Despite a decrease in demand, California’s industrial real estate market remains strong, according to a report.
Industrial Real Estate in California: A Thriving Sector
According to the recently released summer edition of the biannual collaboration between real estate law firm Allen Matkins and the University of California–Los Angeles’s (UCLA) Anderson School of Management, industrial real estate in California is the best-performing sector in the commercial industry.
The California Commercial Real Estate Survey, which questions commercial property owners, developers, financiers, and investors about market insights and their sentiment looking three years into the future, reveals that industrial markets are experiencing historically low vacancy rates and are poised for new building and superior returns.
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While responses suggest less optimism than in prior surveys, the report notes that the industrial market was growing at unsustainable rates during the last two years. However, the slight shift in sentiment does not indicate a significant change in lease prices or vacancy rates.
Commercial real estate is composed of four sectors: industrial, multi-family housing, office, and retail. Industrial properties, dedicated to production, manufacturing, warehousing, storage, and distribution, have been the star performer in the commercial real estate realm.
Vacancy rates remain at record lows, with Southern California averaging 1 percent and Northern California closer to 4 percent. Despite lower leasing volume, industrial development continues with tens of millions of square feet of space currently under construction. Southern California alone has several million square feet of development underway, including warehouses planned for Los Angeles and the Inland Empire.
According to the report, more developers are planning new industrial projects than at any time in the last eight years, except for 2021. However, the increase in vacancy rates predicted for the future suggests that 2026 may not be as profitable as 2023.
Market for Office Space Continues to Suffer
While industrial real estate thrives, other sectors in commercial real estate face challenges. Retail and multi-family housing have seen improved sentiment compared to six months ago, but office space continues to suffer due to work-from-home practices and public safety concerns in some cities.
The prior report forecasted a recession, but the current analysis suggests that it will occur later than expected, with a slowdown anticipated in late 2023 or 2024.
Despite these challenges, the industrial real estate sector in California remains a shining star, offering promising opportunities for investors and developers.
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