California Commercial Property Boom Showing Signs of Cooling Off

The commercial real estate market in California has been a strong one over the recent past thanks to job and income growth, affordable financing rates, and limited building construction. In fact, the values of commercial real estate are more than double what they were back in 2009 following the financial crisis.   

But the commercial property boom in the state is showing signs of cooling off in certain sectors, according to real estate professionals who were polled in a survey by UCLA. The survey included San Diego, Los Angeles, Orange County, San Francisco, Silicon Valley, and the East Bay markets.

Office and retail markets are believed to be capping out, while the industrial and multi-family markets are said to be growing in strength.


Office Space

The latest survey forecasts a new capping off of the office space market. While vacancy rates are said to be on the decline and rental rates on the rise, the trend for developer sentiment in all six markets surveyed is topping off since its peak in 2014.

Sentiment in the office real estate market is highest in Southern California, most likely because of the increase in job growth rate in the area, as well as a squeeze in office space supply.

Retail Market Sentiment is Increasingly Negative

Retail market view have also become increasingly negative among real estate professionals. With eCommerce stores rapidly making headways, the retail market is undergoing a major transformation. As a result of more and more consumers taking to the internet to do their shopping, traditional retail shops will need to take measures to revamp themselves.

However, approximately half of the survey’s panelists in Southern California and almost two-thirds of the panelists in the Bay Area claim that they’re currently in the planning stages of new retail construction over the next 12 months. Half of them stated that they had already started at least one new project over the previous 12 months. This points to the potential of continued opportunities despite the current struggle that the retail space is experiencing, at least when it comes to retail building construction.

Industrial Market Benefitting From eCommerce

What is the thorn in the side of the retail market is a plus for the industrial market. eCommerce is joining exporting and manufacturing in pushing demand for industrial real estate in California. The online shopping platform is fueling growth for industrial real estate investment trusts (REIT), while causing physical retail shops to decline in demand.

Industrial markets continue to be strong, especially in the warehouse segment. The continued optimistic sentiment continues to be revealed in new industrial warehouse building construction. Very low vacancy rates are also lending to a hopeful sentiment by industrial developers, which should help keep this sector booming for at least the next couple of years.

Multi-Family Housing Sentient Continues to Stay Strong

While the retail and office real estate market spaces are showing signs of slowing down, the multi-family market joins the industrial space for optimistic sentiment among the survey’s panelists. The demand for multi-family housing is following strengthened job growth in dense regions of California. In particular, Los Angeles is seeing an increase in multi-family buildings, which will help offset the limited inventory of housing units. 

Considering the fact that California housing is seriously lagging compared to the rate of household formation, the view of an increase in multi-family development is a positive one. This optimistic sentiment of the future of the multi-family housing market for investors is anticipated to carry on with the job growth in California expected to increase at a rate of 1.8% through 2017. A boost in employment points to new household formation, and therefore an increase in demand for housing.