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 is recovering at a cautious, but steady pace in the second half of 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 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 positive across most California markets, with the exception of the Los Angeles office sector, which was negative in the third quarter of 2015 (Q3 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; 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 third quarter (Q3) of 2015, with a low vacancy rate and over 25 million square feet under construction.
However, the Inland Empire’s office market is struggling through its slow recovery, with a high vacancy rate and a sluggish absorption rate.
The region’s retail real estate industry was mostly level with recent quarters, with general retail space faring far better than specialty retail.
Construction: Over 25 million square feet of industrial space was under construction in the Inland Empire during Q3 2015. Most of this new construction was on buildings over 500,000 square feet.
Vacancy: Unoccupied industrial space was at 4.9% at the end of Q3 2015. This is slightly higher than the previous quarter, but more importantly, down from a year earlier. Look to the western submarket of the Inland Empire for the lowest vacancy rates in the region — 3.5%.
Availability: Industrial space marketed for sale or lease was at 6.3%, 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 7.2 million square feet of positive net absorption in Q3 2015. In other words, much more industrial space became occupied in Q3 than became vacant. Absorption has been positive in the Inland Empire’s industrial market since 2010.
Transactions: 5.5 million square feet of industrial space was leased, which continues a downward trend since the beginning of this year. 4.5 million square feet was purchased, slightly less than the prior quarter. Some of the biggest lease transactions included tenants QVC, Inc., Home Depot and LG.
Construction: 17,000 square feet of office space was under construction in Q3 2015, the same space under construction in the prior quarter. No office space completions occurred this quarter or in the previous quarter, reflecting a slowing in the office market and a somewhat high vacancy rate.
<Vacancy: Total unoccupied office space was at 12.9%, down slightly from the prior quarter and a year earlier.
Availability: Office space being marketed for sale or lease was at 16.3%, down just slightly from the prior quarter and down from 17.3% a year earlier.
Absorption: The Inland Empire office market experienced 178,000 square feet of positive net absorption. As office space vacancies gradually decline, expect the price of rents to rise slightly.
Transactions: 314,000 square feet of office space were leased, down by about 200,000 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. Large lease transactions occurring in Q3 were fairly evenly split amongst San Bernardino, Riverside and Moreno Valley.
Construction: 304,000 square feet of retail space was under construction in Q3 2015, primarily consisting of new shopping centers, up slightly from the previous quarter. The better news: nearly 11 million square feet of retail space is in the planning stage for the Inland Empire, most in the eastern part of the region.
Vacancy: Total unoccupied retail space was at 7.7%, level with the prior quarter and down slightly from a year earlier. More specifically, general retail, which includes several types of merchandise in one space, had a low vacancy rate of 4.6% and specialty retail space, which focuses on a specific type of merchandise like shoes, books, etc., had a higher rate of 12.6%.
Availability: Retail space marketed for lease or sale was at 9.9% in Q3 2015, down marginally from the prior quarter.
Absorption: There was 159,000 square feet of positive net absorption in the Inland Empire retail market during Q3 2015.
Transactions: Nearly 660,000 square feet of retail space was leased in Q3 2015, up from the previous quarter. The same trend is seen in the sale of retail space, with 1.6 million square feet sold in Q3 2015, up slightly from a year earlier. The biggest lease transactions went to Sports Authority, 24 Hour Fitness and LA Fitness.
The Los Angeles area saw 3.8 million square feet of office space under construction in the third quarter (Q3) of 2015, the most of any commercial sector. However, the lowest vacancy rate by far was in LA’s industrial sector, at 2.5%. It’s a good time to own industrial space in LA, as vacancies are down and lease rates are up. Retail space in malls was also very low, at 3.3% in Q3.
Construction: 2 million square feet of industrial space was under construction at the close of Q3 2015. 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 2.5%, continuing its downward trend.
Availability: Industrial space being marketed was at 4.3%. This also continues a downward trend, as inventory available is quickly leased or sold.
Absorption: There was 2.4 million square feet of positive net absorption in the Los Angeles industrial market during Q3 2015, continuing a two-year trend of positive net absorption.
Transactions: 5.1 million square feet of industrial space was leased in Q3 2015, less than half of what was leased 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. 5.1 million square feet of industrial space was sold, down by 1.3 million square feet from a year earlier.
Construction: 3.8 million square feet of office space was under construction in Q3 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 12.5%, down somewhat from a year earlier.
Availability: Office space being marketed was at 16.5% in Q3 2015, roughly level with a year earlier.
Absorption: There was 83,500 square feet of negative net absorption in Q3 2015, reversing a generally positive trend experienced over the last two years.
Transactions: 5.8 million square feet of office space was leased in Los Angeles during Q3 2015. Likewise, 4 million square feet was sold. Office space leased and sold was down 14% from the prior quarter.
Construction: There was 1.9 million square feet of retail space under construction during Q3 2015 in Los Angeles. This is the highest level of retail construction in a single quarter since 2011. A significant portion of this construction is mall space under construction.
Vacancy: Total unoccupied retail space was 4.4%, down slightly from a year earlier. Mall vacancies were very low, at 3.3%. Other shopping centers had a higher vacancy rate, at 6%.
Availability: Retail space being marketed was at 6.1%, down slightly from the prior quarter, and roughly level with a year earlier. However, mall retail space was at a low 4% availability rate. The Burbank-Glendale-Pasadena submarket continue to experience the lowest total availability rate, at 4.5%.
Absorption: There was 1.2 million square feet of positive net absorption in Q3 2015.
