SoCal commercial real estate results are in

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The commercial real estate market in 2022 continues a mixed performance with some big developments that have added a touch of light to the darkness. Voit real estate services market reports from the first quarter of 2022 for Southern California (SoCal) reveal where California is struggling and where the state has improved since the previous year.

Read on for details on the industrial, office, and retail situation in SoCal’s major markets.

Industrial

industrial space remained a bright spot for commercial real estate in the first quarter of 2022. Vacancy and availability declined, and growth was sparked in the industrial sector. The Inland Empire saw its inventory increase by 618 million square feet – the benefit of being a booming distribution center.

Vacancy rate continued to decline in SoCal markets in Q1 2022, falling to:

  • 2.1% in San Diego, against 4.3% a year earlier;
  • 1.3% in Orange County, down from 2.5% a year earlier;
  • 1.1% in Los Angeles, against 2.6% a year earlier; and
  • only 0.7% in the Inland Empire, against 2.7% a year earlier.

Industrial vacancy rates today are extremely low—nearly zero. With few alternatives available, industrial tenants are increasingly forced to renew their leases.

Availablity of industrial real estate – real estate held for sale or rental – also continued to decline in Q1 2022, falling to:

  • 3.0% in San Diego, against 6.2% a year earlier;
  • 2.4% in Orange County, compared to 4.0% a year earlier; and
  • 1.4% in the Inland Empire, against 3.4% a year earlier.

Los Angeles stands out as the only area where the availability of industrial property remained essentially stable in the first quarter of 2022. During this quarter, 2.3% of industrial property in Los Angeles was available compared to 2.2% a year ago. earlier.

Construction was a high point for the Inland Empire – making it the most notable SoCal market in building movements. At a record high, 28 million square feet of industrial projects are under construction in the Inland Empire, compared to 23 million square feet under construction in the fourth quarter of 2021. Orange County and San Diego also saw the number of new industrial projects increase in Q1 2022.

In contrast, Los Angeles continues to struggle for new construction with little room to build.

Net absorption — the total change in occupied space — remained positive in SoCal, coinciding with strong industrial demand. In Q1 2022, uptake in all counties was positive:

  • 4.4 million square feet in the Inland Empire, up from 5.1 million a year earlier;
  • 1.6 million square feet in Los Angeles, compared to 3.5 million a year earlier;
  • 1.1 million square feet in Orange County, up from 541,000 a year earlier; and
  • 731,000 square feet in San Diego, up from 273,000 a year earlier.

SoCal’s tight industrial market will remain extremely competitive as long as construction continues to catch up. The market has been unable to keep up with demand since the pandemic caused the increased need for industrial space to skyrocket, in what was already a space constrained market.

Office

The office side of the market has seen a gradual pause after its previous pandemic disaster, but availability and vacancy rates remain high, even with slight improvements in the first quarter of 2022.

Vacancy rates have remained elevated – although they have flattened and declined in Q1 2022, to:

  • 2% in Orange County, the same as the previous year; and
  • 2% in San Diego, down slightly from 12.9% a year earlier.

Availablity for offices in Q1 2022 decreased to 16.4% in San Diego. For reference, this is down from 18.5% the previous year. Similarly, availability in Orange County decreased slightly to 17.1% from 17.3% the previous year. Much like its vacancy rate counterpart, the percentages have fallen, but remain high nonetheless.

The high levels of vacant and available office space are even more apparent when compared to the low levels of industrial and retail. 2022 sees small steps toward stabilization so far, with San Diego seeing positive net uptake, higher rental rates and lower availability rates. Orange County has also taken steps to stabilize since the fourth quarter of 2021, seeing improved net absorption levels.

However, the office sector has suffered heavy losses due to the pandemic and there is still a long way to go to recover. Savvy landlords know that as office space needs have evolved during the pandemic, so will their office space. Landlords are adjusting their physical office spaces to accommodate the impact of the pandemic on current demand. While balance hasn’t fully returned since the push toward remote and hybrid working, the Voit Q1 2022 market report reports that just under half of office workers have returned to the office.

Related article:

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Retail

The start of 2022 has seen continued improvements in retail. Net absorption has been positive, but vacancy rates remain above pre-pandemic levels, according to Voit.

In the first quarter of 2022, commercial space in San Diego experienced:

  • a Vacancy rate of 4.8%, against 5.5% a year earlier; and
  • a availablity rate of 4.8%, down from 5.9%.

The back-to-session economy has made a big difference, but the success of commercial properties revolves around location, leaving some properties dated.

Sales volume remains relatively healthy for retail, rental operations are down, indicating a drop in demand. Additionally, the pandemic has accelerated what was already a growing consumer reliance on e-commerce. Retail will gradually contract in the coming years as landlords convert their spaces into mixed-use properties or other more in-demand property types.

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