While the seas have calmed following the steep losses of the 2020 recession, the 2021 commercial real estate market still remains choppy. The Q3 2021 Voit Real Estate Services market reports for Southern California (SoCal) reveals where the largest struggles remain — and where the commercial outlook is improving.
Read on to hear about the details of how industrial, office and retail are faring in SoCal’s major markets.
Industrial
Thanks to high demand, the industrial market has quickly exceeded expectations that were set at the beginning of 2021. Lease rates and sales prices have increased quickly – a byproduct of demand for industrial products. Vacancies continue to dwindle, and optimism for recovery is improving.
Availability of industrial property – property marked for sale or lease – dropped across SoCal in Q3 2021, declining to:
- 2.6% in Orange County;
- 2.8% in the Inland Empire;
- 2.4% in Los Angeles; and
- 4.5% in San Diego.
Construction of new industrial property continued across SoCal during Q3 2021, with the Inland Empire leading the way through its continued construction boom. Orange County construction remained light, but in Q3 it saw its highest level of construction since 2011 with 2.3 million square feet in the construction queue. The increase was mostly thanks to the Goodman Logistics development in Fullerton.
The majority of new construction in San Diego occurs in the outskirts, with little room for construction growth at the heart of the county. In Los Angeles, construction remains almost non-existent, lacking land or space.
Vacant industrial property fell across all of SoCal, which coincides with a boost in demand for warehouse spaces. Vacant industrial property descended to:
- 1.6% in Orange County;
- 1% in the Inland Empire;
- 1.3% in Los Angeles; and
- 3.2% in San Diego.
Net absorption – the total change in occupied space – was positive across SoCal. This also coincides with high industrial demand. In Q3 2021, absorption across all counties rose to:
- 1.6 million square feet in Orange County, up from 255,300 a year earlier;
- 6.9 million square feet in the Inland Empire, up from 3.9 million a year earlier;
- 3.7 million square feet in Los Angeles, up from 417,900 a year earlier; and
- 4.0 million square feet in San Diego, up from 735,800 a year earlier.
Office
Optimism has gradually returned for the office sector in Q3 2021, especially as vaccination rates go up and workers return to the office. While some workers prefer to remain remote in this hybrid world, many employers are now debating on whether working from home is a viable permanent option to uphold. However, the Delta variant put the lid on some of that new optimism in Q3 2021.
Many plans to return into an office setting were handed a raincheck, but not all hope has been lost. Apple announced, despite the delay in the return to office plans, they continued leasing large blocks of offices in San Diego.
The road to recovery for the office sector has begun – the healing process will rely heavily on how well COVID-19 is contained.
Availability for office space in Q3 2021 decreased to 16.6% in San Diego. For reference, this was down from 17.1% in the previous quarter, though up from 16.3% availability a year earlier.
Likewise, office availability in Orange County decreased slightly to 18.3% in Q3 2021, down from 18.4% in the prior quarter, but up from 15.7% a year earlier.
These volatile availability rates reflect how office vacancies have shifted throughout the many hiccups of the pandemic — most often growing at the heights of quarantine. Still, any decline in availability is slight, showcasing a slow return to office space, and a slow recovery for the office sector.
Construction of new office space in San Diego has seen a slight increase, as well as an increase in net absorptionthe total change in occupied space, in Q3 2021. There are big construction projects in the works in the Downtown area of San Diego – with Kilroy Realty, IQHQ, and Stockbridge anticipating high-tech tenants. San Diego’s office market has 2.4 million square feet of office space under construction as of Q3 2021. Orange County saw new construction slow – with 823,900 square feet currently in the construction queue. Orange County also saw a decrease in net absorption.
Vacant office space in Q3 2021 declined to:
- 13.7% in Orange County, down slightly from 13.8% in the prior quarter; and
- 12.6% in San Diego, down from 12.8% in the prior quarter.
In terms of the worst, it seems to be over. As vaccination rates go up, vacancy rates will go down. The more COVID-19 is combatted, the more people are able to confidently return to working in office spaces. There is still uncertainty surrounding COVID-19, and due to this, nothing is a sure thing, but as the hardest struggles of the pandemic dwindle, the office market is slowly recovering.
Retail
San Diego’s retail vacancy rate in Q3 2021 is down to 5.2%, down slightly from a 5.5% vacancy rate in the prior quarter. Availability and vacancy rates are still higher than they were before the 2020 recession shut down the retail sector.
Absorption rose to 373,300 square feet, which is the most positive absorption San Diego has experienced in the retail sector since 2016. San Diego also completed 405,100 square feet of new construction in Q3 2021.
Due to pent-up demand, San Diego retail property saw an increase in the total transaction volume. Over 2.1 million square feet of retail property was sold or leased in Q3 2021, up from 1 million square feet a year earlier. Retail, as a market, is starting to recover post-recession and pandemic, but the retail market is still relatively weak – especially with the Delta variant holding everything in an uncertain light. The bright spot for this market is the drop it saw in vacancy rates. The retail market is pushing forward, not yet meeting where the market was at this time last year, but still moving forward.
