Business & Economy

Is the commercial real estate bubble about to pop?

Construction crews at work on Horizon at Playa Vista, an area that has seen some of the biggest commercial rent increases. File photo.
Construction crews at work on Horizon at Playa Vista, an area that has seen some of the biggest commercial rent increases. File photo.
JebusHChrist/Flickr CC

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This post has been updated to include new statistics on commercial rent increases since the end of the recession.

The price of Southern California and U.S. commercial real estate has been rising for years, but it may be leveling off or even declining in the coming years, according to a new economic forecast from UCLA's Anderson School of Management.

"The combination of a less favorable financial environment along with weakening fundamentals arising from increased supply and reduced demand will likely bring to an end the seven year bull market in commercial real estate," wrote senior UCLA Anderson economist David Shulman. "To be sure, we are in no way forecasting a 'crash,' but rather an extended period of sideways-to-down prices."

Wayne Brandt, national originations director for Wells Fargo Bank, said he has become more cautious about making loans to commercial developers in anticipation of the shift.

“I think we’re all looking at 2018, 2019 and 2020 as a slowing,” said Brandt. 

Commercial rents in greater Los Angeles have gone up 19.3 percent since the end of the recession, according to Petra Durnin, head of Southern California research for CBRE.

The jump has been much bigger in areas dominated by tech companies. Playa Vista saw the biggest rent jump, 62.6 percent, followed closely by Hollywood with a 54.9 percent increase, and Santa Monica, with a 48.7 percent increase, according to Durnin. 

Any reduction in rent – whenever it comes – would be welcome relief to Adam Lilling, a Playa Vista-based venture capitalist who has stakes in dozens of companies on the pricey Westside, some of which have seen their rent double in the past two years.

“It’s a big issue," said Lilling. "You have this dilemma where you want to create an environment where people want to come to work. If that means spending a little more on office space, it's fine with a couple hundred square feet, but it's harder when it's 20,000 square feet." 

Lilling says once companies grow up and need more space, they sometimes move east, and hope employees follow.

Not everyone shares Shulman's view of a future softening in the commercial real estate market. In a recent research note, CBRE senior research analyst Maximilian Saia said the L.A. office market has more years of growth ahead because the office employment in Los Angeles is forecast to keep growing through 2018, and the local economy has become more diversified since the last recession.

"Fundamentals in the office market should continue to strengthen over the next 12 months," wrote Saia. "Great weather, a deep and wide pool of tenants, and economic pricing relative to other tier I markets will all factor in contributing to the global interest in Los Angeles office for the foreseeable future."