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Commercial Real Estate Vacancy Rates in L.A. County Continue to Rise

4/11/23

This report provided by NAI Capital Commercial

L.A. County's commercial real estate markets slowed in the first quarter of 2023 with vacancy rates rising and rents dropping – except for multifamily rent which jumped back up from the end of last year. As the Federal Reserve continued its fight to cool inflation with two interest rate hikes so far this year, demand for commercial real estate has cooled.

Industrial

The vacancy rate for industrial space moved up 90 basis points to 3.1% in Q1 2023 while the average asking rent declined for the first time since the pandemic shutdown, down 1.8% quarter over quarter. This quarter, at $1.64 per square foot triple net, the average asking rent nonetheless was 22.4% higher than last year.

While the increase in vacant industrial space provided more options for tenants in Q1, high prices along with higher interest rates weakened sales of industrial buildings. Sales volume declined 54.4% quarter over quarter, down 33.9% from a year ago to approximately 4 msf at the end of Q1 2023.

Office

The market for office space remained weak. As companies continued shedding excess space, the vacancy rate grew to 15.7% in Q1, up 50 basis points quarter over quarter and 150 basis points from Q1 2022. The average asking rent receded 3-cents from where it stood for the past four quarters to $3.46 per square foot full-service gross in Q1.

While the availability of office space offered for sublease grew at a lower rate of 2.8% quarter over quarter, more than 11.3 msf of sublease space remained on the market as of Q1. Available sublease space has blown up 43.9% since 2020 through the pandemic shutdown. As office space utilization continues to playout slowly through the office market, the rate of available office space offered for sublease will level off.

Low demand in leasing office space led to a sell-off of office buildings in Q1. Sales volume jumped 158.5% quarter over quarter to more than 4 msf as the average sale price plummeted 41.1% from Q4 2022 to $253 per square foot.

Retail

Retail’s pivot back to brick and mortar remained vulnerable to ecommerce challenges. As retailers continued closing nonperforming locations the vacancy rate rose to 5.6% in Q1, up 20 basis points quarter over quarter and Q1 2022. The average asking rent decreased 8 cents from the prior quarter to $3.46 per square foot triple net in Q1. While the average asking rent grew 2.7% from last year, the growth rate registered well below the latest 5.1% CPI-U index figure for Los Angeles County which is a measure of annual inflation.

Rent not keeping up with inflation may have caused some wary retail property owners to become sellers over the past year. Sales volume when compared to last year increased 27.1% to 2.6 msf while the average sale price per square foot declined 8.9% year over year.

Multifamily

In Q1, the vacancy rate for multifamily units in Los Angeles County moved up a mere 10 basis points quarter over quarter (and year over year) to 4.1% as new construction added to the market caused vacancy to rise for the fourth consecutive quarter.

Newly completed units mainly on the high-end of the market also contributed to a rise in the average asking rent per unit this quarter. The average rent, after a small decline in Q4 of 2022, increased half a percentage point quarter over quarter and 1.9% year over year as 3,112 units were added to the market in Q1. At $2,155/unit per month, the average asking rent reached a new record high in Los Angeles County for the average multifamily housing unit.

While rent is at an all-time high, construction costs, concerns about a slowing economy, rising interest rates, and lower rent growth have impacted multifamily investment. The number of units sold this quarter when compared to last year decreased 46.3% to 5,418 units with the average sale price per unit down 19.1% year over year to $304,615. The number of units sold was the lowest since the pandemic shutdown in 2020.

Economic conditions have caused a shift in Q1 2023. While the Federal Reserve attacks inflation by raising the interest rate, increased borrowing costs, in turn, created challenges for commercial real estate. Los Angeles County’s commercial real estate markets are in the midst of ongoing pressures to adjust to the change, impacting real estate values.

This report was prepared by:

J.C. Casillas
Managing Director, Research
NAI Capital Commercial








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