According to a new economic forecast from UCLA’s Anderson School of Management, the price of Southern California and United States commercial real estate may finally be leveling off or even declining in the coming years. This is in stark contrast to recent years, during which time commercial real estate prices have been steadily increasing.
A Mixed Bag of Reasons Leads to Lower Commercial Real Estate Prices
The commercial real estate market has enjoyed a seven-year stretch as a bull market, but the UCLA Anderson report indicates this will soon be coming to an end. This is largely due to a combination of a less favorable financial environment, reduced demand and increased supply. While the report does not predict a “crash” in the market, it does predict an extended period of prices experiencing a downward trajectory.
Even before the UCLA Anderson report came out, lenders were starting to use more caution in terms of making loans to commercial developers. With most anticipating a slowdown in 2018, 2019 and 2020, the shift in momentum is reason for caution.
Commercial Rent Sees an Increase
While commercial rental prices have generally increased throughout the country, they have seen a significant increase in Los Angeles. In fact, commercial rents in greater Los Angeles increased by 19.3 percent since the end of the recession. The increase has been even more noticeable in those areas that are dominated by tech companies. Playa Vista, for example, experienced the greatest increase with a 62.6 percent rise. Hollywood had the next largest increase with a 54.9 percent rise, while Santa Monica’s commercial rental prices increased by 48.7 percent.
According to some, seeing the prices come down a bit will provide some welcome relief. In some areas on the West side, companies have seen their rent costs double in the last two years. While increasing prices a little bit on a smaller office space may not hurt the pocketbook too much, it is quite different when the cost-per-square-foot is dramatically increased on a property that is several thousand square feet in size. Spending a bit extra to create a space where people want to come to work is worthwhile for many companies, but not when the costs become too prohibitive. As a result, many companies that grow to the point that they need more space are moving east and simply hoping their employees will follow.
The Future of the LA Commercial Real Estate Market
While UCLA Anderson is reporting a softening in the commercial real estate market, CBRE reports that the Los Angeles office market is likely to experience many more years of growth simply because office employment in Los Angeles is predicted to continue growing through 2018. Furthermore, the local economy has become even more diversified over the last several years. This means fundamentals in the office market are likely to continue to strengthen over the next 12 months.
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(all data current as of 10/17/2017)
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