Transactions: 2 million square feet of retail space was leased and 5.2 million square feet of retail space was sold. This is down from a year earlier, likely due to a lower retail inventory available. The biggest leased spaces went to Wal-Mart in San Gabriel Valley and LA Fitness in Ventura.
A strong outlook prevails for Orange County’s retail market in the third quarter (Q3) of 2015, with a low vacancy rate and 800,000 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 2.6%, soon to be countered by high levels of construction — the most, in fact, of any quarter since 2008.
While not as recovered as Orange County’s other commercial markets, the office real estate market continued to improve in Q3 2015, and new construction is expected to pick up in the coming year.
Construction: There was over 1 million square feet under construction in Orange County during Q3 2015, the most since 2008. This construction is mostly taking place in Anaheim, Brea and Fountain Valley.
Vacancy: Total unoccupied industrial space was at an all-time low in Q3 2015, at 2.6%, down from 3% in the prior quarter. Even though 1.7 million square feet of industrial space has been completed since the beginning of 2014, the vacancy rate continues to fall. The lowest industrial vacancy rate is 1.8% in the airport sub-region.
Availability: 4.7% of industrial space was being marketed in Q3 2015, down from 5.9% a year earlier.
Absorption: There was 761,000 square feet of positive net absorption in Q3 2015.
Transactions: 1.8 million square feet of industrial space was leased in Q3 2015, down from 3.4 million in Q3 2014. Industrial space which sold was also down, at 1.3 million square feet sold in Q3 2015, down from 2.4 million a year earlier. The decrease is mostly due to a smaller inventory. Lease rates are up 6% from a year ago and sale prices are nearly 30% higher than this time last year, reflecting high investor confidence in Orange County’s tight industrial market.
Construction: 1.7 million square feet of office space was under construction in Orange County during Q3 2015, an increase from the prior quarter.
Vacancy: 10.5% of office space sat vacant in Q3 2015, down from 12.7% a year earlier. This continues a downward trend from the 18% higher experienced during the Great Recession. As office vacancy rates continue to trend down, construction will likely pick up in 2016.
Availability: Office space being marketed was at 14.6%, down from 16.4% a year earlier.
Absorption: There was 685,000 square feet of positive net absorption in Q3 2015.
Transactions: 2.1 million square feet of office space was leased in Q3 2015, down from 2.8 million a year earlier. Office space which sold was also down, with 2.2 million square feet sold, down from 3.5 million a year earlier.
Construction: 800,000 square feet of retail space was under construction in Orange County during Q3 2015, down from the prior quarter. 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 4.1% in Q3 2015, a slight decrease from the prior quarter. Shopping centers had the highest vacancy rates, at 5.1%, though this was also down from the previous quarter.
Availability: 5.2% of retail space was being marketed at the end of Q3 2015, continuing the downward trend experienced thus far in 2015. 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 2.9%. The highest availability was found in the northern submarket, at 6.2%.
Absorption: There was 187,000 square feet of positive net absorption in Orange County’s retail market during Q3 2015, up substantially from the prior quarter.
Transactions: 660,000 square feet of retail space was leased in Q3 2015, up slightly from mid-year. On the other hand, 480,000 square feet was sold, down from 621,000 a year earlier. The largest retail spaces leased in Q3 2015 included space leased to Orchard Supply Hardware and three home furnishing stores.
San Diego’s industrial market gave a solid showing in the third quarter (Q3) 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: 800,000 square feet of industrial space was under construction during Q3 2015 in San Diego an increase from mid-year.
Vacancy: Total unoccupied industrial space was at 4.3% in Q3 2015, lower today than any time during the Millennium Boom. Of San Diego’s submarkets, Central County had the lowest vacancy rate at 2.7%.
Availability: Industrial space being marketed during Q3 2015 was at 7%, down from 8.7% a year earlier.
Absorption: There was 622,000 square feet of positive net absorption in Q3 2015, higher than the previous quarter.
Transactions: 4.1 million square feet of industrial space was leased or sold during Q3 2015, up from 3.4 million one year ago. Lease rates continue to rise gradually.
Construction: Office construction in San Diego remains level with recent years, but below the historical average. New construction is also joined by renovated and converted properties in the San Diego region.
Vacancy: Total unoccupied office space was at 12.1%, level with a year earlier. The lowest vacancy rate was seen in the Mission Valley submarket, which was 9.5%.
Availability: Office space being marketed was at 15.2%, up slightly from the previous quarter.
Absorption: There was a total of 284,000 square feet of positive net absorption in San Diego’s office market during Q3 2015. Class A office space (which commands the highest rent) and Class C posted positive net absorption, while Class B experienced negative net absorption.
Transactions: 5.4 million square feet of office space was leased or sold in Q3 2015, well above 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 4.3% in Q3 2015, up slightly from the prior quarter. Still, this vacancy rates remain one of the lowest experienced since 2008.
Availability:5.7% of retail space was marketed for lease or sale in Q3 2015. The highest availability in San Diego was found in shopping centers. On the other hand, malls had the lowest availability at just 1.2%.
Absorption: There was 107,000 square feet of positive net absorption in San Diego’s retail market during Q3 2015, an increase from the previous quarter.
Transactions: 2.9 million square feet of retail space was sold or leased in Q3 2015. The biggest retail sale occurred in the Oceanside-Chula Vista submarket. Lease rates declined slightly in Q3, a sign that vacancies will need to fall further before retail construction will pick up.
10 years T-Note is the current basic residential index. What are the current index for commercial, industrial and retail?
J.,
Thank you for your inquiry! Please take a look at our Current market rates page for the interest rates and other factors affecting real estate.
Regards,
ft Editorial