Kidder Mathews has released its 2024 West Coast Market Forecast — an overview of commercial real estate trends for office, industrial, retail, and multifamily sectors, as well as the economy, for the year ahead. The report analyzes data from major West Coast markets to provide an in-depth forecast for the industry.
See overviews for each sector below. View the full 2024 West Coast Market Forecast at kidder.com/forecast.
Many economists are forecasting a “soft landing” for the U.S. economy in 2024. While there are still areas of concern, inflation has eased, consumer spending has trended positively, and job growth has continued at a steady pace. Looking ahead, economic strength will be bolstered as the Fed announced it is likely done with rate hikes and has forecasted three rate cuts this year. The labor market outlook for 2024 can be described as being relatively stable with continued normalization, following the recent pandemic-era volatility.
The post-pandemic office market continued to struggle in 2023, with rising vacancy rates, negative net absorption, and stagnant demand. Largely due to the softening economy and the standardization of hybrid and remote work models, many tenants were forced to reevaluate their future space needs. It is estimated that the average tenant is downsizing their requirements between 20% to 30% to accommodate the evolving workforce, allowing them to maximize their office utilization rates. These trends are expected to bleed into 2024 with low levels of leasing activity, rising vacancy rates, and a further reduction in asking lease rate averages. While there are a few positive signs as the office market reshapes itself with a continued flight to quality and projected tech industry expansion by year-end, it will continue to be constrained in the near term and is likely a few years away from experiencing notable and sustained growth.
The industrial sector produced unprecedented growth between 2021 and 2022 before tapping the brakes in 2023. After extremely low vacancy rates, elevated development activity, robust leasing levels, and record-high rent growth, the market was bound to experience a slowdown. The industrial sector is expected to recalibrate in 2024, with activity levels similar to pre-covid averages while rent growth normalizes to a more moderate pace. Construction deliveries during the first half of the year are expected to contribute to rising vacancy rates, but decelerating construction starts will help keep vacancy rates low in 2024.
While 2023 was filled with economic challenges, the retail sector showed resiliency and promise with low vacancy rates and slightly expanding lease rates. However, leasing activity across the West Coast was down 11% compared to last year and down 25% compared to pre-covid averages. There also continued to be a noticeable performance gap between urban cores and the suburbs — with the former posting vacancy rates between 6% and 10% and the latter generally falling between 3% and 5%. The economy is projected to experience slow growth in 2024, promoting a strengthening of both consumer confidence and retail sales. Furthermore, the recent reduction in retail development will encourage short-term growth activity in the retail sector as overall fundamentals are forecasted to remain solid.
Overall, the West Coast multifamily market performed consistently well over the past decade with low vacancy rates, expanding inventories, and rising lease rates. Additionally, investment activity has been relatively steady, with total sales volume surging in 2021 and 2022. However, while multifamily leasing remained solid in 2023, sales volume fell off a cliff and posted its lowest volume levels since 2013. While apartment inventories have grown substantially, giving tenants more options in 2023 and 2024, construction starts are expected to temper by the end of 2024, helping the balance between supply and demand hover near equilibrium.