Q3 2022 Market Trends Newsletter

November 9, 2022

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Below, we outline the major market trends in four critical Los Angeles and Inland Empire major market sectors, along with key indicators, download the PDF. In today’s quickly changing environment, we remain ready to assist you with your commercial real estate valuation needs at any time.

LOS ANGELES INDUSTRIAL REAL ESTATE TRENDS
  • The Los Angeles industrial market is among the best in the nation, with vacancy rates presently at 2.2%.
  • Asking rents in the metro area have increased by 13.9% during the past year, compared to 11.4% nationally.
  • With average market pricing currently at $330/SF, well above national averages, and cap rates at 4.1%, among the lowest seen among industrial markets in the nation, investors pay top dollar for properties in the L.A. metro area.
  • Net absorption levels in 2022 have been more modest, but with vacancy near its lowest levels in decades, this is a product more of a lack of supply than demand. There is limited space left for tenants to lease, and what space remains available is often in obsolete industrial • properties that cannot work for many space users.
  • The L.A. vacancies have been much lower than the national average at 3.7%, compared to 7.3%.
INLAND EMPIRE INDUSTRIAL REAL ESTATE TRENDS
  • Completed construction deliveries have averaged 20.8 million SF over the past three years, and that total should reach 24.6 million SF in 2023.
  • Developers are struggling to produce enough industrial space to meet incoming demand for large warehouse and distribution centers as they continue to account for the majority of new absorption this year.
  • A recent announcement from Amazon confirming many facility closures throughout the century has not impacted the Inland Empire. The market continues to be highly sought after, and the e-commerce giant has remained committed to the region.
  • Annual rental rates have continued to increase dramatically – rates are currently up 18.7% (compared to 16.4% a year ago).
  • Rents in the Inland Empire are nearly double the national average for buildings with at least 200,000 SF.
LOS ANGELES OFFICE REAL ESTATE TRENDS
  • Vacancies are at a 25 year high, and rental rates are down from a peak in 2Q20.
  • The availability of sublease space is at a record high, 10.9 million SF available as of October. Current levels are 5.5 million SF above amounts seen at the start of the pandemic. Sublease space typically inhibits landlords’ ability to raise rental rates.
  • Average office asking rates in Los Angeles currently stand at $42.00/SF.
  • With the weak leasing environment and amount of available sublease space, landlords will continue to find it difficult to increase rental rates for the rest of the year.
  • Pricing is predicted to remain largely flat for the upcoming term.
INLAND EMPIRE OFFICE REAL ESTATE TRENDS
  • The vacancy rate is continuing to hold at 6.4% while the overall market rent remains at $25.00/SF.
  • Over the past year, rents have grown by 3.7%.
  • While the current rental rate growth sits just below the past five year average of 3.9%, the Inland Empire has had some of the strongest rent gains of any office market in the rest of the nation due to the high demand for medical office space.
  • Price appreciation has been positive for the past years, currently at $220/SF.
  • The average market cap rate of 7.1% remains just underneath the previous 10-year average of 7.4%.
  • The pandemic caused one of the worst vacancy rates for the Inland Empire since 2009 and the market is still recovering.
LOS ANGELES RETAIL REAL ESTATE TRENDS
  • After vacancy rates peaked just above 5.5% in 2Q21, the rates are beginning to return to pre-pandemic gross leasing rates at 4.9%.
  • The market is predicted to continue improving throughout the rest of the year while vacancies begin to trend downward as demand outpaces retail completions.
  • Average asking rents have increased by only 3.0%, trailing the national average of 4.2%. However, the rates in the region remain substantially higher, with an average asking rental rate of $35/SF (vs the national average of $23/SF).
  • Average market cap rates, presently at 5.3%, are far below the national average of 6.8%.
  • The past quarters are trending upward, which is predicted to continue.

INLAND EMPIRE RETAIL REAL ESTATE TRENDS

  • The annual rental rate five-year average currently sits at 3.9%, while the local market gains are at 5.6%.
  • Big-box spaces have been severely impacted by the national closing of many recognized retailers.
  • Despite the negative outlook of retail space, many shopping centers are under construction near major housing developments.
  • During the economic recovery since the pandemic, buyers are targeting shopping centers anchored by nation credit tenants. As a result, investments have surged and pricing has appreciated to a price of $280/SF and cap rates to 5.9%.
  • Rents have increased by 5.6% over the past year creating one of the fastest growth rates in the past decade.
LOS ANGELES MULTIFAMILY REAL ESTATE TRENDS
  • Vacancy rates are currently at the lowest level in decades, sitting at 3.5% (down substantially from a peak of 6.0% in 4Q20.)
  • After the record pace of gains seen in 2021 and the first half of 2022, rent growth has slowed to a pre-pandemic level of 4.6%.
  • Rental market regulations, combined with cities out of compliance with their required housing elements, will substantially impact the market. It remains to be seen how realistic some Builder’s Remedy projects will be – many experts are predicting extensive litigation to slow and development under the as-yet untested provisions.
  • 2.8% of existing inventory is currently under construction in L.A. County.
  • Average market cap rates, at 3.9%, are well below the U.S. average of 4.9%.
INLAND EMPIRE MULTIFAMILY HOUSING REAL ESTATE TRENDS
  • Submarkets with recent construction (Southwest Riverside County/Temecula and Greater Ontario/Rancho Cucamonga) have the highest rent gains with overall metro rents jumping 5.3% over the past year.
  • Single-family home prices have risen faster than apartment rent pricing due to low interest rates. The median home price is over $550,000+, up from last year’s media price by 20%. Apartment asking rents are up to 5.3% throughout the past year.
  • Because of elevated demand, concessions are rare in the Inland Empire even in new properties. This has created an environment for dynamic leasing velocity in recent quarters.
  • The average market cap rate is 4.2%, compared with the five-year average of 4.7%.
  • High population growth has created a steady construction pipeline.

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