Office Space Markets Continue to Trend Down

Developer sentiment for all northern California markets has been declining since at least June of 2016, and the latest survey provides continued evidence of a downturn in the office market space. Office developers in San Diego and Orange County have now entered the negative zone from the recent survey, partly due to panelists' less than confident outlook on the ability of rents to keep up with inflation, and for occupancy to remain at its current high level. Though slightly more Bay Area projects were started in the last 12 months than the panel anticipated last June, only 38 percent are looking at starting new projects in the next year. In Orange County, the expectation is for rental rates to hold their inflation adjusted values, while occupancy rates fall. To keep occupancy rates up, landlords would need to push down rental rates further. In San Diego, the expectation is for both to fall along with inflation adjusted land prices. Thus, as with the Bay Area, the index predicts a downturn in office construction in all but the Los Angeles market over the forecast horizon.

The outlook in Los Angeles is decidedly more optimistic, although less so than two years ago. The difference between L.A. and the other California cities is Hollywood and Silicon Beach. The entertainment and tech industries continue to grow in the Los Angeles region in response to robust demand for gaming, streamed content, television programming and critical mass being achieved in Silicon Beach. The L.A. panel does not view the office products in the pipeline as sufficient to meet all of this demand. Consequently, their expectation is for rents and occupancy to increase through 2020.