Survey: California Office Market Has Topped Out, But Warehouses Are Hot

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An Amazon fulfillment senter in San Bernardino is typical of the new warehouses needed to support online shopping. Courtesy UCLA

The office market has topped out in California, with rents stable, but demand for warehouse space is surging due to the growth in online shopping, according to the latest Allen Matkins/UCLA Anderson survey.

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The biannual survey of sentiment in the commercial real estate industry found that office rental rates are “as high as they will be in the foreseeable future” with two-thirds of respondents not planning projects in the coming year.

“We’ve hit an apex in office development. People are continuing to develop what they previously bought, but there doesn’t seem to be a ton of new development acquisition
deals on the horizon,” said Allen Matkins partner Crystal Lofing.

The survey, which is a joint effort of the Allen Matkins real estate law firm and the UCLA Anderson Forecast, is based on responses from a panel of real estate professionals in the office, industrial, retail and multi-family sectors.

Warehouses to serve the the demand for online shopping were seen by respondents as the major growth area in the industrial sector. These buildings are quickly replacing traditional factory space as a primary focus of development.

“Since California began transforming from a factory economy to an information economy, the space has shifted to being dominated by warehouses,” the survey report noted.

However, the report warned that “disruptive trade wars” could reduce the demand for warehouse space.

Retail continues to be the weakest sector of commercial real estate, the survey found. Panelists reported that two-thirds of their space is occupied by “tenuous leases,” and said they are not increasing the number of projects they will be developing over the next year.

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The report found that what retail opportunities exist are in the conversion of space into either “experiential” retail or mixed-use projects that include housing and office space.

“Experiential retail is up, but experiential retail takes a lot of effort,” noted Allen Matkins partner Pete Roth. “You have to have the right kind of mix and it’s a challenge,
and so repurposing existing retail to fit the new model can be difficult.”

Multi-family residential remains strong, especially in Southern California, where three-fourths of the survey panelists are planning new projects.

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