The economic landscape in California has been feeling jitters and tremors ever since the last recession a decade ago. Over the past several years, the commercial market in the state has, thus, seen all sorts of developments, making it all the more important for real estate owners to try to understand what the foreseeable future holds in store for them.
Among all the things commercial real estate marketers are doing to keep property sellers and buyers aware of market conditions, from discussing specific strategies with individual clients to dispensing general tips about selling retail businesses, and providing them with data trends to make informed decisions is one of the best.
Therefore, for this particular article, I decided to talk about the trends that commercial real estate owners can expect to experience in 2019.
5 Major California Commercial Real Estate market trends to keep an eye on
The sentiment of developers and real estate owners is significantly affected by the state of the market, at large. Regulations and trade wars, depreciation of equity, climbing interest rates, and slackening employment rates are just some of the factors that buyers, sellers, and developers will be taking into account to determine the prospects of the decisions they want to make in the new year and the next.
To help all parties concerned in the commercial real estate market, Allen Matkins, in collaboration with UCLA, runs a regular survey of the industry. For 2019, they conducted the survey with key industry players and created an overall market profile that covers the period of 2019 to 2021.
During 2018, the commercial real estate market in California went through quite an uncertain period, and various sectors behaved in ways not expected of them. However, the data in the survey shows that industry gurus are confident Californian commercial real estate market will continue to stay stable in specific sectors and grow in some others while continue to slope downward for some others still.
In the paragraphs that follow, I will take you through 5 of the biggest trends that have emerged from the collective wisdom of industry leaders in the Allen Matkins/UCLA survey for 2019 so you can make smart decisions about your assets and development plans for the year.
Expect Stable Trends Through The Year
The first and foremost among these trends is the exciting fact that industry leaders show a lot of confidence in the Californian commercial real estate market. Data – which is the collective opinion of market experts – strongly suggests that whether you want to sell your gas station or invest in a new hotel, for instance, the uncertainty of the market should not affect the deal significantly.
Experts believe the previous year has made it clear for real asset owners and sellers that cap rate hikes and other such external factors, including depreciating equity value, will not get in the way of people buying or selling commercial real estate in California.
The way participants in the survey – who are industry leaders and major investors in the various commercial real estate sectors in Californian counties – portray the immediate future of the market significantly affects the market for obvious reasons. If they say a particular industry is going to grow, it typically means they will be interested in initiating new projects in that market soon.
Therefore, when the overall responses collected during the survey paint a positive picture of the market, it is not unwise to expect continued trade in assets and beginning of construction in assets that show promise, such as multi-family housing projects (which brings us to the next section of my piece).
Multi-Family Housing Prospects Not Coming Down
In truth, the overall sentiment about the multi-family property sector has been mixed. It is because, as conditions improve in certain counties of California, they turn poor in some others.
Now, while data suggests a mixed opinion on the sector, it does not mean there is little confidence in the sector. On the contrary, investors show interest in developing multiple multi-family projects in various parts of the state. For instance, while the Bay Area is expected to face a slumping occupancy rate during the year as rents keep crawling up disproportionate to inflation, many developers who took part in the survey showed intent on building multiple new multi-family housing projects.
The same was found true for investors operating in Southern California. In this part of the state, however, it is expected that occupancy rates will stay high despite mounting rent. In other words, even though job growth in the region will remain poor, the demand for housing in multi-family units will continue to stay strong. It is expected that the development in this part of the state will continue to stay far behind the demand.
For current owners of multi-family housing units in California, these trends bode well. With the reported prospects in sight, current multi-family property owners can plan the current year – and immediate ones to follow – smartly.
If you own one or more multi-family housing units in the state, you have nothing to worry about for this period. You can decide whether you want to continue to manage your property or find a great buyer and sell it off. The call is yours.
Warehousing Properties on the rise in Industrial Markets
For the first non-residential sector I talk about, I choose the industrial real estate sector. It is because big things were coming for this sector in 2019.
Incidentally, this is the only non-residential sector I’ve discussed that shows a steady upward trend. While we will talk about the other two separately below, it is crucial here to mention that the shift to digital trading and online shopping has given Californian commercial real estate a new pillar to hold the ceiling high.
