The first quarter of 2022 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 came much more to the forefront as we saw month over month inflationary pressure rising to levels not seen in forty years.

Everyone from the news to economic experts have been anticipating a possible recession, mainly due to the downturn of the housing market. Most savvy investors with experience are looking at everything going on in the market and see opportunity. They realize that downturns in the economy are not necessarily directly correlated, or affect every area of real estate. In fact, due to the different metrics many commercial lenders use, we have not seen the interest rates skyrocket like we have in the residential market of owner occupied real estate (1-4 units). However, Commercial Real Estate is hotter than ever; 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 months, a blink of an eye when it comes to commercial real estate investing. Following are current updates for the second quarter of 2022, in all asset classes of commercial real estate.

Multi-Family Market

One of the most prolific market for multi-family investments right now is without question Los Angeles. 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 rental increase moratoriums from the pandemic expire. Current vacancy rates are low at 3.5%, with overall absorption of units up with 19,049 total units in the past 12 months and with total sales volume up over 200% over historical volumes. Cap rates have remained relatively stable throughout and forecast to remain at current points within the next coming year. With this in mind, now is the opportune time for the investor to take advantage of acquiring the properties that can potentially make these existing conditions work in your favor.

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. Absorption and vacancy rates have remained stable, with current vacancy around 2% 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 hovering just above $300/sq. ft., and forecast to grow upwards of 10% a year in the next few years. Savvy investors can identify a great opportunity for individuals with capital on hand if you ACT NOW and take advantage the current market conditions, as Southern California is one of the most prolific locations in the US. Southern California is presumed to account for one fifth of the country's commercial industrial space.

Retail Market

Retail properties in Los Angeles have remained relatively stable, with current vacancy rates around 5.2%, and expected 3.8% market rent growth in the next year. Sales have remained strong during the past year, and expectations are that it will continue as investors look to retail NNN properties as a hedge against inflationary pressures. Current average price per square foot for retail is approximately $385/ft., with some prime areas still above $1,000 per sq. ft. Investors are looking to also reposition defunct or obsolete retail buildings (a developer just came to terms with the city of Montebello to convert part of a 140,000 sq. ft. Costco to a last mile distribution center. Opportunities are still around for savvy investors,

Office Market

Office occupancy has taken a hit during the pandemic and is slow to recover, and conditions have continued to deteriorate. Although vacancy rates have come up, they are only slightly above what is considered a stable market (currently at 13.8%) but at a 25-year high. Spaces available for sublease are currently tracking high as during the pandemic. Rental rates are down from a peak in Q1 of 2021. While rates have held flat since the second half of 2020, concessions and other incentives have been more generous for tenants than those offered prior to the pandemic. Construction levels have come down from recent peaks, but activity remains relatively high with some developers showing restraint in starting new projects in recent quarters. On the bright side, office sales volume in L.A. has been robust and in line with pre-pandemic levels this past quarter. 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. Average market pricing per SF flatlined starting in early 2020 through most of 2021, but pricing has recently been on the rise.