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.
Construction: Nearly 6.7 million square feet of industrial space was completed in the Inland Empire during Q2 2016. This is more than double the 2.7 million square feet completed in Q1 2016.
Unoccupied industrial space was at 5.5% at the end of 2015. This is higher than the previous quarter and up from 4.8% a year earlier. Temecula Valley has the lowest overall vacancy rate of 2.7%.
Availability: Industrial space marketed for sale or lease was at 6.3%, down from a year earlier when it was 8.5%. Availability continues to fall, signaling the need for more construction in the future, which builders are happy to meet with 11.8 million square feet of industrial space in the planning stage as of Q2 2016.
Absorption: The Inland Empire experienced 5.6 million square feet of positive net absorption in Q2 2016. In other words, much more industrial space became occupied in than became vacant. Absorption has been positive in the Inland Empire’s industrial market since 2010.
Transactions: 9.8 million square feet of industrial space was leased in Q2 2016, down from a year previous when 17.5 million square feet was leased. The largest industrial spaces leased in the Inland Empire during Q2 2016 went to Wayfair in Perris and Amazon in Eastvale.
Construction: 162,000 square feet of new office space was completed in Q2 2016, mostly comprised of the Loma Linda University Health Project. Just three office buildings were completed in 2015, totaling 92,500 square feet. No new office space is planned in the Inland Empire for the rest of the year.
<Vacancy: Total unoccupied office space continued to decrease in Q2 2016, to 11.9% at quarter’s end. While this is the lowest vacancy rate seen since 2007, it remains too high for comfort. However, the decrease will likely continue due to the slowdown in office construction.
Availability: Office space being marketed for sale or lease also continues to decline and was at 14.5% in Q2 2016, down from 16.6% a year earlier.
Absorption: The Inland Empire office market experienced 262,000 square feet of positive net absorption in Q2 2016. As office space vacancies gradually decline, expect the price of rents to rise slightly.
Transactions: 372,000 square feet of office space was leased in Q2 2016. Sale and lease transactions were down slightly from last quarter and this same time last year. The largest sale transactions taking place in Q2 were of Class B space, which demands moderate prices.
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.
Construction: 2.7 million square feet of industrial space was under construction in Q2 2016. The area’s low vacancy rate continues to spur on more construction, and builders are rising to the occasion.
Vacancy: Total unoccupied industrial space was at a very low 2.1%, continuing the downward trend in vacancies and pushing rents higher.
Availability: Industrial space being marketed was just below 4%. This also continues a downward trend, as inventory available is quickly leased or sold in Los Angeles.
Absorption: There was 1.3 million square feet of positive net absorption in the Los Angeles industrial market during Q2 2016, continuing a two-year trend of positive net absorption.
Transactions: 8.6 million square feet of industrial space was leased in Q2 2016, down slightly from a year earlier. This decrease is due primarily to less inventory available for lease. As available inventory has shrunk, the asking rate for industrial lease space has increased 13% from a year earlier.
Construction: 3.1 million square feet of office space was under construction in Q2 2016, slightly less than experienced in recent quarters. Most of this was mixed-used space, attractive for tenants wanting to live, work and play in the same spot.
Vacancy: Total unoccupied office space remained level at 12.1%.
Availability: Office space being marketed was at 16.4% in Q2 2016, down slightly from 16.6% a year earlier.
Absorption: There was nearly 600,000 square feet of positive net absorption in Q2 2016, up about 20% from the previous quarter.
Transactions: Combined lease and sale activity in Q2 2016 covered 10.6 million square feet, much of this due to lease renewals. Sale and lease transactions are concentrated in Class A space, which demands the highest prices.
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.
Construction: There was 42,000 square feet under construction in Orange County during Q2 2016. Most of this construction is of large industrial space, as the high cost of land in Orange County makes smaller projects less profitable.
