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 retail space.
As residents’ wallets become full once more, the retail industry is recovering at a more cautious, but steady pace in mid-2015.
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 and builders and their lenders will seize the opportunity to begin new construction.
Absorption – the amount of space becoming occupied each quarter – was positive across most California markets, with the exception of the Inland Empire office sector, which was negative in the second quarter of 2015 (Q2 2015).
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;
- Sacramento; 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 2015, with a low vacancy rate and 25 million square feet under construction.
However, the Inland Empire’s office market was not doing so well, with a high vacancy rate and negative net absorption, meaning more office space became unoccupied in Q2 than became occupied.
The region’s retail real estate industry was mostly level with recent quarters, with a 7.7% vacancy rate and positive (though declining) net absorption.
Construction: 25 million square feet of industrial space was under construction in the Inland Empire during Q2 2015. Most of this new construction was on buildings over 500,000 square feet.
Vacancy: Unoccupied industrial space was at 4.7% at the end of Q2 2015. This continues a downward trend in industrial vacancies from a year earlier. Further, look to the western submarket of the Inland Empire for the lowest vacancy rates in the region — 3.2%.
Availability: Industrial space marketed for sale or lease was at 5.5%, down from the prior quarter and a year earlier. Like the downward trend in industrial vacancies, availability continues to fall, signaling the need for more construction in the future.
Absorption: The Inland Empire experienced 4.6 million square feet of positive net absorption in Q2 2015. In other words, more industrial space became occupied in Q2 than became vacant. Absorption has been positive in the Inland Empire’s industrial market since 2010.
Transactions: 7 million square feet of industrial space was leased, down from 8.9 million in the prior quarter. 4.5 million square feet was purchased, slightly less than the prior quarter. Some of the biggest lease transactions included tenants Georgia-Pacific, Kimberly Clark and Fisker Automotive.
Construction: 17,000 square feet of office space was under construction in Q2 2015. No office space completions occurred this quarter, reflecting a gradual slowing in the office market and a somewhat high vacancy rate.
Vacancy: Total unoccupied office space was at 13.15%, up slightly from the prior quarter but down from a year earlier.
Availability: Office space being marketed for sale or lease was at 16.6%, roughly level with the prior quarter and down from 17.5% a year earlier.
Absorption: The Inland Empire office market experienced 183,570 square feet of negative net absorption, continuing a negative trend experienced since 2011. As more office space becomes vacant, expect the price of rents to level off.
Transactions: 455,000 square feet of office space were leased, down by 112,000 square feet from a year earlier. Much of the Inland Empire’s lackluster performance in the office market is due to the extended recovery taking place in San Bernardino County.
Construction: 274,000 square feet of retail space was under construction in Q2 2015, primarily consisting of new shopping centers, down somewhat from prior quarters.
Vacancy: Total unoccupied retail space was at 7.7%, down marginally from the prior quarter and down more significantly from a year earlier. More specifically, general retail, which includes several types of merchandise in one space, had a low vacancy rate of 4.5% and specialty retail space, which focuses on a specific type of merchandise like shoes, books, etc., had a higher rate of 12.9%.
Availability: Retail space marketed for lease or sale was at 10.3% in Q2 2015, down slightly from the prior quarter. Retail availability was highest in the East submarket of the Inland Empire, at 10.7%, compared to the 9.3% availability in the West submarket.
Absorption: There was 331,773 square feet of positive net absorption in the Inland Empire retail market during Q2 2015.
Transactions: 746,000 square feet of retail space was leased in Q2 2015, down significantly from a year earlier. The same trend is seen in the sale of retail space, with 855,000 square feet sold in Q2 2015, down from 1.3 million a year earlier.
The Los Angeles area saw 3.6 million square feet of office space under construction in the second quarter (Q2) of 2015, the most of any commercial sector. However, the lowest vacancy rate by far was in LA’s industrial sector, at 2.8%. Retail space in malls was also very low, at 3.2% in Q2.
Construction: 1.6 million square feet of industrial space was under construction at the close of Q2 2015. The area’s low vacancy rate continues to spur on more construction, and builders are happy to comply
Vacancy: Total unoccupied space was at a very low 2.8%, down from a year earlier when it was an already-low 3.4%
Availability: Industrial space being marketed in Q2 2015 was at 4.6%, also down from a year earlier.
Absorption: There was 1.2 million square feet of positive net absorption in the Los Angeles industrial market during Q2 2015, continuing a two-year trend of positive net absorption.
Transactions: 7.6 million square feet of industrial space was leased in Q2 2015, down by half from a year earlier. This decrease is due primarily to less inventory available for lease. As the inventory has shrunk, the asking rate for industrial lease space has increased 13% from a year earlier. 5.6 million square feet of industrial space was sold, up by 1 million square feet from a year earlier.
