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Commercial Spotlight: California 2020

The Golden State still has strong economic fundamentals.

By Neil Pierson

Spanish explorers were the first Europeans to reach California in the mid-1500s, but the path to becoming an economic and cultural powerhouse wasn’t fully laid until shortly before California achieved statehood in 1850. In San Francisco alone, about 40,000 people arrived via boat in 1849 to join the gold rush, and an estimated $2 billion of the mineral was mined from 1848 to 1852.

Today, California leads the U.S. with a population of nearly 40 million and an economy valued at $2.9 trillion — a gross domestic product that is on par with those of Germany and the United Kingdom. Technology drives much of the state’s business output. Companies like Apple, Atari and Oracle were founded in the Bay Area in the 1970s, hastening the growth of Silicon Valley to eventually include behemoths like Alphabet, Facebook, Tesla, Twitter and Uber.

California Demographics Chart

As of this past July, the Golden State had accounted for 3.3 million new jobs, or 15% of the nation’s employment gains, since February 2010. The state’s unemployment rate dipped below 4% this past October, while annualized job growth at that time was 1.8%, according to the U.S. Bureau of Labor Statistics. Employment sectors such as construction, professional and business services, and education and health services consistently outpaced California’s overall job growth during the latter half of 2019.

The Golden State’s economic success, however, has been accompanied by affordable-housing problems. A report in USA Today said that San Francisco’s median home price of about $1.4 million was pushing thousands of people to relocate to cities like Sacramento, Seattle and Austin. In response to escalating housing costs, Gov. Gavin Newsom signed a rent-control measure this past October that limits annual rent increases to 5% plus inflation for California properties that are more than 15 years old.

In Los Angeles County, the population fell by 13,000 people from 2017 to 2018. That was the fourth-largest outmigration among the nation’s most populous counties during that time, CNBC reported this past April. Many people are leaving L.A. for jobs in nearby Riverside and San Bernardino counties, where the average monthly rents are about $800 to $1,100 cheaper than in Los Angeles County, according to CNBC.

This past July, a joint report from Allen Matkins law firm and UCLA’s Anderson School of Management predicted a statewide slowdown in commercial real estate construction activity through 2020. The industrial-property sector may buck that trend, however, with the East Bay Area, Los Angeles and Orange County markets leading the way, and further development of multistory warehouses is likely to occur in some places.

Greater Los Angeles office market

From first-quarter 2018 through third-quarter 2019, the fundamental metrics of the Greater Los Angeles office market were stable, according to Cushman & Wakefield. Average asking rents hovered around $40 per square foot, while vacancy rates stayed relatively flat in the 14% to 15% range.

California Office Market Chart

Cushman & Wakefield also noted that the metro area had nearly 203 million square feet of office space as of this past third quarter, a 30% increase since 2011. Under-construction office projects reached a record high of 4.6 million square feet in third-quarter 2019, with more than half of that space located in the West Los Angeles, Culver City and Hollywood submarkets.

There also were good signs for L.A.’s central business district in the latter half of 2019, Cushman & Wakefield reported. The office vacancy rate there declined from 20.2% in third-quarter 2018 to 18.3% in third-quarter 2019, while the average asking rent grew 4.5% year over year to $44.28 per square foot.

Focus: Trade and logistics

According to the California Association of Port Authorities (CAPA), three of the nation’s largest ports — Los Angeles, Long Beach and Oakland — are located in the Golden State. About 40% of the nation’s containerized-cargo imports and about 30% of its exports flow through California’s 11 ports, which employ more than 500,000 people and generate about $9 billion per year in state and local tax revenue, CAPA reported.

Imports at the L.A. and Long Beach ports were down 14% year over year this past September, the same month that a 15% tariff was tacked onto a variety of Chinese goods, the Los Angeles Business Journal reported. A report this past June in the Los Angeles Times noted that warehouse and distribution facilities in Southern California had vacancy rates of less than 1%. Much of the cargo passing through the SoCal ports sits for long periods, however, negatively impacting the 1 million jobs tied to international trade in the five-county region, the report stated.

What the locals say

“The California market is still super strong and we have a below 4% unemployment rate, so you can hardly argue that we have distress or signs of distress in the broader economy. At the end of the day — driven by consumers and driven by people getting jobs — that’s going to permeate commercial real estate, starting with multifamily [housing]. Occupancy levels continue to be at all-time highs. Typically, an apartment becomes available and someone is waiting to take the space, especially in the smaller-balance, workforce-housing market that we are focused on.”

Pat Jackson Pat Jackson

CEO, Sabal Capital Partners LLC

3 Cities to Watch

Riverside

Riverside

This city sits at the center of the Inland Empire region — which is expected to grow to an estimated 7.2 million residents and become one of the 10 most populous U.S. metro areas by 2046. The Inland Empire has seen high demand for medical office buildings over the past five years, while the region’s industrial real estate sector is experiencing record-low vacancy rates and record-high rent prices.

San Diego

San Diego

City officials tout San Diego as one of the most ethnically and culturally diverse places in the nation. The 26.5% share of foreign-born residents is more than double the national average. The city had about 1.4 million residents in 2018, according to census figures. Commercial real estate brokerage Hughes Marino reported this past August that office vacancy rates have mostly stayed flat or increased across the metro area since 2014.

San Jose

San Jose

San Jose eclipsed the 1 million population mark in 2014 and is now California’s third-largest city.The city’s unemployment rate of 2.4% this past October was well below the national rate of 3.6%. As of the past third quarter, Adobe had broken ground on a new office tower at its downtown San Jose headquarters, while Google was planning a transit-oriented development that could employ up to 25,000 people.

Sources: Allen Matkins, Avison Young, Brittanica.com, Business Insider, California Association of Port Authorities, City of San Diego, CNBC, Cushman & Wakefield, Hughes Marino, Los Angeles Business Journal, Los Angeles Times, The Mercury News, The Press-Enterprise, USA Today, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, U.S. Census Bureau, World Population Review

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