Q1 2023 Commercial Real Estate Report: Los Angeles, CA
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Compared to its performance last year, the California commercial real estate market saw a slow Q1 2023 characterized by low demand, rising vacancies, and sluggish sales activity.
Although retail and multifamily fundamentals are relatively strong, the office space and industrial real estate sectors lagged behind thanks to negative absorption and falling leasing activity.
General Market Trends
The average price for commercial real estate in Los Angeles rose 0.93% to $66.62 per square foot, with an average size of 12,502 square feet. Median prices also jumped 1.29% over the past 90 days to $115.65 per square foot, with a median size of 4,498 square feet
Notable Commercial Real Estate Transactions in Los Angeles in Q1 2023
Los Angeles posted a number of notable commercial real estate transactions this quarter:
- Sony Picture Animations 225,239 square-foot lease at 5750 Wilshire Boulevard;
- A $112,500,000 sale at $628,492 per unit at the Angelene apartments;
- Iconix Fitness's 21,450 square-foot lease at 3883 W Century Blvd;
- Glenair's 552,562 square-foot lease in Irwindale;
- National Road Logistics' 312,212 square-foot lease in Torrance; and,
- Fifth Season's 65,000 square-foot lease at 11355 W Olympic Boulevard.
Most of the notable transactions this quarter were in the industrial and multifamily sectors.
Los Angeles Office Space Performance in Q1 2023
Like many other large cities, Los Angeles office space performance stalled this quarter. Average asking rates fell from $3.88 per square foot to $3.83 per square foot in Q1 2023, with Class A asking rates also registering a 2.0% YoY decrease from $4.09 in Q1 2022 to $4.01 in Q1 2023.
Availability rates rose 90 basis points to an all-time high of 26.0% as demand remains below pre-pandemic levels. Subleasing space is also up to 10.4 million square feet from 10.3 million square feet last quarter.
Office space in Los Angeles has struggled since the pandemic thanks to a combination of decreased demand and high interest rates. Investors can expect doldrums and a more tenant-friendly environment in Los Angeles for the time being.
Los Angeles Office Space Construction and Volume
Leasing volumes fell this quarter, with only 2.9 million square feet of leasing activity—a 0% change from last quarter and a 19% decrease from the same time last year.
High interest rates have essentially halted new construction, and many owners might be running into financial difficulties paying their loans as they struggle to fill space.
Los Angeles Industrial Real Estate Performance in Q1 2023
Los Angeles's industrial real estate market saw falling demand and a flight-to-value in Q1 2023. Year-to-date (YTD) absorption was -2.7 million square feet, and there were over three times the amount of move-outs to move-ins in properties larger than 100,000 square feet.
Direct asking rates fell to $1.71 per square foot, with the highest rents in the South Bay submarket at $1.90 per square foot. Total vacancies rose to 2.0%, while the total amount of subleasing space available rose to over 1.5 million square feet.
Los Angeles Industrial Construction and Volume
Leasing volume was down YoY by nearly 20%, with the largest decreases occurring in the South Bay submarket. Unlike last quarter, which saw over 9 million square feet of new space, new additions in Q1 2023 totaled only 1 million.
As of the end of Q1 2023, Los Angeles has about 6 million square feet of industrial space under construction.
Los Angeles Multifamily Real Estate Performance in Q1 2023
The Los Angeles multifamily real estate market experienced a slower quarter with lower demand and rising vacancy rates. Vacancy rates rose nearly 30 basis points this quarter to 3.8%, which comes out to a YoY decrease of 10 basis points.
Although last year's multifamily market experienced high growth, average asking rates fell this quarter to $2,400 a month. A partial explanation for the tapering off of growth is the labor market cooling down after recovering nearly all lost jobs since 2020.
Los Angeles Multifamily Construction and Volume
The city added over 1,600 new multifamily units this quarter, with another 21,000 under construction. An additional 2,550 units are currently in the permitting process, an 18% decrease from Q4 2022.
Multifamily sales momentum in Los Angeles picked up in the first two months of 2023 but has since leveled off, with a median sale price of $303,500 per unit. Cap rates hovered around 4.6% in Q1 2023—a 60 basis point increase from the same time last year.
Los Angeles Retail Performance in Q1 2023
Like most other sectors, the Los Angeles retail market had a slow quarter, with rising vacancies and falling demand but an active construction scene. Following 8 consecutive quarters of positive absorption, Q1 2023 saw 1.1 million square feet of negative absorption.
Average retail asking rates in Los Angeles were $2.37 per square foot, registering a 4.2% YoY increase.
The retail market added 190,000 square feet of new space, with an additional 2.5 million square feet in the construction pipeline—nearly double the amount in Q4 2022. The Los Angeles County submarket will absorb the majority of these new additions.
Takeaways for Los Angeles Commercial Real Estate Investors
Overall, the Los Angeles commercial real estate market had a sluggish Q1 2023. Although all sectors saw decent rental growth, vacancies increased across the board and general demand has fallen. The Los Angeles retail market shows the strongest fundamentals, but it's slowed down significantly compared to last year.
Overall, investors need to adapt to the flight-to-value we are seeing in many markets. For instance, lower leasing activity in higher-quality industrial real estate signals that tenants are leaving for properties with lower prices that can offer more lease concessions.
Given low demand, we'll be in a tenant's market for the foreseeable future.
Methodology
This report was written with property information from the MyEListing.com platform in corroboration with other freely available commercial real estate research data.
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