The commercial real estate market has turned in a mixed performance thus far in 2020, according to the Q3 2020 Voit Real Estate Services market reports for Southern California (SoCal).
While office and retail have both experienced significant dips in transaction volume and absorption as well as increased vacancies and availability, industrial has experienced the opposite. The pandemic has escalated the move from in-person to online, pushing demand for industrial property to a new high. This move has been led by Amazon fulfillment centers, which are popping up across SoCal.
Read on for details on how industrial, office and retail are faring in SoCal’s major markets during this 2020 recession.
Industrial
Availability of industrial property — property marketed for sale or lease — declined across SoCal in Q3 2020, falling to:
- 4.6% in Orange County;
- 4.7% in the Inland Empire;
- 5.5% in Los Angeles; and
- 7.8% in San Diego.
Construction of new industrial property continued in Q3 2020, with Amazon leading the way, contributing to the historic construction levels seen in 2020. During Q3 2020, there was over 4 million square feet of industrial space under construction in San Diego alone. However, the Inland Empire remains the major region for industrial construction, with 18.3 million square feet under construction in Q3 2020. Los Angeles has seen relatively small construction gains and Orange County is basically capped out for industrial construction, hence their low vacancy rates.
Vacant industrial property displayed mixed signals across SoCal, descending to:
- 2.9% in Orange County;
- 3.3% in Los Angeles;
- 3.5% in the Inland Empire; and
- rising to 4.9% in San Diego.
Net absorption — the total change in occupied space — was positive across SoCal, with the exception of Orange County, which saw 255,000 square feet of negative net absorption. However, this loss is primarily due to the low availability of industrial space in Orange County.
Office
Unlike industrial, the office sector has experienced more ill effects from the pandemic and 2020 recession.
Demand for office space has declined while businesses have sent employees home to work remotely during the pandemic. Having realized the benefits of forgoing a lease, many offices have decided not to return to an in-person work environment. Still others have chosen not to see through previous expansion plans, which detracts from office demand.
Availability for office space increased to 16.0% in Orange County and 16.3% in San Diego. This continues an upward trend in availability that began in 2016 for Orange County and later in 2019 for San Diego.
Construction of new office space has declined significantly over the past year, following decreased demand. This has occurred as net absorption fell further negative in Q3 2020. Over the first three quarters of 2020, net absorption has equaled negative 1.6 million square feet in Orange County and negative 1.5 million square feet in San Diego.
Vacant office space in Q3 2020 rose to:
- 12.0% in San Diego; and
- 11.6% in Orange County.
Voit anticipates the office sector to continue its downturn in the remainder of 2020 and 2021, including lower rents and increased concessions. Vacancies will continue to inch higher as businesses either close their doors or cut costs by choosing not to renew their leases, causing construction to slow further.
Retail
Worse than the office sector, retail has suffered significantly during this recession. Most retail businesses have struggled to cover costs during these times when consumers are doing their shopping from home. Many have been forced to close.
San Diego’s retail vacancy rate is rising but was still just 4.8% in Q3 2020. Still, Voit cautions that this is not yet reflective of the true vacancy rate. That’s because eviction moratoriums in San Diego have thus far kept some commercial landlords from kicking out non-paying tenants. Further, some landlords are not yet marketing their space as vacant or available. But this will soon change, and when it does, vacancies will rise significantly.
Absorption continued to dive below zero, with 575,000 square feet of negative net absorption in Q3 2020. Belying San Diego’s negative net absorption, construction also continues to decline, with just 169,000 retail construction underway thus far in 2020.
Expect retail to continue to suffer in 2020 and 2021. Voit forecasts retail businesses will continue to shutter until a vaccine is broadly administered and the pandemic response is ended. Even then, the downward pressure will continue until jobs return, restoring consumer purchasing power.
