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.
The retail industry continued to recover at a cautious, but steady pace in 2015, spurred on by consumer spending.
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 retail sector, which was negative in the fourth quarter (Q4) of 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 fourth quarter (Q4) of 2015, with a low vacancy rate and nearly 25 million square feet under construction.
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 region’s retail real estate industry was mostly level with recent quarters, with general retail space faring far better than specialty retail.
Construction: Nearly 25 million square feet of industrial space was under construction in the Inland Empire during Q4 2015. Most of this new construction was on buildings over 500,000 square feet.
Vacancy:
Unoccupied industrial space was just below 5% at the end of 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 — 2.4%.
Availability: Industrial space marketed for sale or lease was at 6.3%, level with the prior quarter and down from a year earlier. Like the downward trend in industrial vacancies, availability continues to fall, signaling the need for more construction in the future, which builders are happy to meet with 90 million square feet of new construction in the planning stage at the end of 2015.
Absorption: The Inland Empire experienced 20.4 million square feet of positive net absorption in 2015. In other words, much more industrial space became occupied than became vacant. Absorption has been positive in the Inland Empire’s industrial market since 2010.
Transactions: 41.3 million square feet of industrial space was leased in 2015, though leasing numbers trended down throughout the year. 21.6 million square feet was purchased, slightly less than 2014. The biggest lease transactions in 2015 included tenants General Mills, QVC, Inc., Georgia-Pacific and Home Depot.
Construction: 187,000 square feet of office space was under construction in Q4 2015, most of it Class B space. Three office buildings were completed in 2015, totaling 92,500 square feet.
<Vacancy: Total unoccupied office space was at 12.4%, down slightly from the prior quarter but still too high for comfort. However, vacancies will likely continue to decrease due to the slowdown in office construction.
Availability: Office space being marketed for sale or lease was at 15.7%, down from 17% a year earlier.
Absorption: The Inland Empire office market experienced 286,000 square feet of positive net absorption in 2015. As office space vacancies gradually decline, expect the price of rents to rise slightly.
Transactions: 332,000 square feet of office space were leased in Q4 2015, down from 379,000 square feet 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 2015 were mostly split amongst Riverside, Ontario and Rancho Cucamonga.
Construction: 371,000 square feet of retail space was under construction in Q4 2015, primarily consisting of new shopping centers, up slightly from the previous quarter. The better news: over 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 7.6%, down slightly from the prior quarter and from a year earlier. More specifically, general retail, which includes several types of merchandise in one space, had a low vacancy rate of 4.4% and specialty retail space, which focuses on a specific type of merchandise like shoes, books, etc., had a higher rate of 12.2%.
Availability: Retail space marketed for lease or sale was at 9.9% in Q4 2015, level with the prior quarter and down from 10.3% a year earlier.
Absorption: There was 173,000 square feet of positive net absorption in the Inland Empire retail market during Q4 2015. In total, there was 755,000 square feet of positive net absorption in 2015, down from 984,000 square feet in 2014.
Transactions: 3.2 million square feet of retail space was leased in 2015, down from 4 million in 2014. However sale transactions are up, with 7 million square feet sold in 2015, up from 6 million a year earlier. The biggest lease transactions of 2015 went to Big Country and Haggen Food & Pharmacy.
The Los Angeles area saw 3.6 million square feet of office space under construction in the fourth quarter (Q4) of 2015, the most of any commercial sector. However, the lowest vacancy rate by far was in LA’s industrial sector, at just 2%. 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 3.2% at the end of 2015.
Construction: 3.1 million square feet of industrial space was under construction at the close of 2015, an increase of over one million square feet from Q3. 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%, continuing its downward trend from 2.8% a year earlier.
Availability: Industrial space being marketed was at 4%. This also continues a downward trend, as inventory available is quickly leased or sold in Los Angeles.
Absorption: There was 8.7 million square feet of positive net absorption in the Los Angeles industrial market during 2015, continuing a two-year trend of positive net absorption.
Transactions: 35.7 million square feet of industrial space was leased in 2015, down from 50 million square feet 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 nearly 13% from a year earlier. 21.6 million square feet of industrial space was sold in 2015, up from 18.6 million a year earlier.
Construction: 3.6 million square feet of office space was under construction in Q4 2015, slightly less than the previous quarter which experienced the most construction since 2009, but still high. Most of this was Class A space, meaning it is designed to command higher-than-average rents..
Vacancy: Total unoccupied office space was at 12.3%, down somewhat from the previous quarter and a year earlier.
Availability: Office space being marketed was at 16.6% in Q4 2015, up slightly from 16.3% a year earlier.
Absorption: There was nearly 2.1 million square feet of positive net absorption in 2015.
Transactions: 4 million square feet of office space was leased in Los Angeles during Q4 2015. In total, 35.5 million square feet was leased or sold during 2015, which is down nearly 10 million square feet from 2014.
Construction: There was over 1.7 million square feet of retail space under construction during Q4 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 4.6%, slightly higher than a year earlier. Mall vacancies were very low, at 3.2%. Other shopping centers had a higher vacancy rate, at 6.5%.
Availability: Retail space being marketed was at 6.1%, down slightly from the prior quarter and a year earlier. However, mall retail space was at a low 4% availability rate. The Burbank-Glendale-Pasadena submarket continued to experience the lowest total availability rate, at 4.2%.
Absorption: There was 102,000 square feet of negative net absorption in Q4 2015. However, 2015 ended with a total of 1.7 million square feet of positive net absorption for the year.