The data from East Bay has been positive and shows a continued increase in occupancy and rents over the last 18 months. Cargo from sea and air has increased in the state during the past year, and data suggests this trend will continue over the next couple of years. Whether we are talking about Sacramento and San Joaquin counties in the East Bay area or Inland Empire in Southern California, data continues to encourage development and ownership of large industrial spaces.
With online purchasing comes higher imports and the need to store products on the ground before they are distributed. Thus, warehouses and big storage property units are becoming more and more popular in California’s industrial real estate market.
People ordering products online and having them delivered to California addresses are causing the demand for distribution centers and warehouses. As long as the rate of imports and online purchasing holds among California consumers, the warehousing chapter of the state’s industrial real estate will continue to deliver positive results with high vacancy and rental rates.
Additionally, since current projections about per-capita income in California remain positive for the foreseeable future, industrial real estate will continue to grow until the next episode of trade wars disrupt this growth.
Offices Space Market Reaches Apex
The office space market in California will continue to show no growth during 2019. It is because, unlike recent years in the past, the market has now reached the highest point it is ever going to achieve under current economic conditions. The sector has plateaued and will continue to offer current levels of income and rentals, with a steady occupancy rate, through the state.
The survey sought opinions from California based developers, and there is an almost unanimous opinion among experts that the market will continue to stay where it stands in the first quarter of 2019. Data suggests properties in this sector will not go any higher in terms of occupancy or rentals since it is already reached its apex after growing over the past few years.
However, this means you can expect a pause in new properties emerging in this sector during this year, as well as the next two. Developers would not want to create new options when the market does not have any new occupants looking for office spaces. Incidentally, these observations come from an overall review across the state, including its most potent parts of the office markets, including Silicon Valley, Bay Area, and Southern California.
If you own an establishment with rental office spaces, you have the option of sticking to your assets and sit through the imminent slump in the sector in hopes of a disruptive event that could result in a sudden demand for greater office spaces in California. Another option you have is to sell some of your assets in this sector and invest instead in more profitable sectors in California’s real estate market.
Lack of Speedy Development in Retail
Retail real estate in California is expected to continue its journey downward. The sector was severely hit by the advent of fast-growing online purchasing trends across the state. This reality is a bit surprising, seeing that usual trends that hint to growth in retail, such as per capita income growth, job rate growth, income growth, and state GDP growth – to name a few, have all maintained a positive trend in recent past.
However, this also means that the move from retail development has been to a new kind of retail business – namely online shopping, as already mentioned. California will continue to see stress in traditional retail real estate, such as malls and stores. With Internet purchases increasing in the state at over 10% per year, it is no surprise that the traditional retail real estate is turning useless fast – at least for the time being – to the benefit of industrial real estate, namely warehouses and distribution centers.
With this trend, there is a strong interest among investors to dispense of their retail assets and shift toward other, more profitable types of real estate property. If you are a retail business owner and your business has significantly gone down as a result of the online purchasing shift, now is the right time to make a move away from retail real estate and find new avenues for more profitable returns on your investment.
To conclude, 2019 is going to be a year of familiar conditions for real estate owners across California. Despite the uncertain economic conditions in the country, California’s economy is now showing relatively steady trends in various real estate sectors.
Investors in the retail real estate sector have to be more active with their decisions about their assets. The trends have been discouraging over the past year, and those who still have not found better ideas for their commercial real estate portfolio are going to find it harder to discover more profitable options as time passes since there is no evidence of any imminent shift in the trend in this sector.
As retail continues to go down, industrial real estate – especially warehousing units – are directly profiting from this shift because the increase in online shopping is the cause of both these trends. As more and more people continue to buy online in California, there will be a constant need for reliable warehousing properties in the state.
The office space market has reached as far as it ever could in the current economic conditions. There is no further to go, and the sector has reached a plateau. The only direction it can go from here is downwards, which is where it is headed. Developers are planning to decrease their portfolio in this sector during 2019.
The multi-family housing sector in California is going to continue its positive trend, and more investors will develop this area of their portfolio in 2019 and beyond.