Bay Area Developers Bullish On Industrial, Mixed Outlook For Other Sectors

Bay Area developers haven't changed their minds much from last year about how they expect the industry to perform in the coming months, with industrial continuing to lead the pack and continued concerns about retail.

Allen Matkins and UCLA Anderson Forecast release the California Commercial Real Estate Survey every six months looking at what those in the industry feel about the three years ahead in each sector. It weighs the sentiments of those on the supply side, such as commercial developers and development financiers.

Despite economic headwinds and concerns about an inevitable slowdown in the economy, the general outlook for commercial real estate hasn't changed much from the beginning of 2018 among those surveyed, though there was significant variation in outlook when it came to the four sectors reviewed: industrial, multifamily, office and retail.

"We're seeing a mixed bag in California with respect to commercial real estate," UCLA Anderson Forecast Director Jerry Nickelsburg said in a statement. "Industrial markets will continue to do well. Office markets seemed to have topped out. Retail is still hurting. The housing markets remain tight in California, so multi-family will continue to do well over the next three years."

Industrial

Industrial remains the brightest sector when it comes to industry outlook for the years ahead. E-commerce continues to drive demand for more industrial space, as do increased imports, according to the report.

"Industrial is the belle of the ball," Newmark Knight Frank co-head of U.S. Capital Markets Kevin Shannon said in a statement. "It doesn't show any signs of slowing down and will continue to be solid through 2019 and probably a few years longer."

In the Bay Area, the East Bay continues to be a hot spot for industrial investment and development. Low vacancy rates and increasing freight movements create optimism among those surveyed for the next three years in the East Bay, San Joaquin and Sacramento. Of those surveyed, 80% started a new industrial project in those areas last year, and 80% plan to start at least one new project this year (with three-quarters of those planning more than one project).

Multifamily

Multifamily, a sector under much discussion as the high-cost Bay Area continues to fall short in supply, has mixed sentiment in the survey.

Respondents expect Bay Area occupancy rates to go down while rental rates outpace inflation. About three-fourths of respondents said they would start multifamily projects in the Bay Area this year, and more than half plan to start multiple projects.

If job growth slows as expected, the added inventory could signal the end of an increasingly tight housing market in the Bay Area, though would it still not end the high cost of housing, the survey reports.

Office

The outlook for the office market across California, including in the Bay Area, was down among those surveyed. In the Bay Area, developers expect the market to slow in the next two years, though this hasn't translated into cutting back development activity yet. The main takeaway from the survey is that developers believe the office market has hit its peak.

Retail

Retail sentiment continues to be low. While mixed-use development that brings retail to residential, office or hospitality projects gives the retail market a boost, it is not enough to counteract the losses in the retail space including declining sales and store closings, according to the report. In the past 12 months, 18% of Bay Area developers surveyed started new retail projects. Vacancy rates are expected to continue climbing through 2021.