Anybody following the commercial real estate market has surely noticed the rise of foreign investors flocking to Southern California over the past few years. In fact, according to the US Bureau of Economic Analysis, the state of California currently ranks first for overall foreign direct investment and third for commercial real estate foreign investments, specifically (with Florida and Texas leading the pack). Investors from Mexico, China, Japan, the UK and the Netherlands, in particular, seem more motivated than ever to get a piece of the Golden States’ thriving market, but what is it, exactly, that’s drawing them in?
GDP (or gross domestic product) is a unit of measure used by economists to determine the economic progress within an area or region. A rising GDP is an indication that the local economy is in an upward trend, whereas a falling GDP could suggest trouble down the line. California has consistently trended upwards over the past few years and, as of 2019, the state reported a GDP of $3.2 trillion. Business Insider reports that California is the 5th largest GDP in the entire world among sovereign nations, trailing only the United States as a whole, China, Japan and Germany. It’s long-standing status as an economic powerhouse has made it an increasingly desirable place for foreign investors to put their money with increased confidence that they will gain substantial returns.
According to one news source, as of July 2020, the state of California reported a population of 39.78 million people, a 21,200 person increase from the same month of the year prior. To put it in perspective, that is about 12% of the entire U.S. population. This number continues to increase at an average of .5% per year (with about 60% of the total number residing in SoCal). The continued draw to SoCal is another contributing factor that is currently making it so appealing to foreign investors. With the constant influx of new residents comes the addition of new businesses and, thus, the need for more commercial properties.
Rising Household Incomes
The current median annual income in the state of California is $75,277, up 4.84% annually from 2017 (and exponentially greater than the United States average of $61,937). The consistent rise in household incomes in the state (and in Southern California, specifically) also drive investors into the area. With greater access to expendable income, residents in the Golden State have the ability to maintain the continuous expansion and growth of the booming retail economy in the area (thus keeping the GDP on the rise, as well).
Increased Demand for Industrial Space
While many commercial markets took a huge hit with the onset of the COVID-19 pandemic, the industrial market quickly rebounded. In fact, COVID has actually opened significantly opportunities for anyone investing in the industrial real estate market. The significant need for industrial space as more and more businesses went virtual has certainly contributed to this market’s resiliency. To read more about the industrial market and how it was, and still is, impacted by COVID, check out the following: The Industrial Marketing – 2020 and Moving Forward.
What to Expect Moving Forward
Foreign investors are expected to continue flooding the SoCal market for the next three to five years, taking full advantage of the aforementioned factors indicating positive returns on their investments.
As e-commerce continues to grow, we can expect to see a continuation of retail-to-industrial conversions appealing to these investors in the Golden State and beyond. As more California residents depend upon online shopping, and the demand for same-day delivery increases, there will be an increase in transactions associated with industrial real estate.
It’s not, however, just well-placed Class A buildings that will be in high demand. Investors will also be looking for Class B or dated Class A facilities that will be ideal for extra storage space and returns centers for occupiers (who will want to keep costs down for these purposes).
The largest challenge that the SoCal commercial market is expected to face is finding space as the demand continues to grow, leading some to wonder whether or not this will eventually drive investors and occupiers to seek space in the Las Vegas and Phoenix markets (which are also growing rapidly). That being said, the Inland Empire East still has land ripe for development, meaning that investors should be keeping a close watch on this area into the near future.
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