Author: JC Casillas This post originally appeared on NAI Capital's Featured Insights and is republished with permission. Learn how to submit your blog to theBrokerList.
Q2 2024: Amid high interest rates, vacancy rates rise, rents and sales prices fall, while rents and retail sales prices rise in the multifamily sector despite rising vacancy rates
The largest mixed-use apartment complex under construction has been completed at 5420 Sunset Blvd in Hollywood, California, with 735 units and 95,000 square feet of retail space.
July 2024 | JC Casillas, Managing Director of Research and Public Relations, NAI Capital Commercial
Los Angeles County's commercial real estate market slowed in the first half of 2024, with the summer slowdown causing rising vacancy rates and falling rents and sales prices. However, multifamily rents surged quarter-over-quarter and compared to the second half of last year. Average sales prices also increased in retail, but average office asking rents resisted the market's downward trend amid a sluggish office market.
The Federal Reserve has kept interest rates at a 23-year high for nearly a year since beginning its aggressive rate-hiking campaign in March 2022. The resilience of the economy has forced the Fed to keep interest rates high while awaiting further evidence that inflation is heading toward 2%. Price pressures appear to be easing as the Fed seeks to contain inflation by keeping interest rates high again this year. In response, demand for commercial real estate continues to decline markedly in the second quarter of 2024. High interest rates suppress demand by raising borrowing costs for businesses and consumers, a measure aimed at containing inflation by slowing spending across the economy.
housing complex
Los Angeles County's multifamily vacancy rate rose 10 basis points quarter-over-quarter and 20 basis points year-over-year to 4.9% in the second quarter as an increase in new home construction of approximately 6,300 units year-to-date drove up the vacancy rate.
New construction, primarily at the higher end of the market, continued to drive up the average asking rent per unit this quarter. Average rents increased again after a slight decline late last year, increasing 0.4 percentage points quarter-over-quarter and 0.6 percentage points year-over-year as 4,581 units were occupied over the past two quarters. The average asking rent of $2,203 per month returned to a new record high for the average multifamily unit in Los Angeles County.
While rents are at record highs, construction costs, fears of an economic slowdown, rising interest rates and declining rent growth are impacting multifamily investment. Additionally, the one-year-old ULA tax is negatively impacting sales. Year-to-date sales volume is down 29.3% from last year to $2.2 billion, the average sales price per unit is down 5.1% to $278,889 and the number of units sold is down 1.9% over the same period.
retail
Retail's return to brick-and-mortar stores has remained challenging. Store cuts as bankruptcies continue to impact some retailers have driven vacancy rates up to 5.7% in the second quarter, up 20 basis points quarter-over-quarter and year-over-year. Average asking rents in the second quarter were flat from the previous quarter at $3.11 triple net per square foot. Average asking rents were up 3.7% from last year, but leasing volume was down 9.7% year-to-date, totaling nearly 3 million square feet.
Despite retailers retreating from prime locations, retail real estate investors are finding opportunity. The average sales price per square foot is $554, up 34.9% from last quarter and 66.5% from last year. However, sales volume so far this year is down 41.4% from last year, totaling just over 2.3 million square feet. Interest rates are impacting sales, but investors are still looking to acquire prime retail locations and are willing to pay a premium.
office
The market for office space remains weak. As companies continue to reduce excess space, vacancy rates increased to 16.9% in the second quarter, up 20 basis points from the previous quarter and 150 basis points from Q2 2023. Average asking rents increased 1 cent, remaining essentially flat from the previous quarter and up 4 cents from the past four quarters to $3.47 per square foot for full-service totals in Q2 2024. High asking rents continue to impact leasing volumes, which are down 16.1% year-to-date, totaling approximately 7.8 million square feet.
The availability of office space offered for sublease has increased steadily, with more than 12.1 million square feet of sublease space on the market by the end of the second quarter, up 5.6% quarter-over-quarter and 5.8% year-over-year. Space available for sublease has surged 103% since the second quarter of 2020 following pandemic closures. As office space utilization continues to slow across the office market, the amount of available office space on offer remains high, at a record high of 78 million square feet.
Weak rental demand for office space led to more office buildings being sold in the second quarter, with distressed buildings being sold off. However, office building sales volume was down 70.3% year-to-date to just over 2.9 million square feet, and the average sales price was down 38.0% from Q2 2023 to $330 per square foot.
industry
Vacancy rates for industrial space reached 5.3% in Q2 2024, up 50 basis points from the previous quarter and 160 basis points from the second quarter of last year. Average asking rents have declined for the fourth consecutive quarter, down 7.9% quarter-over-quarter. Average asking rents for the quarter were $1.52 triple net per square foot, 15.6% below last year's levels. Leasing volume also decreased 6.0% year-to-date, totaling approximately 17.4 million square feet.
An increase in vacant industrial space provided more options for tenants in mid-2024, but rising prices and interest rates slowed industrial building sales. Sales volume was down 67.0% quarter-over-quarter and 33.5% year-over-year, totaling approximately 6.6 million square feet at the end of Q2 2024. The average sales price per square foot was down 2.5% quarter-over-quarter to $324, 10.1% above last year's level.
Economic conditions have caused a shift in the second quarter of 2024. As the Federal Reserve fights inflation by keeping interest rates high, increasing borrowing costs are creating challenges for commercial real estate. The Los Angeles County commercial real estate market is under continued pressure to adapt to these changes, which is impacting property values.
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