As we come to an end of the first quarter of 2023 the future of commercial real estate definitely held some surprises for everyone. Of particular surprise was the relative stability with demand and pricing for commercial real estate in the Los Angeles submarket, even in the face of rising inflationary pressures, supply chain issues, energy issues, rising interest rates and of course the war in the Ukraine. Talks of a recession are coming more to the forefront as we saw month over month inflationary pressure and interest rate increases we haven’t seen in over 40 years.

Of new news is the pending banking crisis with Silicon Valley Bank taking the headlines, and other banks helping with the bail-out. Most savvy investors with experience are still looking for deals, but are being more particular regarding pricing and potential opportunities. They realize that downturns in the economy are not necessarily directly correlated, or affect every area of real estate. However, Commercial Real Estate is still very active; especially in heavily industrialized markets such as Los Angeles.

Although the declining economy and unsteady market in the U.S. has been a concern for all investors this past year, many economists (over 50% according to the latest study), expect that the U.S. will be out of this recessionary period within the next twelve to eighteen months, a blink of an eye when it comes to commercial real estate investing. Following are current updates for the second quarter of 2023, in all asset classes of commercial real estate.

Multi-Family Market

One of the most prolific markets for multi-family investments right now is without question Los Angeles. Even with pressures from governmental agencies towards landlords for rent control, rental increases, and eviction moratoriums (the last moratorium will expire at the end of March 2023). Based on the rapid increase in population and the shortage in low cost affordable housing, the demand exceeds the supply and has created an opportunity for the savvy investor. Many experts anticipate that asking rents and property value in Los Angeles are expected to rise considerably throughout the rest of year and going forward as the cost of homeownership increases and interest rates price many first time home buyers out of the market. Current vacancy rates are up from last year, currently at 4.1% a little more than ½ a percent higher than last year at this time (3.5%), with overall absorption of units is down this year with 3,978 total units in the past 12 months and with total sales volume is also down but still strong with approximately $11.6B in transactions from the previous year. Cap rates have remained relatively stable at 3.9% throughout the year and forecast to remain at current points within the next coming year with a possibility of some cap rate decompression.

Industrial Market

The twin ports of Los Angeles and Long Beach together form the third largest port complex in the world. Forty three percent of the nation's goods are being shipped into this exact area, creating a unique situation whereby the demand exceeds the supply for Commercial Real Estate right here in our own backyard. We have seen some companies move manufacturing options to border towns. Absorption and vacancy rates have loosened a bit from last year, with negative absorption of about 10.1M sq. ft., and vacancy around growing from 2% last year to a current 3.1% (still very strong for this sub-market) with some sub-types of industrial even lower. Due to low vacancy rates and high demand, rents are

expected to grow by almost 10% annually in next couple of years. Sales have been very robust, with 2021 setting records, and sales continuing strongly through 2022. Current sales prices are at $346/sq. ft., about 10% higher than last year, and forecast to grow upwards of 10% a year in the next few years. Rents have similarly followed this trend, and increased just slightly above 10% from last year to a current average of $1.53/sq. ft./month. Cap rates have essentially remained stable, going from 4.0% last year to a current 4.1%.

Retail Market

Retail properties in Los Angeles have remained relatively stable, with current vacancy rates stable at 5.3% (up from 5.2% last year), and expected 4-5% market rent growth in the next year. Overall sales volume has fallen in the last year, but sales price per sq. ft. has increased and time to sell has decreased, showing increasing demand for retail investment properties. Sales are expected to remain strong as investors look to retail NNN properties as a hedge against inflationary pressures. Current average price per square foot for retail is approximately $427/ft., with some prime areas still above $1,000 per sq. ft. Investors are looking to also reposition defunct or obsolete retail buildings, especially looking at conversions to last mile distribution centers.

Office Market

Office occupancy has taken a hit during the pandemic and is still slow to recover. Overall vacancy rates increased throughout the year and are currently sitting at 15.2%, up from 13.8% last year. Availability rates as many companies look to either downsize their office space as they move to a hybrid work from home/office week, with current availability at 18.1% in the overall market (a 25 year high). Surprisingly rental rates have stabilized, with current average rental rates at $3.52/Sq. Ft., slightly higher than the same period last year ($3.49/Sq. Ft.). Overall though, concessions and other incentives have been more generous for tenants than those offered prior to the pandemic. Construction levels have come down from last year, but activity remains relatively high with over four million square feet currently under construction. Office sales volume in L.A. has also fallen a bit, but prices still seem to be holding up, with CAP Rates and Price per Sq. Ft. remaining the same year over year. Investors have largely focused on high-quality, well-leased properties since the onset of the pandemic, but there have been several recent notable sales that show investors are purchasing properties to implement riskier value-add strategies.

For more information on market conditions, and how to adjust your investment and growth strategies to better match the current market, please do not hesitate to reach out to us at info@cbicommercial.co