LOS ANGELES--(BUSINESS WIRE)--Commercial construction activity in California has risen to its highest level since 2001. Available financing, low cap rates, an increasingly high demand from technology, advertising, media and information companies, and a shortage of multi-family housing have sparked the industry boom. The outlook for the next three years, based on the most recent Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, is for continued growth in commercial property development. The Survey, examining seven of the state's major markets, is a leading indicator of future commercial construction. The analysis of the three-year outlook for real estate development activity provides insights to new, not yet on the radar, building projects.
“Continued optimism in this Survey is supported by job and income growth and a lack of sufficient building supply,” said Jerry Nickelsburg, adjunct professor of economics at UCLA Anderson School of Management and senior economist with the UCLA Anderson Forecast. “While the outlook remains positive through 2018 with no weakening in occupancy rates, a few of the survey panel participants did express slight caution with regard to this next stage of the CRE building cycle.”
Commercial Office Space: Decreasing Vacancy Rates, Low Unemployment Drive Demand
The Survey's overall outlook for the office market in each of the six markets surveyed in this sector remains strong, due in part to falling vacancy rates and an overall positive outlook for the economy. Technology, advertising, media and information companies are the new driving force for this positive sentiment, as the recovery of service-provider companies, such as accounting, finance, insurance and legal has remained tepid. None of the Survey participants foresee rental or occupancy rate weakness through 2018.
Over the next 12 months, 40 percent of the Southern California Panelists stated they expect to begin at least one new project. This compares to the 23 percent that began one or more new developments over the past 12 months.
Similarly, the Bay Area panels expressed optimism, but the panel had some concerns with respect to rental and vacancy rates. For some of the panelists, though far from a majority, current new construction is sufficient to meet what they perceive to be future demand. Therefore, they do not expect future rental or vacancy rates in these markets to be either better or worse than today. In the December 2014 Survey, only 39 percent of the panelists reported plans for a new development project in the following 12 months. In the current Survey, the percentage rose to 67 percent of the participants.
Multi-Family Residential: Development Remains Strong in All Markets
Multi-family developer optimism remains strong in each of the five regions surveyed, and is reflected by the fact that 74 percent of the panelists started a new project within the past year and even more are expecting to begin new projects in the coming six months. This positive view of the future of multi-family housing is expected to continue as job growth in California will continue to be skewed towards these five coastal communities. Increased employment translates directly into new household formation and additional demands for housing. The Orange County and San Diego County markets were added to the most recent Survey, and as with the previously surveyed markets – Los Angeles, San Francisco and Silicon Valley – the new survey panels expect no decrease in vacancy rates over the next three years.
The story of the current economic expansion has been a shift in tastes from single-family housing to a balanced mix between single-family and multi-family housing. Though overall residential construction has remained at depressed levels in the state, multi-family construction has rebounded sharply. The forecast for higher rents and continued low vacancy rates should induce a further increase in multi-family construction. The UCLA Anderson Forecast, consistent with the Survey, expects that multi-family construction will achieve a 25-year high during the next three years.
Industrial and Warehouse Space: Outlook Remains Steady But Strong
The current Survey of industrial space developers indicates little change in sentiment over the last year. The optimism expressed continues to be manifested in new building, particularly in the Inland Empire. In the current survey 68 percent of the panel are planning one or more new industrial projects in Southern California between June 2015 and June 2016.
While the sentiment is unchanged at strongly optimistic, there is clearly a continued strengthening in the Southern California industrial space market. This is due in part to post labor dispute, increased imports through the San Pedro Bay Ports and more generally to the increase of consumer spending and the increased use of retail distribution centers. The expectation of the panels is for Southern California industrial space markets to remain hot for at least the next three years.
Retail Space: Market Reviving with Consumption Growth
The most recent Survey, the first in which the retail market was included, suggests strong optimism with regard to retail space in the Los Angeles, Orange County and San Diego markets. Two-thirds of the panelists are planning new retail construction in the next 12 months. Though there are not previous surveys to benchmark these results, the technology, advertising, media and information industry boom, and economic growth in specific regions, combined with the optimism expressed by the Survey panels suggests at a minimum a re-vitalization of retail construction in Southern California retail sub-markets.
About the Survey
The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey polled a panel of California real estate professionals in the development and investment markets, on various aspects of the commercial real estate market. The survey is designed to capture incipient activity by commercial real estate developers. To achieve this goal, the panel looks at the markets three years in the future, and building conditions over the three-year period. The survey was initiated by Allen Matkins and the UCLA Anderson Forecast in 2006, in furtherance of their interest in improving the quality of current information and forecasts of commercial real estate.
About Allen Matkins
Allen Matkins, founded in 1977, is a California-based law firm with approximately 200 attorneys in four major metropolitan areas of California: Los Angeles, Orange County, San Diego and San Francisco. The firm's areas of focus include real estate, construction, land use, environmental and natural resources; corporate and securities, real estate and commercial finance, bankruptcy, restructurings and creditors' rights, joint ventures and tax; labor, employment and OSHA; and trials, litigation, risk management and alternative dispute resolution in all of these areas. Allen Matkins is located on the web at www.allenmatkins.com.
About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation and was unique in predicting both the seriousness of the early-1990s downturn in California and the strength of the state's rebound since 1993. More recently, the Forecast was credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast at http://www.uclaforecast.com.
About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world, with faculty members globally renowned for their teaching excellence and research in advancing management thinking. Located in Los Angeles, gateway to the growing economies of Latin America and Asia and a city that personifies innovation in a diverse range of endeavors, UCLA Anderson's MBA, Fully Employed MBA, Executive MBA, Global Executive MBA for Asia Pacific, Global Executive MBA for the Americas, Master of Financial Engineering, doctoral and executive education programs embody the school's Think In The Next ethos. Annually, some 1,800 students are trained to be global leaders seeking the business models and community solutions of tomorrow. Follow UCLA Anderson on Twitter at http://twitter.com/UCLAAnderson or on Facebook at http://www.facebook.com/uclaanderson.