We are here at that time of year when every association has an economic outlook. Not sure if it is good or bad, but this year there isn’t a full day in a conference hall or a plated lunch. All of the outlooks have been via Zoom…the new normal for our society. The three outlooks we have recently viewed were the 21st Annual Economic Forecast Conference presented by the North State Planning and Development Collective at CSU Chico, CCIM Commercial Real Estate Outlook, and the Sacramento Business Journal’s Economic Forecast. A great first slide to summarize the affect on commercial real estate below from the Sacramento Business Journal’s Economic Forecast
As you can imagine, COVID-19 is the hot topic and the unknown for the future. The biggest concern appears to be getting the vaccine through the population and the economy revving again. Here is a recent article on NPR that shows only 6.2% of the US population has actually received the vaccine. Unfortunately, California isn’t leading the pack on administering the state’s population with the COVID-19 vaccine. From all the economists this is key to our economic recovery, in addition to more government stimulus. Dr. Rober Eyler spoke at the 21st Annual Economic Forecast Conference (follow this link and at 16:25 minutes he is the speaker), he stated that economists prefer investment into the economy through investments instead of the transfer of payments to individuals.
No matter the economist, it would appear we are in for a steady, slow recovery over the next few years. However, Dr. Eyler stated that projected GDP growth decline was less than expected. Sanjay Varshney with Goldenstone Wealth Management spoke in the Sacramento Business Journal’s Economic Forecast with similar observations and stating positive attributes of the low interest rate environment and 70% greater earning power/savings just waiting for the economy to return. The stimulus from the Federal Government is distorting the economic data, but all agreed the stimulus was needed, with hopefully more to come.
Locally, it would appear the primary and secondary markets to the south (Sacramento and Bay Area) have been harder hit in the office and retail markets. The hardest hit market is not a surprise being leisure and hospitality. K.C. Conway, CCIM, MAI, CRE touched on that 1 in 5 hospitality workers is not going back to work when speaking at the CCIM Commercial Real Estate Outlook. Dr. Eyler presented a slide, shown below, that shows the change in household spending for groceries versus restaurants, which will hopefully not create a habit that will affect this restaurant industry long-term.
In comparison, Sacramento has 5.3M square feet of industrial space projected for construction in 2021 with the anticipation that half will be absorbed before the middle of the year per Matt Cologna from Cushman Wakefield. Redding industrial market currently reflects the lowest amount of available space over the past several years with a vacancy rate of 3.6% per Co-Star Data.
For all sectors of commercial real estate in Redding, we have continually had the lowest number of new commercial construction projects when compared over the last ten years. The slight uptick in projects shown on the graph below for the past three years are primarily government subsidized projects in the City of Redding. There continues to be a lack of supply for all sectors of commercial real estate in the greater Redding area and it does not appear to be changing soon. This will insulate our tertiary market better than the larger ones to the south. And the mass exodus of people out of the larger cities to the smaller markets is impacting our local residential market and the real estate industry in Redding.
The multi-family market is on fire and not making much sense when evaluating returns. The cap rates are becoming ridiculous as cash chases any investment with cap rates falling below 6%. One thing that might change this is that 52% of the 18-29 year olds are moving back in with Mom and Dad. The highest level prior to this was after WWII returning from home which at that time was 48%. This means that more households aren’t being created and this will affect the job market, which K.C. Conway, CCIM, MAI, CRE states will have lasting consequences. The other issues are the migration out of California. See the studies from Uhaul and United Vanlines for support of this exodus from California.
When we evaluate our local data through the Multiple Listing Service, Co-Star data, and within our office, it appears we had a steady growth of activity over the last year (See graph above). The confidence we hear during tours and discussions with clients is strong and this tends to be the best indicator. The sentiment for the future isn’t the same as we heard in 2007 or 2008, and this is a breath of fresh air for the outlook on our local economy. There is much uncertainty and concern for the hospitality/restaurant industry even on the local level; however, the pent-up demand for this product in our community is real and there is more household savings to spend than ever before. We will continue to watch our larger markets to the south for potential leading indicators, but we anticipate a steady recovery, as long as, we can get the vaccines administered and schools back to a normal schedule for working parents. Sanjay Varshney from Goldenstone Wealth Management finished up his discussion with winners will continue to win and that the 2021 year will shape up to be a good year. One of the economist we follow, Dr. Dotzour, was recently quoted in this article about pent-up demand and it is worth reading. We feel the pent-up demand will result in a quicker recovery than being forecast. “Money is not flowing out of U.S.,” said Dotzour. “We have our problems, but we are still the prettiest pig at the trough.” From the RE Journals.