SoCal developers see boom & bust in different markets in 2022

A UCLA biannual survey shows optimism about California multifamily and industrial development and continued “downward spiral” in the retail space

The impact of China’s coronavirus outbreak on real estate in the U.S. remains muted for now
The industrial market is expected to stay strong and retail will keep sinking, according to a UCLA survey.

The forecast for multifamily and industrial development in Southern California in 2022 is a largely sunny one, with strong growth expected for both sectors. The office market, meanwhile, should remain unchanged from what it is now but the struggling retail market will continue its “downward spiral.”

That’s according to the latest Allen Matkins/UCLA Anderson California commercial real estate survey released Wednesday. The three-year look ahead — 2019-2022 — surveys a group of developers about their level of optimism about the multifamily, office, industrial and retail markets.

“Overall, survey panelists for each market, with the exception of retail, predict that 2022 will be as good or better than 2019,” according to the biannual report. “Panelists are optimistic about industrial and multifamily projects, while office markets are neutral.”

The report found the retail market would continue to struggle in the coming years, following the trend of brick-and-mortar retailers like Sear’s, Express, Forever 21, Macy’s and others that have been battered by the growth of e-commerce.

“While the last survey saw a glimmer of hope for a moderate retail rebound, sentiment in this space has returned to pessimism,” according to the report. That pessimism is “likely fueled by the constant shift to online shopping and the weaker-than-expected start to the 2019 holiday shopping season.”

There also seems to be little will for the revitalization of existing retail space, with developers and landlords opting instead to find new uses for those spaces. In Los Angeles, that has included Macerich and Hudson Pacific Properties’ turning much of the Westside Pavilion mall into office space that Google will fill, and now GPI redeveloping a former Macy’s.

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In contrast, warehouse demand for e-commerce — the main reason for retail’s demise — will continue its “hot streak” in California, particularly the Inland Empire.

“Survey panelists don’t see the red-hot industrial market pulling back any time between now and 2022,” according to the report.

Office market rents are expected to rise in L.A., Silicon Valley and San Francisco, although occupancy rates may slightly decline. The forecast pointed out that these predictions are in line with an expected growth in office jobs through 2022.

The projections on apartment and condo construction are also positive with Southern California markets anticipating a continued building boom, especially given the state’s housing shortage. Developers surveyed also believed the state’s new rent control law — which took effect Jan. 1 — will boost Bay Area market construction for 2022 by providing more certainty to the market.

“There is uniform optimism in Los Angeles, Orange County, and San Diego, as interest rates have lowered and lending conditions are not changing in any significant way,” according to the report.

The only obstacle developers see is a continued shortage of construction workers.