Transactions: 2.3 million square feet of retail space was leased in Q4 2015. A total of 27.8 million square feet was sold or leased in 2015, down 5.6% from 2014. The biggest leased spaces in 2015 went to REI in San Fernando Valley and AutoNation, Inc. in the South Bay submarket.
A strong outlook prevails for Orange County’s retail market in the fourth quarter (Q4) of 2015, with a low vacancy rate and 600,000 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 2.4%, 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 continued to improve in Q4 2015, and new construction is expected to pick up in the coming year.
Construction: There was 552,000 square feet under construction in Orange County during Q4 2015, down by half from the previous quarter. This construction is mostly taking place in Anaheim, Brea and Fountain Valley.
Vacancy: Total unoccupied industrial space was at an all-time low in Q4 2015, at 2.4%, down from 2.6% in the prior quarter. Even though 2.2 million square feet of industrial space has been delivered since the beginning of 2014, the vacancy rate continues to fall. The lowest industrial vacancy rate is 2.2% in the North County submarket.
Availability: 4.5% of industrial space was being marketed in Q5 2015, down from 4.7% in the previous quarter.
Absorption: There was 2.7 million square feet of positive net absorption in 2015. North County saw the highest absorption numbers.
Transactions: 12.2 million square feet of industrial space was leased in 2015, roughly level with 2014. Industrial space which sold was down, with 6 million square feet sold in 2015, down from 9.2 million a year earlier. The decrease is mostly due to a smaller inventory. Lease rates are up 9.5% from a year ago and sale prices are 7% higher than this time last year, reflecting investor confidence in Orange County’s tight industrial market.
Construction: 1.8 million square feet of office space was under construction in Orange County during Q4 2015. Further, Voit reports numerous construction plans are in the pipeline in the Airport submarket, which means an increase in construction in the coming months.
Vacancy: 10.8% of office space sat vacant in Q4 2015, down slightly from 11.5% 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 14.4%, down from 15.4% a year earlier.
Absorption: There was 860,000 square feet of positive net absorption in Q4 2015.
Transactions: 10.4 million square feet of office space was leased in 2015, down from 12.1 million a year earlier. However, office space which sold was up, with 9.3 million square feet sold, up from 8.9 million a year earlier.
Construction: 600,000 square feet of retail space was under construction in Orange County during Q4 2015, down from 800,000 in the prior quarter. Most of this took place in the malls in the northern submarket of Orange County.
Vacancy: Total unoccupied retail space was at 4.2% in Q4 2015, a slight increase from the prior quarter. Shopping centers had the highest vacancy rates, at 5.5%, up from 5.1% in the previous quarter. Power center and general retail had the lowest vacancy rates.
Availability: 5.3% of retail space was being marketed at the end of Q4 2015, up slightly from the previous 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 3.3%. The highest availability was found in the northern submarket, at 6.4%.
Absorption: There was 737,000 square feet of positive net absorption in Orange County’s retail market during Q4 2015, up substantially from the prior quarter.
Transactions: 3.2 million square feet of retail space was leased in 2015, down from 2014 when 3.8 million square feet was leased. On the other hand, 5.5 million square feet was sold, up significantly from the 29 million square feet of retail space sold a year earlier. The largest retail space leased in 2015 was to Haggen Food & Pharmacy in South County.
San Diego’s industrial market gave a solid showing in the fourth quarter (Q4) 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: Over 900,000 square feet of industrial space was under construction during Q4 2015 in San Diego, continuing an upward trend during 2015.
Vacancy: Total unoccupied industrial space was at 3.7% in Q4 2015, down from the 4.3% in the previous quarter and lower today than any time during the Millennium Boom. Of San Diego’s submarkets, the Central Suburban region had the lowest vacancy rate at below 1.7%.
Availability: Industrial space being marketed during Q4 2015 was 7.2%, down from 8.5% a year earlier.
Absorption: There was 753,000 square feet of positive net absorption in Q4 2015, about 20% higher than the previous quarter.
Transactions: 17 million square feet of industrial space was leased or sold during 2015, up 17% from 2014. Lease rates continue to rise gradually. The largest transaction in Q4 was the sale of Pacific Technology Park in Sorrento Mesa.
Construction: Just over 1 million square feet of new office construction was delivered during 2015, mostly Class A space, which has contributed to a rise in average lease rates. 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 remained consistent with recent quarters at 12.1%. The lowest vacancy rate was seen in the Rancho Bernardo submarket, which was 8.7%.
Availability: Office space being marketed was at 15.4%, up slightly from the previous quarter.
Absorption: There was a total of 612,000 square feet of positive net absorption in San Diego’s office market during Q4 2015. Most of this year’s absorption consisted of class A office space, which commands the highest rent.
Transactions: 16.7 million square feet of office space was leased or sold in 2015, about 1.6 million less than 2014. The biggest office sale took place in Sorrento Mesa, with 538,000 square feet sold to John Hancock Life Insurance Co.
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. 704,000 square feet of retail space was delivered in 2015.
Vacancy: Total unoccupied retail space was at 4.6% in Q4 2015, up slightly from the prior quarter and up from 4% a year earlier.
Availability: 6.2% of retail space was marketed for lease or sale in Q4 2015, up from 5.7% in the prior quarter. The highest availability in San Diego was found in shopping centers, which was 9%. On the other hand, malls had the lowest availability at just 1.2%..
Absorption: There was 241,000 square feet of positive net absorption in San Diego’s retail market during 2015.
Transactions: 10.2 million square feet of retail space was sold or leased in 2015. This is up 17% from 2014. The biggest retail sale of 2015, of nearly 1 million square feet, occurred at the Shoppes at Carlsbad.
