights the regional differences in rent expectations and
development plans.
In Northern California, 55% of respondents are planning at least
one new retail development in the next year. However, retail rents
are largely expected to decrease, particularly in San Francisco,
where 57% of respondents expect a decline in rent prices compared
to 31% from the previous survey.
“California’s retail investors and developers are optimizing
existing retail spaces rather than pursuing new developments,” said
Brian Michel, a partner in Allen Matkins' Real Estate Group. “There
is a notable focus on enhancing residential-serving spaces, such as
neighborhood shopping centers, driven by robust demand fundamentals
in these segments. Looking ahead, we anticipate continued
innovation and adaption in how retail spaces are utilized to meet
evolving consumer needs.”
Industrial reaches market balance
The Forecast shows that 59% of respondents believe that
industrial supply and demand will be balanced in the year ahead.
Following recent years of robust development and growth in the
sector, 69% of Northern California respondents and 50% of Southern
California have no new industrial development plans.
As development slows, views on vacancy rates are improving. In
the latest survey, just 25% of Northern California respondents
expect vacancy rates to increase, down from 38% in the previous
forecast. E-commerce continues to be the primary driver of new
industrial development (50%), followed by demand for data center
space to support AI and related technologies (17%).
“While industrial developers are taking a strategic pause, that
does not indicate a contraction in the market,” said Alykhan
Shivji, a real estate partner in Allen Matkins' New York office.
“As new supply is limited, demand for existing, well-located
industrial product will strengthen and boost occupancy rates,
especially amid escalating activity California’s seaports.”
Learn more
To download the full Summer 2024 Allen Matkins/UCLA Anderson
Forecast, click here.
About the Survey
The Allen Matkins/UCLA Anderson Forecast California Commercial
Real Estate Survey and Index polled 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 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, a law firm with more than 240 attorneys, was
founded with deep roots in real estate that has leveraged that
foundation to grow and build prominent litigation, corporate, tax,
labor and employment, land use, and environmental practices
allowing us to partner with clients across myriad industries and
markets. For more than 45 years, Allen Matkins has worked with
clients drawn to us by our reputation for market leading solutions,
pragmatism, exemplary quality, approachability, and our
unparalleled network of contacts and connections in business and
government. For more information about Allen Matkins please visit
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. 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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