Pandemic’s Effects on California Real Estate Will Last Through 2023

An Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, unveiled earlier this year, showed that the pandemic-related economic recession is having a mixed effect on California commercial real estate sectors, as this downturn is not due to slackening in housing markets or a stock market crash. While office space markets are in a holding pattern and retail markets are on a downward trajectory, multifamily housing and industrial space continue to grow.

The biannual survey polled a panel of California real estate professionals to project a three-year outlook for state commercial real estate and forecast the potential opportunities and challenges affecting the industry’s sectors.

Office Developers Take a “Wait-and-See” Approach With the pandemic shifting the use of traditional office space, there is much uncertainty as to what the future of this sector will look like. Though panelists are confident about the growth in demand between 2020 and 2023, they are pessimistic about the return on investment in new office space today. In both Northern and Southern California, panelists believe that newly built space, in addition to companies reducing their existing space, will outstrip any near-term increased demand for new construction. The conclusion is that the end of the latest office building boom is at hand, though there will be demand for office reconstruction and low-rise office building construction. Across the board, there is a waitand- see sentiment, and that portends a downturn in the rate of new development.

Industrial Comes Roaring Back to Record- High Optimism
In the June 2020 survey, industrial space sentiment dropped slightly but was logical, given the pandemic. However, vacancy rates have remained extremely low across all regions surveyed and sentiment about the coming three years shows an optimism that has not been seen for many years. A dramatic shift in buying habits to online shopping during the pandemic has likely changed household purchasing for the future. Although panelists are very optimistic about the next three years, their current building plans are only marginally greater than ambitious pre-pandemic plans. In both Northern and Southern California, approximately 30% of the panelists stated that the recession has made them to consider increasing developments they will undertake. Therefore, the expectation is for a new wave of warehouse building.

Recession Creates More Challenges for Retail
During the last economic expansion, retail faced an uphill battle. The current recession tripled down on that struggle. First, the loss of household income and the shelter-in-place policies reduced demand for brick-and-mortar retail. Second, the inability to physically frequent many retail establishments created a new set of online shoppers. Third, increases in the savings rate on the part of households in response to the recession suggests less spending. Marginal properties may not find tenants who can pay sufficient rent. Panelists believe that retail properties will generate lower, if any, returns in 2023 compared to the end of 2020. New retail property construction is expected to significantly decline from 2020 through 2023.

Multi-Family Market Sentiment Continues to Be Mixed
Panelists do not see 2023 as having higher multi-family occupancy compared to today. The markets that have not improved are either urban areas that have had dramatic declines in rental rates because of an exodus to more suburban areas (San Francisco and L.A.) or are generally lower income (like the East Bay and Sacramento). Overall, multi-family development is still expected to grow in California as the economy rebounds and housing demand grows again.

The Survey
The 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-90s downturn in California and the strength of the state’s rebound since 1993. The Forecast was credited as the first major U.S. economic forecasting group to predict the recession of 2001 and, in March 2020, it was the first to declare that the recession caused by the COVID-19 pandemic had already begun. Learn more at uclaforecast.com.