California Developer Sentiment Improves in Latest Allen Matkins Survey

The Summer 2021 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey is in—and it brings good news. The bi-annual survey, which asks developers their three-year outlook, shows an improvement in sentiment from the end of last year, signaling the beginning of the recovery. While developers continue to show the most optimism for industrial and multifamily, office and retail showed a marked improvement.

There is still great uncertainty about the future of the office market, but survey respondents are more optimistic that a return is coming. While sentiment improved, it remained below the 50% mark, indicating an overall negative outlook. In Northern California, about 30% of participants have cut back on development plans, and in Southern California, 40% have stalled development plans in the market. Still, Northern Californian developers said that demand will begin to grow in step with supply by 2024, and for that reason, many believe the pause in construction activity will be temporary.

Retail was a similar story. Outlook for the asset class overall fell below 50%, indicating a negative forecast, but sentiment had improved from the previous survey. The increase optimism was largely driven by retail employment in the Inland Empire and Sacramento and by the housing boom, both multifamily and single-family. Housing requires retail support, and this will create targeted opportunities for retail over the next three years. However, respondents expect retail returns to be lower in 2024 than in 2021.

Developers continued to have an optimistic outlook of industrial and multifamily. Industrial growth spurred by the pandemic has made the asset class the darling of the CRE industry, and that was reflected in the survey. In this most recent survey, developers had the most optimistic outlook of the industrial market since December 2015. By 2024, survey respondents expect the already low vacancy rate to be even lower and rental rates to exceed the rate of inflation.

Multifamily had a bumpier ride during the pandemic, but it didn’t deter developers who continue to see opportunity in the asset class. Survey participants expect rents to increase faster than the rate of inflation while vacancy rates decrease by 2024. In Southern California, 70% of respondents said they plan to begin a new project in the next three years, while only 50% of developers in Northern California made the same claim.

The results of the last survey were similar, showing mixed investor sentiment along the same asset class lines.