• Tue. Jun 21st, 2022

Decline meets optimism in SoCal commercial real estate markets

While the seas have calmed after the heavy losses of the 2020 recession, the 2021 commercial real estate market still remains choppy. Q3 2021 See Real Estate Services market reports for Southern California (SoCal) reveals where the biggest struggles remain – and where business prospects are brightening.

Read on for details on the industry, office, and retail situation in key SoCal markets.

Industrial

Driven by strong demand, the industrial market has quickly exceeded expectations set at the start of 2021. Rental rates and selling prices have increased rapidly – ​​a byproduct of demand for industrial products. Vacancies continue to decline and optimism about the recovery is improving.

Availablity of industrial property – property held for sale or lease – fell in SoCal in Q3 2021, falling to:

  • 2.6% in Orange County;
  • 2.8% in the Inland Empire;
  • 2.4% in Los Angeles; and
  • 4.5% in San Diego.

Construction new industrial properties continued in SoCal during the third quarter of 2021, as the Inland Empire paved the way for its continued construction boom. Orange County construction remained light, but in the third quarter saw its highest level of construction since 2011 with 2.3 million square feet in the construction queue. The increase is mainly due to the development of Goodman Logistics in Fullerton.

The majority of new construction in San Diego occurs in the outskirts, with little room for construction growth in the county core. In Los Angeles, construction remains almost non-existent, due to a lack of land or space.

Vacant industrial property dropped across SoCal, coinciding with an increase in demand for warehousing space. Vacant industrial property descended to:

  • 1.6% in Orange County;
  • 1% in the Inland Empire;
  • 1.3% in Los Angeles; and
  • 3.2% in San Diego.

Net absorption — the total change in occupied space — was positive in SoCal. This also coincides with strong industrial demand. In Q3 2021, absorption in all counties increased to:

  • 1.6 million square feet in Orange County, up from 255,300 a year earlier;
  • 6.9 million square feet in the Inland Empire, up from 3.9 million a year earlier;
  • 3.7 million square feet in Los Angeles, compared to 417,900 a year earlier; and
  • 4.0 million square feet in San Diego, up from 735,800 a year earlier.

Office

Optimism has gradually returned for the office sector in the third quarter of 2021, especially as vaccination rates increase and workers return to the office. While some workers prefer to stay remote in this hybrid world, many employers are now wondering if working from home is a viable permanent option to champion. However, the Delta variant put an end to some of this new optimism in the third quarter of 2021.

Many back-to-office projects have received a rain check, but all hope has not been lost. Apple announced, despite the delay in office return plans, that they continue to lease large office blocks in San Diego.

The road to recovery for the office sector has begun – the healing process will heavily depend on getting COVID-19 under control.

Availablity for offices in Q3 2021 decreased to 16.6% in San Diego. For reference, this is down from 17.1% in the prior quarter, but up from 16.3% availability a year earlier.

Similarly, office availability in Orange County fell slightly to 18.3% in Q3 2021, from 18.4% in the prior quarter, but up from 15.7% a year earlier.

These volatile availability rates reflect how vacancies have evolved throughout the many aftermaths of the pandemic – most often increasing during the height of quarantine. Nonetheless, any decline in availability is slight, reflecting a slow return of office space and a slow recovery in the office sector.

Construction new office space in San Diego saw a slight increase, as well as an increase net uptakethe total change in occupied space, in the third quarter of 2021. Major construction projects are underway in downtown San Diego – with Kilroy Realty, IQHQ and Stockbridge anticipating high-tech tenants. The San Diego office market has 2.4 million square feet of office space under construction in Q3 2021. Orange County has seen new construction slow – with 823,900 square feet currently awaiting construction. Orange County also experienced a decrease in net absorption.

Vacant office space in Q3 2021 decreased to:

  • 13.7% in Orange County, down slightly from 13.8% in the prior quarter; and
  • 12.6% in San Diego, compared to 12.8% in the previous quarter.

For the worse, that seems to be over. As vaccination rates increase, vacancy rates will decrease. The more COVID-19 is fought, the more people are able to confidently return to work in office spaces. There is still uncertainty around COVID-19, and for this reason, nothing is certain, but as the toughest struggles of the pandemic wane, the office market is slowly recovering.

Retail

the San Diego one retail vacancy rate in the third quarter of 2021 is down to 5.2%, down slightly from a vacancy rate of 5.5% in the previous quarter. Availability and vacancy rates are still higher than they were before the 2020 recession shut down the retail sector.

Absorption grew to 373,300 square feet, which is the most positive uptake San Diego has seen in the retail sector since 2016. San Diego also completed 405,100 square feet of new construction in Q3 2021.

Due to pent-up demand, San Diego commercial real estate has seen an increase in total transaction volume. More than 2.1 million square feet of commercial properties were sold or leased in the third quarter of 2021, compared to 1 million square feet a year earlier. Retail as a market is beginning to recover from the recession and pandemic, but the retail market is still relatively weak – especially with the Delta variant holding everything in an uncertain light. The bright spot in this market is the drop in vacancy rates. The retail market is growing, not yet reaching the level it was at this time last year, but still moving forward.