California Multifamily Market Poised for a Resurgence

The California multifamily market is experiencing a resurgence despite broad expectations of distress reversing a tempered outlook earlier in the year when plans for new development significantly slowed. Of CRE participants, 60% in Northern California and 57% in Southern California expected multifamily demand to grow faster than supply in the coming years, according to the Summer 2024 Allen Matkins/UCLA Anderson Forecast that surveys California real estate professionals about their projections for the next three years.

New multifamily development in Southern California is expected to pick up, with two-thirds of respondents planning at least one new project in the next year, compared to 55% in the winter 2024 forecast. However, the majority of Northern California respondents do not have new multifamily development plans in the next 12 months, which may lead to rents in San Francisco increasing faster than the rate of inflation, according to the latest forecast. Fifty-six percent of respondents believe Silicon Valley rents will increase faster than the rate of inflation, compared to 27% in the previous survey.

“At the outset of the year, developers approached California’s multifamily sector cautiously as interest rates and concerns about recent overdevelopment impacted valuations,” said Timothy Hutter, a partner in Allen Matkins’ Land Use Group. “The industry’s rebound indicated in the Summer 2024 Forecast highlights surging confidence in the market driven by regulatory improvements and an expanding demographic of renters and remote-ready housing. As California navigates its critical housing shortage, we anticipate a renewed wave of development presenting fresh opportunities in the market.”

Meanwhile, new office development remains at a standstill, with 95% of Northern California and 90% of Southern California respondents reporting no new developments in the next 12 months. However, vacancy rates are expected to improve in existing properties.

The California retail market is poised for more development in the coming years, with 65% of respondents expecting that demand will grow faster than supply. Vacancy rates for retail space are expected to fall across Los Angeles, Inland Empire, Orange County and San Diego.

Finally, industrial supply and demand are expected to be balanced for the coming year, according to the forecast. Following recent years of robust development and growth in the sector, 69% of Northern California respondents and 50% of Southern California have no new industrial development plans. E-commerce continues to be the primary driver of new industrial development, followed by demand for data center space to support AI and related technologies.

“While industrial developers are taking a strategic pause, that does not indicate a contraction in the market,” said Alykhan Shivji, a real estate partner in Allen Matkins’ New York office. “As new supply is limited, demand for existing, well-located industrial product will strengthen and boost occupancy rates, especially amid escalating activity in California’s seaports.”