UCLA Anderson forecasts booming commercial real estate market in California
California’s commercial construction activity has risen to its highest level since 2001 and is expected to continue to grow over the next three years, according to the most recent conducted by law firm Allen Matkins and UCLA Anderson School of Management.
The study, which examined seven of the state’s major markets for indicators of future commercial construction, notes that the industry boom has been sparked by available financing, low cap rates and an increasingly high demand from technology, advertising, media and information companies, as well as a shortage of multi-family housing.
“Continued optimism in this survey is supported by job and income growth and a lack of sufficient building supply,” said Jerry Nickelsburg, adjunct professor of economics at UCLA Anderson School of Management and senior economist with the UCLA Anderson Forecast. “While the outlook remains positive through 2018 with no weakening in occupancy rates, a few of the survey panel participants did express slight caution with regard to this next stage of the CRE building cycle.”
The survey’s overall outlook for the office market remains strong in each of the six markets surveyed, due in part to falling vacancy rates and an overall positive outlook for the economy. Technology, advertising, media and information companies are the new driving force for this positive sentiment, as the recovery of service-provider companies, such as accounting, finance, insurance and legal has remained tepid.
None of the survey participants foresee rental or occupancy rate weakness through 2018. In Southern California, 40 percent said they expect to begin at least one new project in the next 12 months. This compares to the 23 percent that began one or more new developments over the past 12 months.
Optimism remains strong among multi-family developers in each of the five regions surveyed, with 74 percent saying they started a new project within the past year and even more are expecting to begin new projects in the coming six months. The regions surveyed included Los Angeles, San Francisco, Silicon Valley, Orange County and San Diego County.
This positive view of the future of multi-family housing is expected to continue as job growth in California will continue to be skewed towards these five coastal communities, the study said. The new survey panels expect no decrease in vacancy rates over the next three years.
The study found there has been a shift in tastes from single-family housing to a balanced mix between single-family and multi-family housing. Though overall residential construction has remained at depressed levels in the state, multi-family construction has rebounded sharply, it said. The UCLA Anderson Forecast expects that multi-family construction will achieve a 25-year high during the next three years, with expected higher rents and continued low vacancy rates fueling increases in multi-family construction.
The survey of industrial space developers indicates little change in sentiment over the last year and remains optimistic, particularly in the Inland Empire. In the current survey, 68 percent of the panel are planning one or more new industrial projects in Southern California between June 2015 and June 2016.
There is clearly continued strengthening in the Southern California industrial space market, with activity expected to remain hot for at least the next three years, forecasters say. This is due in part to post labor dispute, increased imports through the San Pedro Bay Ports and more generally to the increase of consumer spending and the increased use of retail distribution centers.
Meanwhile, the outlook on retail construction in the Los Angeles, Orange County and San Diego markets also is upbeat. Two-thirds of the panelists are planning new retail construction in the next 12 months.