In California’s K-shaped economic recovery, is your sector the arm of the “K” or the leg?
It might be hard to tell for licensees working in the commercial real estate sector, which continues to see mixed signals about demand. Some types of properties enjoyed record growth while others remain stunted from the effects of the 2020 recession and pandemic.
Yet a champion outlier now emerges from the recession: industrial property. Demand for this type of property remained strong in Q2 2021. In fact, Southern California (SoCal)’s major metros saw positive net absorption figures for industrial properties from the prior quarter, including:
- 876,000 square feet in Orange County, up from 541,000 square feet in Q1 2021;
- 8.5 million square feet in the Inland Empire, up from 5 million square feet in Q1 2021;
- 3.7 million square feet in Los Angeles, up from 3.5 million square feet in Q1 2021; and
- 1.4 million square feet in San Diego, up from 243,000 square feet in Q1 2021, according to Voit Real Estate Services.
Net absorption represents the total change in occupied space within a given period. Agents look to this figure, which is measured in square feet, to gauge current and future commercial real estate demand.
And the future looks bright for industrial properties. In their Q3 Industrial Space Demand Forecast, NAIOP (the Commercial Real Estate Development Association) expects demand to continue climbing across the country in the months to come.
In sum, the forecast estimates national industrial absorption growth of:
- 163 million square feet in the latter half of 2021;
- 81 million square feet for Q3 and Q4 2021;
- 330 million square feet for 2021;
- 335 million square feet for 2022; and
- 80 million square feet for Q1 and Q2 2023.
2020’s massive industrial space gains are thanks to a consumer shift from retail stores to online sales. Though that shift has been steadily gaining traction over the last 20 years, the pandemic escalated the trend to online shopping, in turn pushing industrial demand to new highs.
But these optimistic forecasts may still be underrating the strength of the industrial sector. The Delta variant of COVID-19 may yet result in more infections and business restrictions, refocusing consumer behavior toward online shopping. In that case, industrial demand will then see an even higher boost.
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Restricted supply and outsized demand
In addition to exploding online sales, low vacancy rates also signal a relentless ascension.
The industrial vacancy rate in SoCal remained low in Q2 2021, registering at:
- 2.15% in Orange County, down .61 percentage points from a year ago;
- 1.78% in the Inland Empire, down 2.14 percentage points from a year ago;
- 1.76% in Los Angeles, down 1.62 percentage points from a year ago; and
- 3.70% in San Diego, down 1.34 percentage points from a year ago, according to Voit.
But the industrial sector’s incredible demand is not balanced with appropriate supply. One important factor restricting supply for industrial space is the lack of new industrial property construction.
New construction of industrial property in SoCal during Q2 2021 varied by region, with:
- 2.7 million square feet of space in the planning stage of construction in Orange County;
- 19 million square feet under construction in the Inland Empire;
- 2.9 million square feet in the construction queue in Los Angeles; and
- 5.2 million square feet under construction in San Diego, according to Voit.
Despite a tight supply of industrial space, the industrial real estate market is not expected to lose its momentum anytime soon — largely thanks to burgeoning e-commerce needs.
Some of the more volatile commercial markets to watch include retail, office and lodging. So far in 2021, these industries have enjoyed an uptick in supply from the prior year with new mortgage originations increasing by:
- 88% for retail;
- 149% for office; and
- 234% for lodging, according to the Mortgage Bankers Association (MBA).
While the commercial real estate market continues to experience an uneven, K-shaped recovery from the pandemic and 2020 recession — with industrial still leading the way — the worst of the effects on commercial properties from the shortest recession on record may well be behind California.
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Industrial is the bright spot for SoCal commercial real estate