Declining Demand: SoCal's Commercial Market Shows Signs of Weakness in Q1 2023
The latest reports on Southern California's (SoCal's) commercial market for the first quarter (Q1) of 2023 have revealed concerning trends. After experiencing significant growth for over a decade, the industrial, retail, and office sectors across SoCal are now grappling with increased availability, higher vacancy rates, longer time-on-market, and greater landlord concessions. Voit Real Estate Services has provided insights into these changes that are causing a softening of the commercial market in the region.
San Diego County - Industrial, Retail, and Office
In Q1 2023, San Diego County's industrial vacancy rate reached 2.53%, marking an increase from 2.28% in Q4 2022 and surpassing the 2.24% rate observed in Q1 2022. The retail vacancy rate also rose to 4.26% in Q1 2023, up from 3.93% in the previous quarter, but remained below the 4.75% level recorded in Q1 2022. Meanwhile, the office vacancy rate climbed to 11.85% in Q1 2023, slightly exceeding the 11.67% rate in Q4 2022 but remaining lower than the 11.99% vacancy rate in Q1 2022. However, this figure still surpassed the pre-pandemic vacancy rate of 10.30%.
San Diego County's industrial net absorption, representing the overall change in occupied industrial space, experienced a significant decline of -147,262 square feet in Q1 2023. This decrease follows a positive trend of +797,817 square feet in Q4 2022 and +687,935 square feet in Q1 2022. The retail net absorption also experienced a downturn, with -394,774 square feet in Q1 2023, compared to +183,203 square feet in Q4 2022 and +275,998 square feet in Q1 2022. Similarly, the office net absorption contracted to -200,124 square feet in Q1 2023, significantly lower than the +1,425 square feet in Q4 2022 and +171,638 square feet in Q1 2022.
Orange County - Industrial and Office
In Orange County, the industrial vacancy rate rose to 1.46% in Q1 2023, up from 1.08% in Q4 2022, and surpassed the 1.28% vacancy rate recorded in Q1 2022. Industrial space remains relatively scarce in the region. The office vacancy rate also witnessed an increase, reaching 16.85% in Q1 2023, compared to 15.75% in Q4 2022 and 14.70% in Q1 2022.
The net absorption of industrial space in Orange County experienced a significant decline of -496,325 square feet in Q1 2023, following positive growth of +2,644,930 square feet in Q4 2022 and +1,090,457 square feet in Q1 2022. Similarly, the net absorption of office space contracted to -1,262,288 square feet in Q1 2023, significantly lower than the -413,803 square feet in Q4 2022 and -364,433 square feet in Q1 2022.
Los Angeles County - Industrial
Los Angeles County's industrial vacancy rate surged to 2.49% in Q1 2023, up from 1.86% in Q4 2022, and exceeded the 1.13% vacancy rate reported in Q1 2022. Moreover, the net absorption of industrial space in Los Angeles County contracted significantly to -3,606,403 square feet in Q1 2023, down from -712,855 square feet in Q4 2022 and +1,587,197 square feet in Q1 2022.
Inland Empire - Industrial
The Inland Empire experienced a sharp increase in its industrial vacancy rate, reaching 2.15% in Q1 2023, up from 1.41% in Q4 2022, and surpassing the 1.02% vacancy rate in Q1 2022. Despite the rise in vacancies, the region's industrial net absorption grew to +3,063,631 square feet in Q1 2023, up from +2,152,486 square feet in Q4 2022 but lower than the +4,439,510 square feet in Q1 2022.
In conclusion, the first quarter of 2023 has revealed a noticeable softening in Southern California's commercial market. After years of consistent growth, the industrial, retail, and office sectors are now facing challenges such as increased vacancy rates, declining net absorption, and longer periods on the market. These shifts signify a change in the demand dynamics, indicating a slowdown in the region's commercial real estate activity.
San Diego County, Orange County, Los Angeles County, and the Inland Empire have all experienced varying degrees of negative trends in their respective markets. San Diego County, while still maintaining relatively low vacancy rates, has witnessed a decline in net absorption across industrial, retail, and office spaces. Orange County has seen a rise in both industrial and office vacancies, coupled with significant decreases in net absorption. Los Angeles County, known for its robust industrial sector, has also encountered a notable increase in vacancy rates and a sharp decline in industrial net absorption. Conversely, the Inland Empire has shown resilience in its industrial sector, with positive net absorption despite an increase in vacancy rates.
These market indicators emphasize the need for careful observation and strategic decision-making by stakeholders in Southern California's commercial real estate sector. While the region has experienced a period of significant growth, the recent softening suggests a potential adjustment phase. Industry participants will need to adapt to changing market conditions, recalibrate their expectations, and explore innovative approaches to navigate the evolving landscape.