The commercial real estate environment is continually improving in California as our economy has finally entered a period of expansion. Jobs surpassed their peak pre-recession level a year ago and the rate of new employment is exceeding the hot pace of the late 1990s, with upwards of 40,000 new jobs added each month in California. All this employment is increasing demand for office space, apartments and eventually (but not quite yet) retail space.
As residents’ wallets become full once more, the retail industry continued to recover at a cautious, but steady pace in 2016 and 2017.
Vacant commercial property was mostly down across the state, a good sign for future construction and prices. Once vacancies fall on demand for more space, prices will rise more quickly and builders and their lenders will seize the opportunity to begin new construction.
Absorption — the amount of space becoming occupied each quarter — was mixed across Southern California markets.
How did your region fare? Industrial, office and retail are covered across the following regions, courtesy of Voit Real Estate Services:
- the Inland Empire;
- Los Angeles;
- Orange County; and
- San Diego.
Check out the details that follow, or visit Voit for even more specifics (you’ll need to sign up for a free Voit account to access their data).
The Inland Empire’s commercial market is defined by its sprawling industrial buildings, by far its largest commercial sector. Industrial showed healthy activity in the second quarter (Q2) of 2016, with 6.7 million square feet of industrial space completed.
However, the Inland Empire’s office market is struggling through its slow recovery, with a high vacancy rate (soon to be remedied due to low levels of construction) and a sluggish absorption rate.
The Los Angeles area saw 2.7 million square feet of office space under construction in the second quarter (Q2) of 2016. However, the lowest vacancy rate by far was in Los Angeles’ industrial sector, at just 2.1%. It’s a good time to own industrial space in Los Angeles, as vacancies are down and lease rates are up.
Office space also continues to grow in Los Angeles, with mixed-used developments leading the way.
The industrial sector is heading into a period of expansion in Orange County. Industrial was at 2.6% in Q2 2016, up slightly from an all-time low experienced in late 2015. Today’s low vacancy rate is soon to be countered by high levels of construction.
While not as recovered as Orange County’s other commercial markets, the office real estate market mostly improved in Q2 2016, and new construction is expected to pick up in the coming year.
San Diego’s industrial market continued at a solid pace in the second quarter (Q2) of 2016, with a low vacancy rate and a steady flow of new construction. However, negative net absorption casts a shadow on the otherwise strong quarter.
The office market is not quite recovered, as vacancies remain somewhat high and thus construction and sale and lease transactions remain low.
Expect to see more new construction of retail space in the coming quarters, as today’s low vacancy rate and low level of construction is a recipe for higher rents, and builders will undoubtedly notice.