Forecast: Office Optimism Tempered With End-of-Cycle Predictions

The majority of office developers are building right now and 2016 is gearing up to be an even stronger year than last, with plenty of product hitting the market and continued optimism, according to the latest Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey.

The survey finds a majority of developers are optimistic regarding the next three years across California's coastal markets, says UCLA Anderson Forecast senior economist Jerry Nickelsburg. Bisnow got an early peek at the office market expectations.

Allen Matkins partner Tony Natsis says we're in the part of the cycle where the main players who bought a lot of land and re-entitled it are now focusing on ground-up development. Click here to see Allen Matkins' video on California's office market.

Allen Matkins' John Tipton says with a massive number of buildings coming online, what will be interesting this year is where prices will land. Prices will serve as proof of how much people believe in the legs of the market after 2016, he says.

The most positive outlook for office space is in Southern California, likely because of job growth and a tightening office market, the survey finds. One-third of Southern California panelists started a new project in the past year, while 42% planned to start one or more projects this year.

The Bay Area has a more tempered outlook, as many of those surveyed believe the 5% growth rate of office-using employment in San Francisco and 7% in Silicon Valley is unsustainable, according to the report. So there is no expectation of dramatic improvement in an already strong market.

Jerry says new building in both Northern and Southern California is being largely driven by demand from tech companies that want to locate somewhere other than your traditional office park. Meanwhile, rental rates are expected to go up faster than inflation and vacancy rates are expected to fall, he says.

But there is caution. In certain markets, the 2007 refrain that vacancy is worth more than leased space (driving up the value due to the higher rental rates that vacant space could command) is starting to surface again, says Buchanan Street Partners president Tim Ballard. He's not looking to buy a lot of vacancy when the coming years could hold some softness in the market.

Office demand also is expected to continue to push into the East Bay as higher rents in San Francisco and Silicon Valley drive companies to the east, Jerry says.