San Francisco may register only a slight decline in office occupancy if there is a downturn.
SAN FRANCISCO—Although the economy is predicted to slow in 2020, developers' two-year views on most sectors of California commercial real estate are optimistic, reflecting an eagerness to get in early on the next expansionary cycle, according to the winter 2020 Allen Matkins-UCLA Anderson Forecast|California Commercial Real Estate survey. The biannual survey projects a three-year outlook for California's commercial real estate industry, and forecasts potential opportunities and challenges impacting the office, multifamily, retail and industrial sectors.
"Most economic forecasts predict a potential softening in the economy in late 2020 and 2021," John Tipton, partner at Allen Matkins, tells GlobeSt.com. "Because our survey predicts development conditions three years out, our panelists are expressing optimism in 2022 based on a re-energizing of certain markets following this potential downturn."
With the exception of retail, survey panelists for each market predict that 2022 will be as good or better than 2019. Panelists are optimistic about industrial and multifamily projects, neutral about office markets and retail space sentiment remains generally pessimistic.
While recent surveys indicated that the peak of the office market had been reached in the current cycle, the latest survey indicates a beginning of a return to confidence by 2022. For the East Bay, the panelists were optimistic that rental rates would increase faster than inflation while vacancy rates would be lower than today. In the San Francisco and Silicon Valley markets, this optimism is confined to rental rates, with only a slight decline in occupancy. These views are consistent with the perspective of most economists that the California economy will return to faster growth in 2022 and generate new jobs requiring additional office space.
With the industrial market currently dominated by warehouses serving continued e-commerce growth, survey panelists don't see the red-hot industrial market pulling back any time between now and 2022. Activity throughout Northern California is expected to remain at the same level of strength as today, continuing its hot streak due to warehouse demand.
While the last survey reported a glimmer of hope for a moderate retail rebound, this has not come to fruition. With retail continuing its downward spiral, sentiment in this space has returned to pessimism. Panelists have given retail its lowest values since this survey began collecting retail predictions four years ago. This pessimism is likely fueled by the constant shift to online shopping and the weaker-than-expected start to the 2019 holiday shopping season. A weakness in the demand for the revitalization of existing retail space is also driving this pessimism.
Though new retail construction is expected to fall from now through 2022, some activity remains. Some of the Bay Area panelists began new retail development or redevelopment projects in the last year– more than anticipated–and an equivalent percentage of panelists expect to start at least one new project this year.
Multifamily market expectations this time around continue the trends in previous recent surveys. In the Bay Area, where rent control now has more certainty to it with AB 1482, panelists predict an increase in the amount of new multifamily construction.
The only impediment to the multifamily market continues to be the lack of qualified labor and the resulting increase in construction costs. California's construction workforce has reached levels close to that experienced during the housing boom of 2004 to 2006.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
