UCLA Survey Forecasts a Mostly Sunny Outlook for CRE

The latest Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey shows optimism among CRE developers through 2018, but slight caution persists.
JohnTipton

John Tipton of Allen Matkins

California industry leaders continue to be cautiously optimistic about investment and development opportunities in their state with many of them planning office, retail and industrial projects through 2018, according to the 2016 Winter/Spring Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey.

The results of the survey, taken by California’s CRE industry leaders in December 2015, indicate “continued optimism with only a smattering of caution with respect to the continuation of the current run,” said Jerry Nickelsburg, adjunct professor of economics at UCLA Anderson School of Management and senior economist with the UCLA Anderson Forecast.

John Tipton, operating partner of the Century City office of Allen Matkins and immediate past chairman of the firm’s real estate department, told CPE that “the strength of the U.S. economy, the employment growth, the fact that we aren’t overbuilt has lead them to be bullish/cautiously optimistic.”

Asked what might be causing some concerns, he said it was less about the Federal Reserve beginning to slightly raise interest rates and more about China, “which clearly has slowed down or may actually be in a recession.”

Noting that we operate in a “very interdependent world economy,” Tipton said, “It’s going to impact us. How much remains to be seen.”

The survey is done twice a year by Allen Matkins, a California-based law firm specializing in real estate issues, and the UCLA Anderson Forecast, which analyzes the California and national economy. It covers several major markets, including San Francisco, Silicon Valley, East Bay, Orange County, Los Angeles and San Diego. The survey forecasts three years because that is the approximate time frame it would take for a developer to plan a project, get it entitled and built, Tipton said.

The December survey was only the second to include questions about retail development and investment and this time it included the three Bay Area markets. So far results have been “strongly positive” with nearly two-thirds of panelists planning new retail construction within 12 months and half saying they already had at least one new retail project underway.

“It shows at least half of the people are putting fresh capital into play because they think there’s enough strength in their market to support it,” Tipton said.

The survey found that developers have realized the most successful retail centers are those offering dining and entertainment options or are part of mixed-use projects.

“Retail is moving from being a distribution outlet where you go to a store just to buy something to being an experience,” Nickelsburg said. “To create that experiential aspect of retail, you need to do more building.”

The outlook for the industrial markets continues to be strong for manufacturing and warehousing facilities to support exports to Asia and Mexico and to move consumer goods imported from Asia. The survey reports 75 percent of developer panelists in all markets were planning one or more new projects this year. About 66 percent stated they had started at least one development project in 2015.

“I was actually happy to see the optimism which remained in the industrial market in the Inland Empire due to the amount of building that had occurred and the slowdown in China,” Tipton told CPE. “I was happy to see people had maintained their optimism. I had been monitoring it over the last year or so when it became clear that China was slowing down.”

Office market developer sentiment, however, was slightly down, but still positive for four of the six regions surveyed. It improved in the San Francisco and East Bay markets. This is where concerns over slower global economic growth and the “more volatile world financial markets dictate a bit of prudent caution,” the report noted. But no panelists expect the office market to weaken and most expect it to tighten between now and 2018. Tech-related employment is growing faster and markets favored by tech companies “are experiencing robust markets.”

For more insights from the survey, see a video overview of the results.