California Office Market Awaits Recovery

While class A office asset prices in California have climbed back to about 90 percent of their peak, rental and occupancy rates still have a long way to go, according to the June 2011 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, which tracks office and industrial activity in the state’s major markets.

“The easy money policy of the Fed combined with a below normal equilibrium number of properties available has led to a rapid price recovery,” while the underlying fundamentals of these assets have shown little to no sign of improving, the report says. As a result, the major gap in price and earning potential suggests either a bubble or a coming recovery of fundamentals. Developers in these markets are cited as being generally optimistic about construction market improvements in 2013 and 2014.

Southern California’s current office market vacancy rates remain high with localized improvements in select markets being achieved at the expense of nearby markets. The report characterizes the current state as the “churn” before the overall market starts to improve. The market’s continued weakness is attributed to overall economic conditions rather than overbuilding in both Los Angeles and San Diego, according to the report.

Northern California’s conditions are more favorable, mostly due to the active high-tech sector. A significant number new leases and new construction projects in the San Francisco/Bay Area market have shifted local developers’ view from optimistic to enthusiastic, the report says.