Commercial Real Estate Outlook 2020
With a pandemic-induced recession still looming large in the United States, reports such as the Allen Matkins and UCLA Anderson Forecast provide valuable insight into the current state of commercial real estate. Here are some takeaways:
Office Space Markets
The survey looked into trends surrounding working from home and how this impacts office space demand. Will an increase in work from home setups decrease demand for office spaces? It appears that the answer is not as straightforward. Factors such as what industries are currently hiring (tech and finance) and which ones will ramp up hiring in the future (health care) need to be considered. The survey also notes that:
“Although half of the Bay Area and Southern California panelists said their plans for the coming 12 months were unaffected by the pandemic, one-third are ramping back development by more than 15 percent from their previous plans. Overall, 75 percent of panelists expressed some stress with current tenant leases. For the one-third that will engage in some new development, the panelists in each market believed that land, building materials, and labor costs would be more favorable.”
Developments are projected to be on the rise beginning in late 2021.
Retail Space Markets
One of the hardest hit industries during the pandemic has been retail. Workers could not come in, there was loss of income so consumers have little to spend, and consumers in general have increasingly been turning to online shopping thus affecting brick-and-mortar stores. Here’s what the survey says regarding retail space markets:
“In the Bay Area and Southern California, two-thirds of panelists will not develop any new properties in the coming 12 months. Approximately the same percentage expect difficulty with current leases and expect plummeting property values.”
New retail development projects are still happening but there is a significant decline.
Industrial Space Markets
While panelists from the survey are generally pessimistic about the retail markets, they believe that the demand for warehouse spaces will still see steady growth.
“Sixty percent of the panelists in Southern California and 43 percent in Northern California are planning at least one new development in the next 12 months, and 39 percent and 29 percent are planning multiple projects respectively.”
However, “[i]f If the demand for warehouse space and the stock of warehouses are increasing at about the same rate as projected, then 2023 will see a mild erosion of rental rates when adjusted for inflation, and there remains the possibility of some erosion in occupancy.” The outlook for industrial spaces leans towards a more balanced one.
Multi-Family Housing Markets
In a previous UCLA Anderson study, there was a contrast between Southern California and Bay Area development growth rates. Panelists predict that with economic recovery and growth, multi-family housing demands in both Southern California and the Bay Area will increase with it.
“Though the UCLA Anderson Forecast is looking at a 30-month recovery in the state, and there remains a great deal of uncertainty with regard to the current public health crisis, the market for multi-family housing remaining robust seems likely. Indeed, in spite of the turn-around in sentiment from each of the six panels, almost three-fourths of the Southern California panelists and two-thirds of the Bay Area panelists stated that the pandemic had either not changed their plans for future activity or increased it.”
The survey concludes with a hopeful take. Jerry Nickelsburg, UCLA Anderson Forecast Director & Senior Economist, notes that “this survey is not what is going on now, but what is going to go on three years from now in 2023. Across these spaces, with the exception of retail, there is certainly some optimism about opportunities that may exist.”
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