Construction: 3.6 million square feet of office space was under construction in Q2 2015, the highest since 2009. Most of this was Class A space, meaning it is designed to command higher-than-average rents.
Vacancy: Total unoccupied office space was at 12.6%, down somewhat from a year earlier.
Availability: Office space being marketed was at 16.7% in Q2 2015, roughly level with a year earlier.
Absorption: There was nearly 1.6 million square feet of net absorption in Q2 2015, continuing a general positive trend over the last two years.
Transactions: 4.3 million square feet of office space was leased in Los Angeles during Q2 2015. Likewise, 4 million square feet was sold. Office space leased and sold was up 20% from the prior quarter.
Construction: There was 1.5 million square feet of retail space under construction during Q2 2015 in Los Angeles. One-third of this space was for mall space under construction. This is the highest level of retail construction taking place since 2011.
Vacancy: Total unoccupied retail space was 4.5%, down from a year earlier. Mall vacancies were very low, at 3.2%. Other shopping centers had a higher vacancy rate, at 6.1%.
Availability: Retail space being marketed was at 6.2%, up slightly from the prior quarter, and roughly level with a year earlier. However, mall retail space was at a low 3.7% availability rate. The Burbank-Glendale-Pasadena submarket had the lowest total availability rate, at 4.5%.
Absorption: There was 288,600 square feet of positive net absorption in Q2 2015.
Transactions: 2.1 million square feet of retail space was leased and nearly 4 million square feet of retail space was sold. This is down slightly from a year earlier, likely due to a lower retail inventory available.
Orange County’s retail market was in a strong position in the second quarter (Q2) of 2015, with a low vacancy rate and over one million square feet of retail space under construction. Industrial is also heading into a period of expansion, as it rested at an all-time low vacancy rate of just under 3%, countered by high levels of construction—the most, in fact, of any quarter since 2008.
The office real estate market continued to improve in Q2 2015, but is still on its way to a recovery from the 2008 Great Recession.
Construction: There was 833,300 square feet under construction in Orange County during Q2 2015, the most since 2008. This construction is mostly taking place in Brea and Fountain Valley.
Vacancy: Total unoccupied industrial space was at an all-time low in Q2 2015, at 2.95%. This is despite the 1.6 million square feet of industrial space added since the beginning of 2014.
Availability: 5% of industrial space was being marketed in Q2 2015, down from 6% a year earlier.
Absorption: There was 1.4 million square feet of positive net absorption in Q2 2015.
Transactions: 2.3 million square feet of industrial space was leased in Q2 2015, down from 2.7 million in Q2 2014. Industrial space which sold was also down, at 1.3 million square feet sold in Q2 2015, down from 2.2 million a year earlier. The decrease is mostly due to a smaller inventory.
Construction: 650,000 square feet of office space was under construction in Orange County during Q2 2015.
Vacancy: 11.1% of office space sat vacant in Q2 2015, down from 12.7% a year earlier. This continues a downward trend from the 18% higher experienced during the Great Recession.
Availability: Office space being marketed was at 15%, down from 16.1% a year earlier.
Absorption: There was 442,700 square feet of positive net absorption in Q2 2015.
Transactions: 2.6 million square feet of office space was leased in Q2 2015, up slightly from a year earlier. Office space which sold was down slightly, with 1.4 million square feet sold, down from 1.6 million a year earlier.
Construction: 1.1 million square feet of retail space was under construction in Orange County during Q2 2015. Most of this took place in the malls in the northern submarket of Orange County and the outlet mall in the south submarket.
Vacancy: Total unoccupied retail space was at 4.3% in Q2 2015, roughly level with the prior quarter. Shopping centers had the highest vacancy rates, at 5.3%.
Availability: 5.5% of retail space was being marketed at the end of Q2 2015, down from 5.7% in the prior quarter. The Orange County submarket with the lowest availability rate was the airport area (including Corona del Mar, Huntington Beach and Newport Beach, among others), at 3.2%. The highest availability was found in the northern submarket, at 6.7%.
Absorption: There was 60,900 square feet of positive net absorption in Orange County’s retail market during Q2 2015.
Transactions: 604,000 square feet of retail space was leased in Q2 2015. 1.9 million square feet was sold, nearly three times that sold a year earlier. The largest sale transactions occurred in the northern submarket and the airport area.
Sacramento’s commercial real estate market varies wildly across the region, with the strongest submarkets in Benicia and Fairfield. However, positive absorption continues in each Sacramento commercial sector, and the recovery from the 2008 Great Recession continues.
Construction: 1.3 million square feet of industrial space was under construction in Sacramento during Q2 2015, consisting of six new industrial buildings.
Vacancy: Total unoccupied industrial space was relatively low at 9.2% in Q2 2015, down somewhat from a year earlier. The Fairfield submarket had the lowest vacancy rate — 3.75% — and South Sacramento had the highest vacancy rate at 36%, mostly due to the unoccupied Campbell’s Soup building.
