Outlook for 2020 – Commercial Real Estate Northern California
It is always intriguing to attend the different economic forecasts during the first part of the year and listen to the differences between the data and opinions. There are emails, blogs, and articles that fill your desk projecting the coming year and predicting the market. It is sometimes difficult to sharpen these forecasts to the greater Redding area. I have summarized the information provided to our firm to help better understand our local market.
Our office had the opportunity to attend the 20th Annual Economic Forecast Conference at the Sheraton Redding Hotel presented by the California State University, Chico Center for Economic Development. Much of the discussion and presentations were on the local economy and the aspect of housing. You are actually able to watch the entire forecast through this link; https://vimeo.com/384155452#t=1500s
We had the privilege of once again hearing from Dr. Robert Eyler, PhD on the economic projections for the Northern California area. The big take away was positive with the economy continuing to push forward at a projected steady growth. Based on the observations there is no recession on the immediate horizon and through 2022. There might be a slowdown; and if there is a larger unanticipated global event this could trigger a recession. However, inflation is below or at Feds target levels, unemployment is at lowest levels we have seen in many years, and the stock market even performed well last year. He anticipates that the Feds are done increasing rates and the yield curve didn’t invert for a long period of time compared to historical inversions, which provides comfort. The leading index from the Feds is still showing no signs of recessions (see graph below).
Dr. Eyler expressed concern with future political and global events that will affect all areas, but the rural areas even more. My opinion is if there is an economic trigger for recession our market will most likely be more mild than the last recession. We have had strong absorption of vacant space across all sectors of commercial real estate, there is still strong demand for housing and commercial space, little to none development of space over the past decade, and our main economic force, Bethel, appears to be somewhat immune to a recession. Keep in mind the U.S. is officially in its longest expansion of economic growth starting in June of 2009 since we have kept records. We are going into the 127-month long run. Is this cause for concern? Look at Australia with economic growth for the last 26 years. Maybe we need to be comfortable and positive for a future economic growth into the foreseeable future.
Touching back on commercial real estate market, there was a recent article in the Times of San Diego with a general steady outlook for commercial real estate overall in California by a UCLA Economist (https://timesofsandiego.com/business/2020/02/05/ucla-economists-forecast-strong-commercial-real-estate-market-for-california/). There appears to be a continued movement with some sectors of commercial real estate being more influenced by our spending habits and evolving technology. However, California is large and what is happening in Redding can be completely different. As mentioned earlier, our market is steady with more growth in value in certain sectors of commercial real estate. Industrial is the bright light and we are just now seeing the market values starting to creep very close to the cost of construction. Rents are increasing because of lack of supply, which is a typical reaction to the supply and demand equilibrium. We will start to see rents increase further as construction is required to meet the demand and the rents have to increase to make construction feasible. The other sectors of commercial real estate in the Redding market are right behind Industrial. One other leading indicator for the market is the improving positive activity with the Architecture Billings Index (ABI). This index continues to show the positive business conditions at architecture firms over the past few years. This has been echoed from discussions with engineering firms in the local Redding area.
The fundamentals are pointing in the right direction for Redding with the lowest unemployment (see graph below). However, many in our Northern California community continue to have pains over the labor shortage. In addition, the construction industry is very much impacted with not enough labor and raising material costs. However, the business confidence is strong and is supported by the survey conducted by the Redding Chamber of Commerce and Golden Valley Bank. The positive outlook by the local businesses in the greater Redding area is wonderful and will translate to solid economic prosperity in the area to come.
Inconclusion, we see improving fundamentals in the greater Redding area. There appears to be slow, steady growth with good business confidence in the local market. Interest rates are low and there is an appetite to lend by the local community banks. Construction costs are still higher than commercial real estate values, but the gap is closing especially with industrial. There has been zero development in the past decade and the demand exceeds the supply. This will translate into increasing rents, which will increase market values. Historically the market has slowed in election years, but it appears everyone is confident with the anticipated outcome. The greater Redding area is on track for continued steady growth.