SoCal commercial real estate results are in

The 2022 commercial real estate market continues a mixed performance with some big developments that added a touch of light in the darkness. The Q1 2022 Voit Real Estate Services market reports for Southern California (SoCal) reveal where California is struggling and where the state has improved since the previous year.

Read on for the details of how industrial, office and retail are faring in SoCal’s major markets.

Industrial

Industrial space remained a bright spot for commercial real estate in Q1 2022. Vacancy and availability lowered, and growth sparked across the industrial sector. The Inland Empire saw inventory increase a much needed 618 million square feet — the benefit of being a booming distribution hub.

Vacancy rates continued to decline across SoCal markets in Q1 2022, falling to:

2.1% in San Diego, down from 4.3% a year earlier;
1.3% in Orange County, down from 2.5% a year earlier;
1.1% in Los Angeles, down from 2.6% a year earlier; and
just 0.7% in the Inland Empire, down from 2.7% a year earlier.

Today’s industrial vacancy rates are extremely low — essentially zero. With few alternatives available, industrial tenants are increasingly forced to renew their leases.

Availability of industrial property – property marked for sale or lease – also continued to decline in Q1 2022, decreasing to:

3.0% in San Diego, down from 6.2% a year earlier;
2.4% in Orange County, down from 4.0% a year earlier; and
1.4% in the Inland Empire, down from 3.4% a year earlier.

Los Angeles stands apart as the only area where availability of industrial property remained essentially flat in Q1 2022. In this quarter, 2.3% of Los Angeles industrial property was available compared to 2.2% a year earlier.

Construction was a highlight for the Inland Empire — making it the most notable SoCal market in construction movements. At an all-time high, 28 million square feet of industrial projects are under construction in the Inland Empire, up from the 23 million square feet under construction in Q4 2021. Orange County and San Diego also saw the number of new industrial projects increase in Q1 2022.

In contrast, Los Angeles continues to struggle for new construction with little room to build.

Net absorption – the total change in occupied space – remained positive across SoCal, coinciding with high industrial demand. In Q1 2022, absorption across all counties was a positive:

4.4 million square feet in the Inland Empire, down from 5.1 million a year earlier;
1.6 million square feet in Los Angeles, down from 3.5 million a year earlier;
1.1 million square feet in Orange County, up from 541,000 a year earlier; and
731,000 square feet in San Diego, up from 273,000 a year earlier.

SoCal’s tight industrial market will remain extremely competitive as long as construction continues to catch up. The market has not been able to meet demand since the pandemic first spiked the increased need for industrial space, in what was already a market constrained by space.

Office

The office side of the market had a gradual break after its previous pandemic doom, but availability and vacancy rates remain high — even with slight improvements in Q1 2022.

Vacancy rates remained high — even as they flattened and decreased in Q1 2022, at:

2% in Orange County, level with the prior year; and
2% in San Diego, down slightly from 12.9% a year prior.

Availability for office space in Q1 2022 decreased to 16.4% in San Diego. For reference, this is down from 18.5% a year prior. Likewise, availability in Orange County decreased slightly to 17.1% from 17.3% in the year prior. Much like its vacancy rate counterpart, the percentages decreased, but remain high regardless.

The high levels of office space vacant and available are even more apparent when compared to the low rates of industrial and retail. 2022 is seeing small steps towards stabilization thus far with San Diego seeing positive net absorption, rising rental rates and decreasing availability rates. Orange County has also made steps towards stabilizing since Q4 2021 — experiencing improved net absorption levels.

However, the office sector experienced heavy pandemic losses, and there is still a long road ahead to recovery. Savvy landlords know: as the needs for office space have shifted during the pandemic, so will their office spaces Landlords are adjusting their physical office spaces to adapt with the impact the pandemic had for current demand. While the balance has not completely returned since the push toward remote and hybrid work, the Q1 2022 Voit market report reports a little less than half of office workers have returned to the office.

Related article:

2022 commercial market to be led by industrial and conversions

Retail

The beginning of 2022 saw continued improvements in the retail realm. Net absorption has been positive, but vacancy rates remain higher than pre-pandemic levels, according to Voit.

In Q1 2022, San Diego retail space experienced:

a vacancy rate of 4.8%, down from 5.5% a year prior; and
an availability rate of 4.8%, down from 5.9%.

The economy back in session has made a big difference, but the success of retail properties revolves around location — leaving some properties outmoded.

Sales volume remains relatively healthy for retail, though lease transactions are down, indicating decreased demand. Further, the pandemic sped up what was already a growing consumer reliance on e-commerce. Retail will gradually contract in the coming years, as property owners convert their spaces to mixed-use or other types of properties in higher demand.

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