Throughout 2019, real estate markets are expected to remain stable, with some performing stronger than others, according to industry experts. Measured price increases for the residential and industrial markets are likely to continue, explained Edward Coulson, a professor of economics and the director of research at the University of California, Irvine’s Center for Real Estate.
“The residential real estate market in Southern California is, of course, always very strong. But we are finally seeing . . . a deceleration,” Coulson said. “Some data has indicated rents are flattening, and that’s actually going to slow down the growth in home prices.”
Another cause for the moderation in home price increases, according to Coulson, is the loss of certain tax advantages for owner-occupiers due to the tax reform bill passed in 2017. However, Coulson noted that home prices have surpassed their 2007 peaks. High prices are a factor in declining single-family home sales, he noted, adding that the market is still “quite stable.”
The multi-family market continues to experience low vacancy rates. However, rental rate increases are expected to slow because they are not sustainable; prices are becoming exceedingly unaffordable, Coulson said. Thousands of new units coming online throughout Los Angeles and Orange counties in 2019 may have a decrease rental rates slightly, Coulson said.
“Southern California remains an extraordinarily desirable place to live. What keeps people away is the fact that there’s just such a shortage of available units,” Coulson said. “When you build more, it’s great for those people. It might dampen rent growth a bit, but it’s not going to have any dramatic effect.”
Of all the real estate markets, industrial remains the “hottest,” Coulson said. Vacancy rates in L.A. and Orange counties remain at historic lows – between 1% and 1.5%, depending on the area – and property values continue to climb. Demand for large industrial spaces is still strong, he added.
“Based on our forecast’s semiannual survey, we found the industrial market has been very good over the past several years, and we believe that it will continue to do so in 2019 as long as the U.S. economy maintains this positive growth,” William Yu, an economist at UCLA Anderson Forecast, said.
The office market should remain stable, according to Coulson. Asking rents are modestly rising; however, despite positive absorption in the Southern California market, vacancy rates have remained flat or have dropped very little.
According to a report by the NAIOP Commercial Real Estate Development Association, the average U.S. office square footage per employee has been steadily declining since 2010. This means companies need less space overall, which could be the reason positive absorption has not equated to lower vacancy rates, Coulson explained.
Yu said the outlook for the retail market is mixed. “In Los Angeles County we see the retail employment still declining,” Wu said. “E-commerce damage to a brick-and-mortar retail will continue.” The exception to this rule, he noted, are high-end stores.
Coulson said that Southern California’s retail market remains strong compared to others in the U.S, noting a decrease in retail vacancy in Orange County and the continued success of the South Coast Plaza shopping center as evidence.
“Retailers are responding to the challenges by putting in more of the experiential stuff that can’t be recreated online – the Five Fs: fashion, fitness, food, furniture and fun,” Coulson said. “But it’s certainly one of the weaker sectors going forward because we don’t know how much more e-commerce can replace brick-and-mortar retail.”
Becky Blair
President, Coldwell Banker Commercial BLAIR WESTMAC
The forecast for 2019 is expected to be sustained retail sales growth, according to CBRE, which noted that 3rd quarter 2018 retail sales were up 6% year over year. The positive continued retail growth outlook can be attributed to increasing job growth and a 3.5% unemployment rate, but that’s not the entire story. Innovative marketing techniques and customer appreciation are changing the way we view brick-and-mortar retail in a positive way. Many savvy landlords are renting to pop-up stores along major corridors. Pop-up stores are a good choice for landlords that only want short-term rentals, and they are good for tenants because of their smaller foot print and because they don’t have to commit to a long-term lease. The multichannel approach is another innovative model for retailers. By offering customers the option to browse online and buy in-store, retailers have an advantage over businesses that are only online or brick-and-mortar stores. Retail sales growth – the result of rising consumer confidence, a strong job market, lower taxes and higher wage growth – will drive strong retail fundamentals in 2019.
Steve “Bogie” Bogoyevac
Senior Managing Director of Investments, Marcus & Millichap and Founder, Bogie Investment Group
Looking forward, we expect Long Beach to remain a fundamentally strong multi-family market in 2019. Long Beach’s consistently low vacancy rates, robust rent gains and increased demand for Class A units will continue to attract investors to the area. With interest rates and available inventory very low, we anticipate investor demand will remain strong. The city saw a nearly 6% year-over-year increase in effective rents in the fourth quarter of 2018; however, two important questions for values in 2019 are: can Long Beach sustain recent rental increase rates? And will interest rates remain low?
Brandon Carrillo
Principal, Lee & Associates Commercial Real Estate Services
Past demand has outstripped the limited supply in the Long Beach industrial real estate market. Market signals show us this trend should continue into 2019. The direct industrial vacancy rate in Long Beach is hovering around a historic low of 1%. Rents have begun to level off due to the lack of available Class A properties. Sale volume dropped off in 2018 compared to 2017 due to the lack of readily developable land and high asking prices. CAP Rates continue to be pushed downward as investors clamor for limited quality investment projects in the area. According to the NAIOP Industrial Space Demand Forecast, without an increase in construction for industrial space, landlords will see a rise in rent and occupancy rates. With over 500,000 square feet under construction, we expect renewal transactions to continue to dominate most large transactions as tenants have limited options for modern fulfillment space. I believe an economic contraction may come sooner rather than later with the background noise of a possible trade war with China and government shutdown, which could be the catalyst for a local and global slowdown in the economy. High values should be leveling off and now is the time for property owners to capture these historically high values. As seen in 2018, industrial property for lease or sale will continue to be difficult to find while new facilities are built to support ecommerce fulfillment centers and the shift toward electronic retailing.