Vacancy: Total unoccupied industrial space was 2.6% in Q2 2016, up slightly from the all-time low of 2.4% experienced in late 2015. The lowest industrial vacancy rate is 1.9% in the North County submarket.
Availability: 4% of industrial space was being marketed in Q2 2016, up slightly from the previous quarter.
Absorption: There was 88,000 square feet of negative net absorption in Q2 2016, down from 1.5 million square feet of positive net absorption in Q2 2015. This means more space became vacant than occupied during this quarter.
Transactions: 3.8 million square feet of industrial space was leased in Q2 2016, up 14% from this same time last year. Industrial space which sold was down, with 1.1 million square feet sold in Q2 2016, down from 1.7 million a year earlier. Asking lease rates are up 15.4% from a year ago and sale prices are 10.3% higher than this time last year, reflecting investor confidence in Orange County’s tight industrial market.
Construction: 2.4 million square feet of office space was under construction in Orange County during Q2 2016. Further, Voit reports numerous construction plans are in the pipeline, which means an increase in construction in the coming months.
Vacancy: 11% of office space sat vacant in Q2 2016, up slightly from 10.9% a year earlier. However, the office sector shows considerable improvement from the 18% high experienced during the Great Recession.
Availability: Office space being marketed was at 14.5%, down from 15% a year earlier.
Absorption: There was 163,000 square feet of positive net absorption in Q2 2016.
Transactions: 1.8 million square feet of office space was leased in Q2 2016. The total number of lease transactions was half what it was a year earlier. The largest sale and lease transactions were of Class A space.
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.
Construction: 354,000 square feet of industrial space was under construction during Q2 2016 in San Diego and 665,000 square feet has been completed so far this year. Most of today’s construction is taking place in Oceanside and Otay Mesa.
Vacancy: Total unoccupied industrial space was at 4.4% in Q2 2016, up from 4% in the previous quarter, but still low from a historic perspective. Of San Diego’s submarkets, East County (including El Cajon, La Mesa and Santee) had the lowest vacancy rate at 3%.
Availability: 7% of industrial space was being marketed during Q2 2016, down from 7.5% a year earlier.
Absorption: There was 504,000 square feet of negative net absorption in Q2 2016. This negative figure follows six years of positive net absorption.
Transactions: 3.4 million square feet of industrial space was leased or sold during Q2 2016, down 27% from Q2 2015. Lease rates continue to rise gradually.
Construction: 375,000 square feet of new office construction was delivered in Q2 2016. Office construction in San Diego is below the historical average. New construction is also joined by renovated and converted properties in the San Diego region.
Vacancy: Total unoccupied office space remained consistent with recent quarters at 11.9%. The lowest vacancy rate was seen in the Rancho Bernardo submarket, which was 8.2%.
Availability: Office space being marketed was at 14.9%, up from the previous quarter’s 14.7% availability.
Absorption: There was a total of 27,900 square feet of negative net absorption in San Diego’s office market during Q2 2016. Therefore, more office space became vacant than occupied.
Transactions: 3.2 million square feet of office space was leased or sold in Q2 2016, continuing a downward trend over the past year. The biggest office sale took place in Torrey Pines to the University of California.
Construction: While up from recent years, new retail construction numbers have been underwhelming in San Diego, with most construction limited to renovations of existing retail space. 439,000 square feet of retail space was under construction in Q2 2016.
Vacancy: Total unoccupied retail space was at 4% in Q2 2016, down from 4.5% in Q1 2016.
Availability: 5.4% of retail space was marketed for sale or lease in Q2 2016. The highest availability in San Diego was found in shopping centers, which was 7.9%. On the other hand, malls had the lowest availability at just 1.4%.
Absorption: There was 785,000 square feet of positive net absorption in San Diego’s retail market during Q2 2016.
Transactions: 1.6 million square feet of retail space was sold or leased in Q2 2016, down from 1.9 million in the prior quarter. Chula Vista saw some of the largest sale and lease transactions of Q2 2016.
