Commercial real estate outlook in California a mixed bag

Continued uncertainty dampens office market sentiment

The pandemic reared its ugly head across the office market, reversing an erstwhile optimistic trajectory given continual delays among many employees in returning to the workplace, according to the findings. Investors’ resistance rooted in pandemic-fueled uncertainty about near-term economic prospects contributed to a downturn in Southern California, with a more neutral view in the northern part of the state, analysts found. Sentiment about development remains slightly optimistic in the Bay Area – “…though there are not yet plans in place to increase the rate of development,” according to the survey.

The prevailing feeling is that pessimism will evaporate as companies increasingly put plans into place to return their workforce to office settings, which could usher in a need for new office development, according to the survey.

“This is the one area where there is still the most uncertainty,” Tipton conceded. “Before the pandemic hit, you already had firms that were doing a couple of things: One being a little more cautious with their space, and in some cases downsizing, but you also had more common amenities – places for people to gather and work together and be collaborative – so that was a general change in the design of office. The pandemic hits and you have several things come out of that. One was, gee, maybe people don’t want to be on top of each other quite as much as before. Two, you have that so many people have been working remotely, at least in part, for so long and gee, it actually seems to work pretty well for existing employees who know what they’re doing and now doing their job elsewhere. But you also have the fact that as things go on that way when you’re trying to onboard new talent it’s really hard if there’s all kinds of collaborative work, and learning the culture of the place and getting to know people.”

Multi-year optimism continues for growing industrial market 

At the other end of the spectrum is the industrial market, which has seen consistently high occupancy rates and superior rate growth over the past few years, the survey found. Such optimism continues with the latest CRE study, Tipton noted. The sector’s success is attributable to rapid industrial development barely keeping up with absorption – leaving plenty of demand for additional supply.

Consistently high occupancy rates and superior lease rate growth have kept the optimism high for all industrial markets, according to survey findings. The current survey predicts more of the same — that significant future increases in demand will outstrip planned and projected 2025 supply. This view of an even tighter market stems in part from the fact that demand in the last few years has driven vacancy rates to their astonishingly low levels, analysts found.