The Southern California CRE could return to normalcy by the summer, according to SoCal NAIOP CEO Tim Jemal, who sees a light at the end of the tunnel, thanks to the vaccine rollout and improving market fundamentals.
“The 2021 outlook is pretty good for commercial real estate in Southern California,” Jemal tells GlobeSt.com. “We are starting to see a glimmer of light at the end of the COVID-19 tunnel. Despite a slow start, the vaccine is being deployed throughout Southern California, which raises hope for some normalcy by summer. There is already a second round of Paycheck Protection funding and it looks like there will be a third tranche of federal COVID relief funding coming from Washington.”
Jemal’s optimism extends across asset classes in Southern California, which is good news for the region’s diverse investor pool. Of course, industrial is taking the lead. “There is no question that the industrial sector enters 2021 with the wind at their back driven by e-commerce,” says Jemal. “We expect demand for industrial and logistics assets will remain strong throughout the year propelled by online sales and parcel deliveries.”
Although ecommerce activity has been the driver, Jemal expects to see activity in all types of industrial property profiles, not ecommerce exclusively. “Despite the continued expansion of e-commerce operations, there are damaging regulations to warehouses proposed by the South Coast Air Quality Management District that could stifle growth and harm the important goods movement industry,” he says.
In retail, innovation will help to drive the market forward. The good news is that in many ways this was already on the menu before the pandemic hit. “There were already signs of retrenchment in 2019 with COVID-19 causing further contraction,” says Jemal. “We are also seeing examples of innovation and re-imagination in retail with a focus on convenience and a better consumer experience. Despite the strength of e-commerce, brick and mortar retail sales are expected to grow in 2021.”
He did offer a caveat: not all retailers will weather the storm. Some retail product will shutter, opening conversion opportunities. “It’s likely retail inventory will continue to decline with class-B and C malls converting to other uses including industrial, multifamily and hotels,” he adds.
Tech and life science properties are another bright spot in the Southern California landscape. “Expanded health insurance coverage from a Biden Administration is likely to increase demand for medical and health care space,” says Jemal. “Life sciences firms usually like to remain close to premier research universities like UCLA, USC and UCI increasing demand for commercial space. Just last week, UC Regents approved a $1 billion medical complex with a 144-bed hospital next to UC Irvine’s main campus. Facebook, Netflix and Apple have expanded their footprints in LA as more affordable space becomes available when other occupiers downsize to reduce costs.”
Finally, improving market fundamentals and job growth will help to fuel recovery in both the apartment and hotel sectors. “We will see some regional jobs growth in 2021, which will help strengthen the multifamily sector. In the local hospitality industry, which was decimated by COVID-19, drive-to hotel and leisure destinations will likely recover first,” says Jemal.
While he is largely optimistic on the market, office is the one sticking point. “The office sector might be the least clear to forecast until late 2021,” he says. One big question, even with large-scale COVID-19 vaccinations, is whether the office sector will ever return to normal or whether there will be a new normal.”
He notes a recent survey published by Gensler, a member of NAIOP SoCal, that indicated a significant percentage of previously full-time workers want to continue to work at home either part- or full-time after stay-at- home orders and social distancing requirements are lifted. “It’s clear that if employers believe workers are productive while working from home, and these employees continue to desire working from home at least part time, some lasting changes in remote work will occur,” says Jemal.
Still, this isn’t a death sentence for the office market, just an unknown change to office usage. “This may not mean less demand for office space as new design configurations requiring greater social distancing and use of outdoor space should arise,” says Jemal. “The new normal may be office space that’s flexible, has desired amenities, greater spacing and touchless technologies.”