Amid a choppy marketplace with high office vacancy rates and uncertainty about the demand for more real estate, experts are predicting only more distress to come.
“Consumer behavior is changing, and that will transform how traditional real estate is used,” John Tipton, a partner at Allen Matkins, said. “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.”
The downtown-based law firm, in partnership with the UCLA Anderson Forecast, released its biannual commercial real estate survey late last month, highlighting a projected three-year ahead outlook for the industry and the macroeconomic trends impacting the multifamily, office, retail and industrial market sectors.
The polling indicated that 71% of California’s commercial real estate industry participants anticipate distress levels to rise in the coming months with 53% predicting that new development will decrease over the next three years – noting interest rates as the main culprit for the staggering numbers. The office market is most at risk of further deterioration.
“Office, which is traditionally probably some of the highest-end real estate, is going through an existential crisis,” Tipton said.
With companies shifting to hybrid schedules – and in some cases, fully remote ones – some businesses are choosing to lessen their physical footprint. And the reduced demand for office space is causing many buildings to default. But some risky investors eye the distress as a discounted opportunity.
“As distasteful as bad times are, they do set the table for future growth,” Tipton said. “I have clients who had said they had sworn off office five years ago and now they’re really excited because they see this as a great opportunity to pick up some world-class assets at a great price.”
Los Angeles County, for example, announced it was acquiring the Gas Company Tower downtown for $215 million earlier this month, a bargain compared to its estimated value of $632 million just three years ago.
On the other end of the asset class spectrum, Tipton said the industrial, multifamily and retail markets are all faring quite well.
“Industrial has been red hot for a number of years, and then of course the pandemic hit,” Tipton said. “I can’t speak for your house, but in my house, the number of packages that show up in a month now versus the many that showed up in 2018, the amount of online shopping we do, is just through the roof. And I think that’s probably true of a lot of people. All that goes into warehousing and distribution. Industrial has just had a great run and got supercharged by the pandemic.”
While industrial is expected to remain a stellar performer, experts believe it will find a balance in the coming years as online shopping subsides and brick-and-mortar rebounds.
The survey indicated that Southern California’s retail market is poised for more development, with 65% of respondents expecting that demand will grow faster than supply. In addition, the forecast illustrated vacancy rates for retail are expected to fall in Los Angeles specifically, with rents projected to increase faster than inflation.
And on the multifamily front, rentership is up as it is becoming harder and harder to become a homeowner in today’s market climate.
“Many people would like to be in a house with a yard, but with escalated interest rates and elevated housing costs, home ownership is out of reach for most,” Kitty Wallace, a senior executive vice president at Colliers, said. “This has led to a tremendous jump in the quantity of developers building to rent, which has served as a boon to renters and developers alike.”
Looking ahead, new multifamily development in Southern California is expected to pick up, with 66% of respondents planning at least one new project in the next year, a jump from the 55% just six months prior.
