Commercial real estate in Los Angeles faces uncertain economic conditions, uneven recovery from the COVID-19 pandemic, and structural shifts in demand. Despite these challenges, not every sector and market is created equal. There are signs of strength across LA that point to a strong and resilient future. The current market conditions call for a temperature check to gain a more holistic view of LA’s real estate.
THE BIG PICTURE… LA IS RESILIENT
The region’s diversity of industry and talent bodes well for resiliency. LA has over 700,000 college students, 6.3 million employees, top universities, major sports teams, and world-leading film and production talent. Other strengths include:
• The San Pedro Bay Port Complex is unmatched. These ports account for 31% of all container movement in seaports.
• LA has fared better with inflation than other metros. At the end of April 2023, LA’s inflation grew at a slower pace than Miami, Detroit, Phoenix, Tampa, Seattle, Dallas, Chicago, and others.
• Not one industry accounts for more than 20% of the market’s employment.
OFFICE: COLD, BUT ALL STORMS END
Headwinds
• The sector faces high-interest rates, debt maturity, and a decline in demand.
• Office owners have buildings worth less than the debt owed.
Tailwinds
• Occupiers should lock in favorable terms for high-quality spaces that foster collaboration.
• Cash buyers will seek out quality office products at a discount.
• Medical office has performed better than the overall sector. Vacancy declined from 11.7% in Q1 2023 to 11.2% in Q2 2023.
INDUSTRIAL: COOLING BACK TO NORMAL
Industrial demand skyrocketed amid the COVID-19 pandemic. While 2022 was a record year for annual rent growth, projections show the market returning to normal levels and growing steadily.
Headwinds
• Greater LA started the year with two consecutive quarters of negative absorption. Inland Empire absorption turned negative in Q2 2023.
• Record rents have impacted tenants unable to afford their existing operations as sublease availability grows.
Tailwinds
• Vacancy remains tight for LA relative to other markets in the United States. Greater LA vacancy was 1.5% in Q2 2023 and Inland Empire was 2.7%.
• Rents are projected to increase 5-12% over the next year in Inland Empire, according to CBRE Econometric Advisors.
• A diverse tenant mix of third-party logistics, food, and beverage, and retailers supports strong fundamentals.
HOTELS: WARMING UP AND REVITALIZED
Tourism will always be a major contributor to LA’s economy.
Headwinds
• A looming recession is at the forefront of consumers’ minds and may lead them to pull back on discretionary spending, including travel.
• Labor shortages impact services. In the LA-Long Beach-Glendale area, leisure and hospitality employment was still below its pre-pandemic levels, as of April 2023.
Tailwinds
• Average daily rate increased by 4.0% and revenue per available room increased by 12.5% year-over-year in LA.
• Average daily rates exceed pre-pandemic levels in Los Angeles. The figure increased from $175.16 in Q1 2019 to $189.25 in Q1 2023.
• Passenger volume at LAX in Q1 2023 increased 23% from Q1 2022.
RETAIL: LUKEWARM WITH STRONG FUNDAMENTALS
Retail was hit hard from the COVID-19 pandemic leading to closings and a decline in leasing activity. However, underlying fundamentals led to a better-than-expected recovery as consumer spending surged.
Headwinds
• Elevated production costs erode retailer profit margins.
• Food and beverage retailers continue to experience shortages in labor, disrupting services.
Tailwinds
• Availability remains tight, below 7.0%, in LA, with low levels of new construction.
• Grocery-anchored retail and power centers are the preferred retail subtype for investment.
MULTIFAMILY: MOST SOUGHT-AFTER SECTOR IS WARM
Annualized rent growth exceeded 10% in each quarter in 2022 due to limited availability. Increasingly higher mortgage rates priced out prospective buyers and incentivized them to rent.
Headwinds
• Lending conditions continue to tighten.
• Population growth remains stagnant or negative in submarkets around Greater LA.
Tailwinds
• Transaction volume reached $2.05 billion in Q1 2023 in LA.
• Multifamily is the most sought-after sector for investment.
Lew Horne, Jessica Lall, and David Barnett are with CBRE. Learn more at CBRE.com.