Availability: 11.6% of industrial space was being marketed in Q2 2015, down from 13.8% a year earlier. The highest availability was in the South Sacramento submarket, with 27.7%. Fairfield had the lowest availability, at just 5.1%.
Absorption: Sacramento experienced a positive net absorption of 231,200 square feet in its industrial market.
Transactions: 1.5 million square feet of industrial space leased during Q2 2015. The largest property leased was 180,000 square feet in the Roseville/Rocklin submarket, leased to 24-Hour Recreational Storage. During the same time, 616,000 square feet sold, with the largest transaction going to Artemis Real Estate Partners in the Natomas/Northgate submarket.
Construction: There was no office space under construction in Q2 2015. However, there is 4.6 million planned office space, which has yet to begin construction.
Vacancy: The office vacancy rate was 14% in Q2 2015 — not great, but this is still the lowest rate experienced since 2008. The Midtown submarket had the lowest office vacancy rate, at 6.6%. Benicia-Vallejo fared the worst, with a 27% vacancy rate.
Availability: 17.4% of office space was being marketing in Sacramento during Q2 2015. Rio Linda-North Highlands had the highest availability, with 41.9% of retail square footage available.
Absorption: There was 280,200 square feet of positive net absorption in Q2 2015, continuing a positive absorption trend which began in 2012.
Transactions: 1.6 million square feet of office space was leased or sold in Q2 2015, up slightly from the prior quarter.
Construction: 547,500 square feet of retail space was under construction in Sacramento during Q2 2015.
Vacancy: The retail vacancy rate was 8.2% at the end of Q2 2015, the lowest rate since 2008. The lowest vacancy rate was in the Benicia submarket, at 3.1%. The worst vacancy rate was in Yuba, at 27.4%.
Availability: 9.6% of retail space was being marketed in Q2 2015, not much change from a the prior quarter, but slightly below a year earlier. Like the vacancy rate, Benicia had the least availability, while Yuba had the highest.
Absorption: There was 631,000 square feet of positive net absorption in Q2 2015, continuing a long trend of positive retail absorption in the region.
Transactions: 1.5 million square feet were sold or leased in Q2 2015. The largest sale transaction occurred in Auburn, at 134,000 square feet purchased by Epic Real Estate Partners, LLC. The largest retail lease was 33,000, signed by Viva Supermarkets in the Highway 50 Corridor submarket.
San Diego’s industrial market was in a strong positive in the second quarter (Q2) of 2015, with a low vacancy rate and a steady flow of new construction. 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.
Construction: 700,000 square feet of industrial space was under construction during Q2 2015 in San Diego.
Vacancy: Total unoccupied industrial space was at 4.7% in Q2 2015, lower than during the Millennium Boom. Of San Diego’s submarkets, East County had the lowest vacancy rate at 3%.
Availability: Industrial space being marketed during Q2 2015 was at 7.7%, down from 9.3% a year earlier.
Absorption: There was 417,300 square feet of positive net absorption in Q2 2015, well above the average absorption rate seen in recent years.
Transactions: 3.7 million square feet of industrial space was leased or sold during Q2 2015. The biggest sale transaction was in the Otay Mesa submarket, with Stockbridge Capital Group, LLC purchasing 704,000 square feet of industrial space.
Construction: Office construction in San Diego remains level with recent years, but below the historical average.
Vacancy: Total unoccupied office space was at 11.3%, down from 12.8% a year earlier. The lowest vacancy rate was seen in the Rancho Bernardo submarket, which was 8%.
Availability: Office space being marketed was at 14.8%, up slightly from the previous quarter.
Absorption: There was a total of 157,600 square feet of positive net absorption in San Diego’s office market during Q2 2015. Class A office space (which commands the highest rent) actually posted a negative net absorption, while Class B and Class C saw positive net absorption.
Transactions: 3.2 million square feet of office space was leased in Q2 2015, level with the previous quarter. The biggest office sale took place in Governor Park-Sorrento Mesa, with 392,000 square feet sold to John Hancock Life Insurance Co.
Construction: There isn’t much new retail construction occurring in San Diego, with most construction limited to renovations of existing retail space.
Vacancy: Total unoccupied retail space was at 4.2% in Q2 2015, up slightly from the prior quarter. Still, this vacancy rates remain one of the lowest experienced since 2008.
Availability: 5.4% of retail space was marketed for lease or sale in Q2 2015. The highest availability in San Diego was found in shopping centers. On the other hand, malls had the lowest availability at 1.1%.
Absorption: There was 52,000 square feet of positive net absorption in San Diego’s retail market during Q2 2015, down from recent quarters, but still positive.
Transactions: 1.3 million retail space sold or was leased in Q2 2015. The biggest retail sale occurred in the Oceanside-Chula Vista submarket.
