2020 commercial real estate saw industrial shine, office and retail grow dark

The commercial real estate market experienced a mixed performance in 2020, according to the Q4 2020 Voit Real Estate Services market reports for Southern California (SoCal).

While office and retail both experienced significant dips in transaction volume and absorption as well as increased vacancies and availability, industrial has experienced the opposite. As the pandemic has escalated the move from in-person to online, demand for industrial property has been pushed to a new high. This move has been led by Amazon fulfillment centers, which are popping up across SoCal.

Read on for details on how industrial, office and retail are faring in SoCal’s major markets during our ongoing recession.

Industrial

Availability of industrial property — property marketed for sale or lease — declined across SoCal in Q4 2020, falling to just:

4.1% in Orange County;
3.9% in the Inland Empire;
4.4% in Los Angeles; and
7.5% in San Diego.

Construction of new industrial property continued in Q4 2020, with large distribution centers leading the way in support of the growing e-commerce sector.

However, the number of square feet delivered declined this year, largely due to social distancing measures, which slowed construction significantly during 2020. The total number of industrial square feet delivered in 2020 was 1.4 million in San Diego, a steady decline from the recent peak in 2018. Still, San Diego continues to be a bright spot for construction in SoCal. Los Angeles and Orange County are basically limited to infill properties, as there is no land available to build upon.

Beating all of these regions is the Inland Empire, which saw exponentially more construction completions compared to the rest of SoCal. In 2020, roughly 16 million square feet of new industrial construction was delivered, down slightly from recent years.

Vacant industrial property became more scarce across SoCal, descending to:

2.4% in Orange County;
2.7% in Los Angeles;
3.1% in the Inland Empire; and
4.4% in San Diego.

Net absorption — the total change in occupied space — was positive across SoCal, with vacancies dropping and less new construction to fill the needs of businesses seeking industrial space.

Office

Unlike industrial, the office sector has experienced more ill effects of the pandemic and 2020 recession.

Demand for office space has declined while businesses continue to send employees home to work remotely during the pandemic. Having realized the benefits of forgoing a lease, many offices have decided never to return to an in-person work environment again.

Availability for office space increased again to 17% in both Orange County and San Diego. This continues an upward trend in availability that began in 2016 for Orange County and 2019 for San Diego.

Construction of new office space has declined significantly over the past year, following decreased demand. This has occurred as net absorption fell further into the red in 2020. Over the course of 2020, net absorption totaled negative three million square feet in Orange County and negative 1.7 million square feet in San Diego.

Vacant office space in Q3 2020 rose to:

12.4% in San Diego; and
12.5% in Orange County.

Voit anticipates office to continue its downturn in 2021, including lower rents and increased landlord concessions. Vacancies will continue to inch higher as businesses either close their doors or cut costs by choosing not to renew their leases, causing construction to slow further.

Retail

Even worse than the office sector, retail has suffered significantly during this recession. Most retail businesses have struggled to cover costs during these times when consumers are doing their shopping from home. Many have been forced to close, lay off employees or move their businesses online.

San Diego’s retail vacancy rate is rising but was still just 4.7% in Q3 2020. Still, Voit cautions that this is not yet reflective of the true vacancy rate. That’s because eviction moratoriums in San Diego have kept some commercial landlords from kicking out non-paying tenants. Further, some landlords are not yet marketing their space as vacant or available. But this will soon change, and when it does, vacancies will rise significantly.

Absorption continued to dive below zero, with 1.3 million square feet of negative net absorption in 2020. Retail construction also continues to decline, with just 193,000 square feet of new retail property delivered in 2020.

Expect retail to continue to suffer in 2021 and even beyond. Voit forecasts retail businesses will continue to shutter until the pandemic response is ended and the recession over. Even then, the downward pressure will continue until jobs return, restoring consumer purchasing power.

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