The Summer 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey released today reveals that a majority of California’s commercial real estate industry participants (71%) anticipate distress levels to rise in the coming months, with 53% predicting that new development will decrease over the next three years. As interest rates remain the primary concern for the industry, these findings signal ongoing challenges for stakeholders across the commercial real estate spectrum, as well as emerging opportunities.

The Allen Matkins/UCLA Anderson Forecast is a bi-annual survey that polls a panel of California’s real estate professionals to project a three-year ahead outlook for commercial real estate and the macroeconomic trends impacting industry participants across the multifamily, office, retail and industrial markets.

Allen Matkins partner John Tipton said: “Consumer behavior is changing, and that will transform how traditional real estate is used. We are working closely with our clients to recalibrate their development and investment strategies, embracing adaptive reuse, digital integration and sustainable practices to create the infrastructure of our future economy.”

Multifamily’s great move in

Following a tempered outlook earlier in the year, when plans for new development significantly slowed, the multifamily market is experiencing a resurgence despite expectations of distress in the broader market. Optimism in the sector is improving compared to the previous survey, with 65% of Northern California respondents and 57% of Southern California respondents expecting demand to grow faster than supply in the coming years.

New multifamily development in Southern California is expected to pick up, with two-thirds (66%) of respondents planning at least one new project in the next year, compared to 55% in the Winter 2024 Forecast. However, the majority of Northern California respondents do not have new multifamily development plans in the next 12 months.

Given this limited development in Northern California, 44% of respondents project that rents in San Francisco will increase faster than the rate of inflation, compared to 20% from the previous survey. Fifty-six percent believe that Silicon Valley rents will increase faster than the rate of inflation, compared to 27% in the previous survey.

“At the outset of the year, developers approached California’s multifamily sector cautiously as interest rates and concerns about recent overdevelopment impacted valuations,” said Timothy Hutter, a partner in Allen Matkins’ Land Use Group. “The industry’s rebound indicated in the Summer 2024 Forecast highlights surging confidence in the market driven by regulatory improvements and an expanding demographic of renters and remote-ready housing. As California navigates its critical housing shortage, we anticipate a renewed wave of development presenting fresh opportunities in the market.”

Office shape shifts

New office development remains at a standstill, with 95% of Northern California and 90% of Southern California respondents reporting no new developments in the next 12 months.

However, the Summer 2024 Forecast reveals vacancy rates are expected to improve in existing properties. Seventy-three percent of Northern California respondents expect vacancy rates to stay the same or decrease, up from 50% in the previous Forecast, and signaling a plateau if not a rebound on the horizon.

Still, 64% of respondents anticipate that it will take longer than through 2027 for the office market to recover. With continued uncertainty, nearly a quarter (24%) of Forecast respondents are exploring the adaptive reuse of existing office spaces.

"We have seen clients, who were waiting for distressed sale opportunities, start to close on those deals, whether through a note sale or foreclosure, or just trading directly with the existing owner in an off-market transaction," said Anthony Burney, a partner in Allen Matkins' Real Estate Group. "Our expectation is that this initial activity will lead to a larger wave of transaction volume, bringing more potential buyers off the sidelines to start acquiring properties."

Retail continues slow rebound

The Summer 2024 Forecast indicates that Southern California’s retail market is poised for more development in the coming years, with 65% of respondents expecting that demand will grow faster than supply. Further, respondents’ three-year forecast shows that vacancy rates for retail space are expected to fall across Los Angeles, Inland Empire, Orange County and San Diego, with rents in these markets projected to increase faster than inflation.

While retail outlook is improving, Forecast respondents are focused on filling existing spaces over new development. More than half (53%) of respondents do not expect retail to enter a new development cycle by 2027. Mixed sentiment across the state highlights the regional differences in rent expectations and development plans.

In Northern California, 55% of respondents are planning at least one new retail development in the next year. However, retail rents are largely expected to decrease, particularly in San Francisco, where 57% of respondents expect a decline in rent prices compared to 31% from the previous survey.

“California’s retail investors and developers are optimizing existing retail spaces rather than pursuing new developments,” said Brian Michel, a partner in Allen Matkins' Real Estate Group. “There is a notable focus on enhancing residential-serving spaces, such as neighborhood shopping centers, driven by robust demand fundamentals in these segments. Looking ahead, we anticipate continued innovation and adaption in how retail spaces are utilized to meet evolving consumer needs.”

Industrial reaches market balance

The Forecast shows that 59% of respondents believe that industrial supply and demand will be balanced in the year ahead. Following recent years of robust development and growth in the sector, 69% of Northern California respondents and 50% of Southern California have no new industrial development plans.

As development slows, views on vacancy rates are improving. In the latest survey, just 25% of Northern California respondents expect vacancy rates to increase, down from 38% in the previous forecast. E-commerce continues to be the primary driver of new industrial development (50%), followed by demand for data center space to support AI and related technologies (17%).

“While industrial developers are taking a strategic pause, that does not indicate a contraction in the market,” said Alykhan Shivji, a real estate partner in Allen Matkins' New York office. “As new supply is limited, demand for existing, well-located industrial product will strengthen and boost occupancy rates, especially amid escalating activity California’s seaports.”

Learn more

To download the full Summer 2024 Allen Matkins/UCLA Anderson Forecast, click here.

About the Survey

The Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey and Index 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, a law firm with more than 240 attorneys, was founded with deep roots in real estate that has leveraged that foundation to grow and build prominent litigation, corporate, tax, labor and employment, land use, and environmental practices allowing us to partner with clients across myriad industries and markets. For more than 45 years, Allen Matkins has worked with clients drawn to us by our reputation for market leading solutions, pragmatism, exemplary quality, approachability, and our unparalleled network of contacts and connections in business and government. For more information about Allen Matkins please visit 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. The Forecast was credited as the first major U.S. economic forecasting group to call 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. 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, UCLA-NUS Executive MBA, Master of Financial Engineering, Master of Science in Business Analytics, 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.

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