Robert Garey
Senior Director, Cushman & Wakefield
The Long Beach office market has never looked better! This market has experienced significant investor capital with the repositioning of office buildings to meet the demand for creative and inspirational space. Such investments are paying off with higher occupancy rates and a return on investment. A good example is The Hubb in Downtown Long Beach, which was purchased in November 2015 for $35.2M with an occupancy rate of 69%. Looking to reposition this asset, the owner invested $12 million in improvements to design a creative office environment. The market responded positively and the occupancy quickly rose to 88%, while rental rates increased over 40%. Capitalizing on the market conditions, The Hubb sold in November 2018 for $60.5 million resulting in a net profit of $13.3M over a three-year period. At Douglas Park, you can see the transformation to a vibrant and amenity-rich environment. Other investors are eager to capitalize on this trend, evidenced by the 180 E. Ocean Blvd. building, which sold in August 2018. This investor is looking to reposition the asset to be an inspiring place to do business with breathtaking views of the Pacific Ocean. We see this trend continuing with a bright future for Long Beach.
Phil Jones
Managing Partner, Coldwell Banker Coastal Alliance
Long Beach’s residential housing market is in the midst of what I term a “normalization,” meaning that we are experiencing a shift from a seller-advantaged market to a balanced or a slightly buyer-advantaged market.
Sales in 2018 were down approximately 4% from 2017’s pace, and that trend is continuing as we enter the new year. Affordability remains a major issue as incomes have not kept pace with housing price appreciation. The expected increase in mortgage interest rates began in the 4th quarter of 2018 but rates have regressed some recently because of the volatility in the stock market. This provides buyers a window of opportunity to capitalize on the lower rates if they act sooner than later.
The California Association of Realtors is projecting a 3.3% drop in the number of sales and a 3.1% increase in the median home price in 2019 statewide. They are also predicting that mortgage interest rates will rise from 4.7% in December 2018 to 5.2% at year-end 2019. Locally, the dynamics should not differ significantly as we all look to our state and nation’s capitols for action (or inaction) that could impact any forecasts.
Douglas Shea
Partner, Centennial Advisers
A mirror to last year is what I am seeing for the upcoming year. We have hot industrial and self-storage. We have office as pretty much topped out and we show a weakening retail sector.
The good news that came out of the Federal Reserve’s last meetings is that they are not going to raise rates as quickly this year. As we look closer inward at Long Beach, all the industrial regions from the Westside to Douglas Park are very hot right now. There just does not seem to be enough product.
Self-storage is still topping on the radar for great investments. Long Beach’s new skyline with large multi-family high rises has not allowed for enough self-storage development. Most apartment dwellers need the additional outside self-storage space as the units themselves do not have enough space. Cities do not like self-storage due to lack of tax dollars, but Long Beach is way underbuilt in this sector.
Retail in California is a little cool while it tries to reinvent itself. Locally we are seeing the largest retail development in years at 2nd and PCH. Look to see across the street at the Market Place make some moves either via sale or redevelopment itself. Downtown Long Beach will still move along the exact same line it did last year. The Bixby Knolls region is, in my opinion, moving on a slight upward trend.
Bob Stallings
Broker/Owner, Re/MAX Real Estate Specialists
How will 2019 look for the single-family real estate industry? I believe Long Beach will follow a similar trend as the county and the state. We are seeing sales retreating and prices starting to level off. After 6.5 years of rising prices, we should get closer to a normal market. With home affordability at a 10 year low, we are due for an adjustment. 2019 will be a great year to buy a Long Beach/Signal Hill home, if you are planning to own for 4-5 years. The inventory of homes is up 11.6% over December 2017. While the medium sales price is up 3.8%, the days on market has increased by 11.1%. This longer time on the market will cause sellers to be more willing to negotiate with buyers, while still getting a fair price. With mortgage rates increasing, the affordability issue could be larger. The average rate in 2018 was 4.5%, and rates are expected to be 5 to 5.5% by year’s end. After 39 years as a realtor and 32 years as broker/owner of RE/MAX Real Estate Specialists, I have experienced many market changes. When compared to other investments, I believe that buying a home will continue to be the best long-run investment.
Robert Stepp
Principal, Stepp Commercial
The Long Beach multi-family market will continue to experience growth in 2019 with a particular concentration of that growth in prime submarkets, which include Downtown Long Beach, Belmont Heights, Belmont Shore and the Traffic Circle. With the threat of rent control off the table, buyer interest has been reignited in Long Beach. This demand, however, is largely focused on the prime, well-located neighborhoods and on property that offers an upside through renovation in order to maximize rents to create a cash-flowing asset. “C” areas of Long Beach have been declining in both buyer interest and pricing, giving an opportunistic play for patient investors looking for a longer-term hold.
Ultimately, the billions of dollars in investment in Downtown Long Beach has been good not only for downtown, but for the entire Long Beach market. 2019 will see strong activity for new development here, especially south of 7th Street, as the well-respected Sares-Regis Group is underway on two new multifamily complexes totaling approximately 385 units with some retail space. This activity, along with other key projects, is subsequently attracting additional institutional players. The pro-business, pro-development environment here is a major contributor to a thriving downtown area that will look very different four years from now as businesses, residents and supporting amenities locate here.