CRE Turns Bearish On Office Sector As Remote Work Gains

California office developers and financiers have worsening outlooks on the state's office sector after a coronavirus-induced recession and concerns about remote work, Allen Matkins and UCLA Anderson Forecast said in a new report. 

In their latest California Commercial Real Estate survey, the law firm and forecasting group recorded worsening sentiments across property types, calling remote work's effect on the office sector in particular "an open question."

The biannual survey asks California developers and financiers in the office, retail, industrial and multifamily sectors about how well they predict their respective property types will fare in six of the state's biggest markets three years into the future.

The duo's report shows sentiments for office rental and vacancy rates in three years' time having been cut in almost half for markets like the East Bay Area, San Francisco, Los Angeles and Orange County compared to December.

Even so, about half of Bay Area and Southern California panelists said their plans for the coming 12 months were unaffected by the pandemic. One-third will decrease development by more than 15%, while one-third plan on engaging in some new development, citing the belief that land, building materials and labor costs would decrease, the report shows.

Conducted in June, the survey arrives as remote work continues for much of the country, and many of the country's thousands of office buildings remain largely empty.

California-based corporate giants like Facebook and Google have embraced remote work. The former said in May that it could have up to half of its workforce working remotely in the next five to 10 years; the latter said just this week it would keep its employees out of offices until at least July 2021. 

In an analysis of the latest Allen Matkins and UCLA Anderson Forecast survey results, Newmark Knight Frank co-Head of U.S. Capital Markets Kevin Shannon said there is a clear tension between the potential for office de-densification adding to office demand and remote work taking away from it.

“Very early feedback from our leasing teams show a net neutral effect although it’s way too early to say this is the trend,” Shannon wrote.

Likewise, John M. Tipton, a partner in Allen Matkins' real estate division, said sentiments could change drastically with more certainty.

"We've got to get another data point," Tipton said of the need for another survey in six months to determine what trends last. "Stuff is still going to get built, but the spec buildings — no, they're not."

Compared to experts in the office sector, industrial and multifamily developers and financiers revealed relatively modest drops in sentiment. Most Southern California industrial panelists, for instance, don't expect excess supply in 2023 despite their worsened outlooks for rent and vacancies for the sector. 

Similarly, almost three-fourths of SoCal panelists and two-thirds of Bay Area panelists stated that the pandemic has either not changed their plans for multifamily development or that it has increased it.

For retail, "the current view is that retail properties will be generating significantly lower, if any, returns in 2023 compared to the middle of 2020," according to the report. Two-thirds of retail panelists will not develop any new properties in the next 12 months, and about the same percentage "expect plummeting property values," according to the report.

“Across these spaces, with the exception of retail, there is certainly some optimism about opportunities that may exist,” UCLA Anderson Forecast Director and Senior Economist Jerry Nickelsburg said.

Contact Dean Boerner at [email protected].