Long-Term View Promising for Real Estate, Report Says

Anyone concerned about the sluggish California real estate market shouldn’t get too discouraged because the long-term outlook is promising, according to a new report from UC Berkeley.

“It has become fashionable of late for economists and real estate analysts to bash California,” according to the 49-page study prepared by the university’s Center for Real Estate and Urban Economics.

“But what California naysayers lack is the longer-term view,” concluded the report, which is titled “California Real Estate Opportunities in the 1990s: Is California Still a Good Place to Invest?” The study was partially funded by the California Mortgage Bankers Assn.

The report conceded that the state’s unemployment rate is troubling and that personal income growth is lagging from the go-go 1980s, but the Berkeley researchers predicted that over the next decade the state’s economy would continue to expand, which will benefit the real estate market.

Like other studies that are upbeat on California real estate, the rosy prediction depends on bullish forecasts about the state’s population.

“Despite a softening economy, California added 740,000 new residents in 1990, more than any year since 1943,” the report said. “Most significantly, California’s population growth accelerated at the same time that population growth in the rest of the country began to level off.”

The population analysis leads to optimistic scenarios about the future demand for real estate.

--In the next 10 years, housing demand will require an additional 2 million to 3 million new housing units.

--Demand for office space will heat up in the second half of the decade with 180 million to 230 million square feet of space required.

--By the year 2000, the state will need 250 million to 500 million square feet of industrial space.

The report debunks the myth that California’s surge in population is driven entirely by foreign immigration.

“Natural increases (births minus deaths) accounted for 45.6% of California’s population growth (in the last decade), as compared with 28.5% for domestic in-migration and 25.9% for foreign in-migration.”

However, the report pointed out that foreign immigration patterns here are different than they are in other parts of the country. Most foreign immigrants who come to the United States through ports other than California continue on to other regions of the country. But foreign immigrants who arrive in California first “behave like domestic immigrants: if they come to California they tend to stay in California.”

The Berkeley researchers use the population forecasts and an analysis of homeownership rates of different ethnic groups to calculate the state’s differing housing needs in the next 10 years.

Los Angeles County will have the greatest demand for rental housing, where an additional 194,000 new apartments are needed. By contrast Riverside and San Bernardino counties together need 283,000 owner-occupied homes but only 151,000 new apartments.

The bullish housing predictions are consistent with other recent forecasts. For example, the latest UCLA economic forecast concluded that “the groundwork is being laid for a rebound in home construction.”

But UCLA researchers are much more cautious about the state’s commercial real estate market: “Because of overbuilding, the non-residential sector will do well just to hold its ground over the next few years.”

The Berkeley study admitted that record high vacancy rates in office buildings have created 120 million square feet of “excess” space, but the researchers also predicted that the demand for office buildings will grow by 230 million square feet through the 1990s.

A major caveat in the Berkeley study is, “if present trends continue.” The university analysts concluded that forecasts about 5 million new residents, 2.5 million new jobs and 3 million new housing units depend on the state’s solving a multitude of fiscal, economic and environmental problems.

“How California responds to those challenges will determine whether the state’s development potential will be realized,” the report concluded.