The Changing Landscape of Commercial Real Estate
UCLA ANDERSON FORECAST JUNE 2014 CONFERENCE
The UCLA Economic Outlook Conference was held on June 12, 2014 and involved university academics and industry leaders speaking about trends that will have an impact on commercial real estate in Los Angeles, as well as around the country and the world. The following are a few of the topics that were discussed:
1. Chinese Investment in U.S. Real Estate
Chinese nationals are interested in investing in the American market. China’s foreign direct investment (FDI) in 2013 was approximately $13 billion. This is almost 50% higher than FDI in 2012 and over 300% higher than in 2011. A form of FDI Chinese individuals are interested in is multifamily real estate, partly because the price to rent ratio is much lower (a good thing) in the United States than in China. If the P/R ratio is higher, it takes much longer for an investor to recoup initial purchasing costs. When comparing prices per square foot, LA apartment units are a better value than apartments in China’s two biggest cities, Beijing and Shanghai. Because of the lack of demand and lower GDP per capita, monthly rents are cheaper in China than in the U.S (a bad thing for investors). Additionally, Los Angeles is an ideal place for Chinese real estate investment due to its depth and liquidity, geographic location (closer to Asia), abundance of Asian communities and nice weather.
2. Retail Outlook
E-commerce sales have surged in the past several years. The percentage of retail sales from e-commerce has increased from 1% in 2000 to 6.2% in 2014. Since the recession, e-commerce sales have increased by 110%, while retail sales (not counting auto businesses) have gone up 23%. The UCLA Anderson Forecast Team predicts that e-commerce will eventually erode the foundations of retail real estate. They also say that underperforming malls will close and that the existing land will be used for other purposes. Retail profitability is decreasing due in part to the smartphone, allowing phone users to compare prices on the go (e.g., at the mall). Mall owners are favoring more restaurant tenants, as eateries are not affected as significantly by e-commerce. Even Home Depot is concentrating its efforts on e-commerce sales and no longer expanding its brick and mortar stores. E-commerce is making a dent into kitchen, bath and pharmacy products. UCLA Anderson also notes that what is working in retail appears to be street level shopping in high density urban areas that experience significant year-round tourism– like Santa Monica's Third Street Promenade.
3. Office Outlook
Although the overall office market looks bleak at the moment, the technology and energy related office markets are faring much better. This is why Silicon Beach in LA and Midtown South in Manhattan are doing much better than traditional markets like Brentwood and Park Avenue, respectively. A far more serious problem to demand is that office space is becoming increasingly clustered. The number of workers per square foot is increasing, especially in the technology sector. Instead of the traditional 200 sq. ft. allotted per worker, firms are allowing for 120-150 sq. ft. per worker. This is happening because technology itself is eliminating the need for file space, due to the facility of digitizing records. Dense workplaces are not limited to tech companies, as Goldman Sachs, Credit Suisse and Unilever have decided to put more people in compact areas. Because firms can fit more people per square foot and pay less rent as a result, the national office vacancy rate will remain high for years to come.
4. Industrial / Hospitality / Multi-family Outlook
As opposed to retail being negatively affected by e-commerce, industrial is actually recovering because of the increase in online transactions. However, industrial growth will be curtailed due to the delayed widening of the Panama Canal in 2016 to accommodate larger cargo ships. This could shift warehouse demand from the west coast to the Gulf and East Coasts.
Technology has made the hospitality industry far more transparent. Future hotel guests are making more informed decisions about where to stay, based on review websites such as Tripadvisor. The “sharing economy” is increasing, where homeowners can rent out their rooms, condos and houses directly to interested parties. One of the most prominent websites to offer this service to consumers is Airbnb, which received VC financing – giving the company a $10 billion value, more than Hyatt Hotel’s market cap.
ulti-family housing is looking good, due to many factors. They include a decline in homeownership, increasing consumer demand for urban and suburban density, sluggish economy that is delaying marriage and child birth, and environmentally friendly housing projects close to public transit. The vacancy rate has decreased from 8% during the 2008-2009 recession to 4% in 2014. UCLA Anderson is forecasting that 400,000 units will be built each year in 2015 and 2016, the highest level since the mid-1980s. By 2016, they expect that increases in construction and stagnating homeownership levels will result in rising vacancies and less rent increases.