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Rebecca Trounson – (310) 825-1348
UCLA Anderson School of Management
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Allen Matkins Media Relations
**EMBARGOED UNTIL JULY 29, 2020**
CALIFORNIA COMMERCIAL REAL ESTATE AFFECTED NEGATIVELY BY PANDEMIC THROUGH 2023, SAYS ALLEN MATKINS/UCLA ANDERSON FORECAST CALIFORNIA CRE SURVEY
Developers Pessimistic Across all Markets, with Industrial and Multi-Family Only Moderately Affected
Los Angeles (July 29, 2020) — In the wake of the current pandemic-induced economic recession, the Summer 2020 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey shows uniform pessimism and a drop in sentiment for developers across all commercial real estate spaces in 2023. The biannual survey projects a three-year-ahead outlook for California's commercial real estate industry and forecasts potential opportunities and challenges impacting the office, multi-family, retail, and industrial sectors.
Overall, survey panelists see office market demand decreasing due to work-from-home policies, industrial only moderately decreasing due to the shift to online shopping, retail continuing its downward spiral, and multi-family only moderately decreasing due to the continued shortage of housing across the state.
The Summer 2020 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and related content are available for download here on July 29, 2020 at 2:00 a.m. PDT.
Demand Uncertainty Fuels Office Space Market Pessimism
Given the continuing pandemic, there is much uncertainty about how the experience of working from home will affect today’s office space market. The panelists' shared sentiment is about as gloomy as it was in December 2008, during the height of an implosion of economic activity. They see rising vacancy rates and downward pressure on rents over the next three years. This is consistent with the UCLA Anderson Forecast’s projection that a rapid return to pre-recession, office-using employment is not likely.
The implication of the drop in sentiment is, as in 2008, a continued decrease in new office construction over the ensuing three years. Although half of the Bay Area and Southern California panelists said their plans for the coming 12 months were unaffected by the pandemic, one-third are ramping back development by more than 15 percent from their previous plans. For the third that will engage in some new development, the panelists in each market believed that land, building materials, and labor costs would be more favorable. Given the uncertainty about office space demand, these responses seem reasonable and indicate growth in development beginning in late 2021 and a slow return to pre-recession levels.
Industrial Demand Drops Less Than Other Sectors Due to Increased Online Shopping
Although there has been consistently high occupancy and superior rate growth in the industrial market over the past several years, the deep economic recession has caused sentiment expressed in our latest survey to drop precipitously in all markets except the East Bay Area. However, the panelists’ actions also indicate that they do not feel as pessimistic as the overall index suggests. Sixty percent of the panelists in Southern California and 43 percent in Northern California are planning at least one new development in the next 12 months, and 39 percent and 29 percent are planning multiple projects, respectively. When one considers that this is in the middle of a recession with a great deal of overall economic uncertainty, these numbers are quite telling.
With an increase in household savings, a recession, and a continued trade war with China, there will be near-term downward pressure on rental and occupancy rates. However, this is from a very high level. If the demand for warehouse space and the stock of warehouses are increasing at about the same rate as projected, then 2023 will see a mild erosion of rental rates when adjusted for inflation, and there remains the possibility of some erosion in occupancy. However, that does not mean that industrial space markets will be depressed, rather that they will not be as imbalanced as in recent years.
Recession Furthers Retail’s Downward Spiral
The current recession has tripled down on the struggles retail already faced during the previous economic expansion. First, household loss of income and shelter-in-place policies reduced current demand for brick and mortar retail. Second, the inability to physically frequent many retail establishments created a new set of online shoppers. Third, increases in the savings rate on the part of households in response to the recession portends less consumption. To be sure, some activities will return, particularly personal services and experiential retail. However, marginal properties will not find tenants willing to pay sufficient rent to keep the properties in the retail space.
The pessimism expressed by panelists from the Bay Area and Southern California in the latest survey is an extension of the trends from the past three years. The current view is that retail properties will be generating significantly lower returns in 2023 compared to the middle of 2020. In the Bay Area and Southern California, two-thirds of panelists will not develop any new properties in the coming 12 months. Approximately the same percentage expect difficulty with current leases and expect plummeting property values.
Continued Housing Demand Minimizes Multi-Family Market Downturn
Though the pessimism that has come with the recession has hit each of the multi-family markets in the state equally, the view that rental and occupancy rates will not be as good as they are at present has not affected the rate of activity by developers.
As the economy grows, the demand for housing in the Bay Area and Southern California will grow alongside it. Though the UCLA Anderson Forecast is looking at a 30-month recovery in the State, and there remains a great deal of uncertainty with regard to the current public health crisis, it is likely that the market for multi-family housing will remain robust. Indeed, in spite of the turnaround in sentiment from each of the six panels, almost three-fourths of the Southern California panelists and two-thirds of the Bay Area panelists have stated that the pandemic has either not changed their plans for future activity or increased it. Thus, we expect to observe a quick turnaround in this sector’s sentiment with the December 2020 survey.