Does L.A. Still Have a Vacancy Issue?

Beginning in 2023, Los Angeles will face increasing challenges that threaten to prevent economic recovery.

According to information provided by a major firm, the office vacancy rate increased once again in the fourth quarter, while apartment rents decreased somewhat. Additionally, investment across all asset classes has slowed down due to increasing interest rates.

The L.A. commercial real estate industry is expected to undergo challenges as the economy responds to changes in supply, demand, and pricing going into 2023, according to said research. Difficulties in borrowing money lead to less expenditure, which lowers real estate values while the Federal Reserve keeps raising interest rates.

The Federal Reserve is slowing down the economy in an effort to combat inflation by raising interest rates, but it’s clear that strategy is starting to have an effect on commercial real estate. The market is showing rising vacancy and falling rents, with the exception of industrial rent, which has held steady. It’s predicted that in the new year, each type of property will face its own chances and difficulties.

Office
Landlords are reporting reductions in occupancy rates due to a larger migration to quality assets as well as significant cutbacks in the tech and media industries, which have for years been major drivers in L.A. Larger office tenants are cutting excess space and reevaluating overall workspace needs, but most experts are in agreement that the sector is still on a “slow path to recovery.”

Demand for office space decreased even as the vacancy rate increased 110 basis points from the previous year to 15.2 percent in the third quarter of 2022. At $3.48 per square foot, the average asking rent was just slightly lower (less than 5 cents) than it was at the beginning of the year.

The research stated that landlords will become creative in recruiting tenants to occupy unoccupied space, offering advantageous concessions including flexible lease terms, free rent, and tenant improvement allowances.

Multifamily
Multifamily vacancy increased somewhat by 10 basis points year over year to 3.7 percent in the fourth quarter following a spike in development. According to a leading local firm, typical asking rent decreased for the first time since the pandemic shutdown. This was still 3.2 percent higher than it was in 2017.

The report stated that the change in market dynamics and demand for multifamily housing will persist beyond 2023. Rising borrowing rates, escalating construction costs, and a sluggish economy will influence the rate of growth for multifamily units, which seek stability.

Retail
While the average asking rent increased over the same period, retail vacancy rates were unchanged from a year earlier at 5.4 percent in the fourth quarter, despite some businesses returning to brick-and-mortar locations.

It’s expected that retail will continue to evolve, with the majority of merchants holding less physical selling space in storefronts and more warehouse space for e-commerce, outdoor restaurant dining, and curbside pickup—a permanent change.