Though some are hotter than others, all real estate markets in Southern California are performing well, according to Edward Coulson, a professor of economics and the director of research at the University of California, Irvine’s Center for Real Estate.
“The office market is the most nebulous,” Coulson said. “Vacancies have been solid and absorption has been pretty good, but going forward we won’t see a lot of action on the plus or minus side.”
Amenities such as nice lobbies and common space are important factors when it comes to office space, Coulson explained. Walkable proximity to food service and the “urban experience” can be important for some types of office environments, but overall it is not as important as some have claimed, he said.
Richard Green, director and chair of the University of Southern California Lusk Center for Real Estate, said creative office space with open floor plans and high amenities is doing quite well, with rents increasing. However, traditional office space, typically in suburban markets, has higher vacancy rates due to the fact that companies are utilizing less square footage per employee, Green explained. So, despite decreasing unemployment rates, the office market is weaker.
“Industrial is doing great, and I expect it to continue doing great because it’s basically substituting for other types of real estate – both retail and office,” Green said. “One thing that worries me is if we have a trade war, that is going to be bad for industrial.”
If a trade war ensues, Green said industrial space near the ports of Long Beach and Los Angeles, as well as in the Inland Empire, will suffer due to a decrease in imports. “If the ports start losing business because of a silly trade war, that could have a pretty profound effect on the industrial market,” he said.
As long as a trade war is avoided, Green said he is very bullish about the industrial market, with low vacancy rates continuing to put upward pressure on prices. Coulson said prices would likely continue to rise over the next 18 months. However, he added that the sky could be the limit on pricing as more and more companies build up their distribution networks, especially in denser environments where it’s difficult to create new space.
“The death of retail has been greatly exaggerated. A lot of companies are decreasing their amount of space, of course, but that creates capacity,” Coulson said. “You can never underestimate the ability of entrepreneurs to utilize capacity.”
Current trends in retail call for more creativity in how businesses use space, Coulson said. Offering services that cannot be purchased online is key, he noted. For example, 20 years ago there were no storefronts where people could drink wine while they painted, he noted. Food is also taking the place of traditional retail spaces, including creative food courts with entertainment options, he added.
Green is not certain how sustainable the current influx of new restaurants is. “The restaurant business is a tough business,” he said. “You can be a great chef and still not know how to manage a restaurant. The capital costs of a restaurant are very high, and everyone can think of a restaurant they really liked that has gone out of business.”
The continuing disappearance of the middle class is going to be problematic for retail for quite some time, Green said. From 2000 to 2014, the number of middle-income households dropped in 203 of the 229 U.S. metropolitan areas examined in a Pew Research Center analysis of government data. While the wealthy maintain their level of goods and services consumption, he said the fundamental driver of spending is the middle class because low-income families often do not have disposable income.
Prices for single-family homes are continuing to rise, and in many areas are within 10% of prices seen in 2006 and 2007, Coulson said. However, price increases have slowed considerably, he noted.
“They can only grow so much before you’re overpriced compared to the matching income group,” Coulson explained. “That being said, the fact that the growth is stalling out does not mean that prices are going to come down anytime soon.”
Depending on the source, home prices have increased 5% to 8% year over year, Green said. Median home price in Orange County is above $700,000 and Los Angeles County is just under $600,000, he said. Green agreed that there are no indicators that prices will come down, due to the lack of inventory. He added that people are moving less frequently, which is another factor in low inventory.
Vacancy rates for multi-family real estate are around 3% in the region, with the Inland Empire being a little higher, Green said. The pace of rising rents has slowed from around 6% annually to 2% or 3% and there is no indicator that they will not continue to increase, he explained, adding that the current market is somewhat paradoxical.
“On the one end, vacancies are low, which should mean that the landlords have pricing power,” Green said. “On the other hand, there is only so much you can get out of people for rent, so there should be some income restraint on the amount of rent that landlords can charge.”
For investors, Coulson said multi-family building prices should have solid growth, in addition to increased asking rents. The cause is a lack of supply and a seemingly endless demand, he explained. Most areas have recognized the issue and are pushing for a relaxation in regulatory requirements to speed up the development process, he added.
A major factor for a lack of rental units is that Millennials are not as quick to take up homeownership as previous generations, Coulson said. This could be due to Millennials having a better understanding of the risk involved in purchasing a home, after witnessing the market collapse during the Great Recession, he said.
“My faith in the Southern California real estate market is pretty strong,” Coulson said. “I think any softening of the market will be followed by a rebound driven by demand from people and entities that want to be part of the Southern California environment, which is always going to be attractive from anywhere in the world.”
Source: Long Beach Business Journal