An Economic Turn Is Looming

Tony Natsis is a partner at Allen Matkins.

LOS ANGELES—The results from the Allen Matkins/UCLA Anderson Forecast Survey , which GlobeSt.com has obtained exclusively, show that there may be a turn in the market looming in the near future. The survey asks California commercial real estate professionals their three-year market outlook, and many believe that retail and office are topping out while industrial and multifamily sectors have runway remaining. While there have been questions about the end of the cycle for years now, this is the first time since the recession that the survey has returned a tempered outlook from professionals. “When you are in an up cycle, people wonder when it is going to end, but they never change their actions. Now, people are starting to change their actions,” Tony Natsis , a partner at Allen Matkins , tells GlobeSt.com. “They are saying, ‘I don’t want to be standing at the end of this musical chairs game.’ An example is of some large deals that are coming to market to sell. It used to be that deals would have 20 bidders and everyone would have everything in on time. Now someone still wants to buy the property, but they aren’t rushing to buy it and they aren’t getting everything in on time. Those are the well-heeled people. You end up with the same pricing, but it is less frothy.” While the retail and office sectors were thought of as more challenging sectors, the participants in the survey still held an overwhelmingly bright outlook for industrial and multifamily, and Natsis agreed that those sectors still had runway remaining. “Industrial is heavily graded by ecommerce,” he says. “If you think about it as a transference of space, you know that industrial is going to keep doing well, especially in port cities. We have tons of millennials that need immediate gratification, and industrial is really replacing destination retail, so I think industrial will continue to do well.” Natsis says that retail will likely continue to be flat or even trend downward as a result of the success in industrial and the shift toward ecommerce shopping. As for the multifamily market, Natsis says that there is real demand and real rent growth now like we didn’t have during the last cycle, which was largely inflated. With millennials preferring to rent, multifamily will continue to be strong. “Multifamily is fine because the workforce generation doesn’t want to return home and live there, and they are making a decent amount of money, so they want to rent something,” explains Natsis. “You have a huge explosion of tech hubs, and you need someplace to house them. Doesn’t surprise me at all that multifamily is still doing well.” While there was a sentiment that an economic turn may hit in the next three years, it certainly isn’t here yet. At the moment, the market fundamentals are still healthy, and Natsis says that when a recession does hit, it will likely be more or a flattening or softening than a cliff-drive, as we saw in 2008. “This time it is totally different because we have very little leverage,” he says. “In 2008, everyone borrowed heavily, which meant that projects were essentially owned by the lender. If you own a $300 million project with no debt and the market turns, you can wait out the cycle until you have massive appreciation again. You have very well heeled people that can weather the storm.”