Despite an expected weakening in commercial real estate (CRE) over the next 18 months, California developers are optimistic the market will return to expansion in 2022, according to the latest Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.
“On average, panelistsare saying that in 2022, notwithstanding slowdowns that might be happening in 2020 and 2021, we will see a return to optimism,” says John Tipton, partner at law firm Allen Matkins, which in conjunction with UCLA Anderson Forecast, conducts biannual surveys of developers from major California metropolitan areas. The survey examined trends and the collective outlook of developers working in the office, industrial, retail and multi-family markets.
“The uncertainty of China does insert risk, but I think it’s more of a short-term, acute risk as opposed to a long-term kind of structural risk,” says Tipton, who notes that the ongoing trade wars between the U.S. and China are producing little to no erosion in developer confidence so far.
Respondents were most optimistic about the industrial market, now dominated by warehouses as California shifts from a factory economy to an information economy. Tipton expects the Inland Empire and Inland Northern California areas to remain “red-hot” and says the East Bay, Los Angeles and Orange County industrial development markets will become more lucrative by 2022.
The biggest trend in the industrial market may be the construction of multi-floor warehouses with robotics enhancing productivity, according to the report.
“Even though there is still technology development in process for multi-floor industrial, this appears to be what is driving values and optimism in the coastal areas,” says the report. “The timing of the introduction of requisite new technology is a risk to the timing of the development.”
Meanwhile, as new office space development has flattened, developers expect a 2022 demand surge that will raise rental rates faster than the rate of inflation, but report mixed views on occupancy rate improvements.
At the same time, enthusiasm for multi-family housing developments, which have become markedly more expensive to build due to increasing land, labor and material costs, is shrinking.
“Because the Bay Area housing has been such a tight, expensive market for single-family residences, it’s been driving really strong optimism in multi- family, so to suddenly see a down tick seems counterintuitive,” says Tipton. “But, the conjecture is that in the single-family market in the Bay Area, there has been some softening in pricing and a little growth in inventory which can make single-family residences marginally more attractive, which takes some demand from multi-family housing.”
Tipton tells ENR he was most surprised by the return to optimism for 2022 retail development in the Bay Area as developers expect retail to support new housing and upgrades associated with gentrification and densification. Southern California remains mired in pessimism due to consumers’ adoption of online shopping.
Peter Tateishi, CEO of Associated General Contractors (AGC) of California, tells ENR that the association’s members also are optimistic due to healthy backlogs, and are remaining selective in taking on new projects. Earlier this year, AGC California’s survey found 96% of members expected moderate to strong business activity in 2019.
Tateishi attributes some of that optimism to Senate Bill 1, which calls for $5 billion in annual state infrastructure investment over the next 10 years. “That infrastructure work opens up ancillary construction projects for the entire industry—resulting in increased construction and development of office, multi-family, retail, and industrial spaces.”