Unveiling the Dual Faces of Q2: Los Angeles' Industrial and Office Market

The real estate market of Greater Los Angeles (GLA) has unveiled two contrasting narratives in the second quarter of 2023, offering a fascinating insight into the impact of e-commerce growth and evolving work patterns on industrial and office spaces.

Industrial Market: Riding the E-commerce Wave

Defying the ongoing pandemic challenges, the GLA industrial market continues to cement its resilience, riding the wave of exponential e-commerce growth. Demand for industrial space has skyrocketed, dramatically outstripping supply and fueling an unprecedented increase in rental prices.

In Q2 2023, the average asking lease rate reached a record peak of $1.00 NNN per square foot per month. Interestingly, landlords are also pulling back on concessions, reflecting their increased confidence in the market's robustness and vitality.

This surge in demand has paralleled a thriving industrial construction landscape. An impressive 8.2M sq. ft. of new space entered the market in Q2 2023, fuelled by the escalating need for warehousing and distribution centers to support the burgeoning e-commerce industry.

Office Market: Pivoting in the Pandemic Aftermath

As businesses worldwide reevaluate their operational structures in the aftermath of the pandemic, the GLA office market is experiencing a period of transition. Several tech and entertainment firms listed large blocks of sublease space on the market in Q2 2023, which contributed to a 3.1% YoY rise in total vacancy.

However, the office market is far from languishing. New leases made up 60% of total leasing activity in Q2 2023, a positive sign of enduring demand for office space. The asking rents also saw a minor hike of $0.05 as more class A space made its way onto the leasing and subleasing market. To sweeten the deal for potential tenants, landlords are increasingly offering incentives such as free rent and tenant improvements.

The office market's transition period has also seen sublease availability across GLA grow to 10.8M sq. ft. in Q2 2023. This shift points towards an evolving work culture, as organizations increasingly adopt hybrid work models and prioritize amenities that facilitate collaboration.

However, the office market faced its share of challenges in Q2 2023, recording negative net absorption for the fourth consecutive quarter. Factors such as variable office usage, increased cost of capital, and high inflation have had a dampening effect on the market's overall vibrancy.

Looking Forward: A Tale of Two Markets

In terms of employment, Los Angeles County's seasonally adjusted unemployment rate hovered at 5.0% in June. While the leisure and hospitality sector experienced a significant job surge in Q2 2023, the motion picture and sound recording sector saw substantial job losses.

As we move ahead, the two contrasting narratives of the industrial and office markets will continue to shape the GLA real estate landscape. On one hand, the industrial market is set for continued expansion, bolstered by a thriving e-commerce sector. On the other hand, the office market will continue to navigate the post-pandemic shift in work patterns and space requirements.

This exciting dichotomy underscores the resilience and adaptability of the Greater Los Angeles real estate market, as it embraces new opportunities and challenges in the face of changing global circumstances.