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Less office space, more e-commerce warehouses: Lockdown continues to dictate real estate market

Trucks make their way through the narrow streets of the industrial part of West Long Beach near the Port of Long Beach Thursday, February 18, 2021.Photo by Thomas R. Cordova.

Despite the ongoing vaccination effort and subsequent reopenings currently underway in Long Beach, the local real estate market is still operating under the cloud of COVID-19.

The demand for office space is low, as many companies continue their work-from-home policies, in turn driving up demand in the residential market as stuck-at-home workers grow tired of the four walls they’ve been surrounded by for almost a year or require more room for a home office.

As those stuck at home order apparel, tech gadgets and even groceries online, an uptick in e-commerce has kept the industrial sector flourishing, while the rest of the commercial real estate market has suffered.

Industrial

The industrial sector is “the darling in the market right now,” said Robert Garey, senior director at Cushman & Wakefield in Long Beach.

Vacancy rates in the South Bay and ports region are still at record lows, despite a slight uptick over the past year, with Lee & Associates reporting a vacancy rate of only 1.7% for the last quarter of 2020.

Most companies leasing industrial spaces have remained in operation throughout the pandemic, with some experiencing significant growth as a result of the e-commerce boom.

“The vitality of the tenants is by far the strongest,” said John Eddy, executive vice president at Coldwell Banker Commercial BLAIR WESTMAC. “Many have actually flourished.”

But, Eddy pointed out, there’s a cap on growth in this subsector in the Long Beach area because of the scarcity of land on which new industrial property can be developed.

“The South Bay is really hamstrung from a growth standpoint,” Eddy said.

The limited inventory and high demand for warehouses, distribution centers and other industrial properties near the nation’s largest port complex has kept vacancies low and demand high, experts say.

Retail

The yin to industrial real estate’s yang is found in the retail sector, where a move to online shopping and mandated closures has many businesses struggling—causing more inventory to come online and less demand to absorb it.

“The transaction flow is pretty darn anemic for now,” said Toliver Morris, CEO of Morris Williams Commercial, which holds over 500,000 listings in the Long Beach area.

But the reopening of outdoor dining and the upcoming spring and summer seasons provide a glimmer of hope that is reflected in a slight uptick in inquiries for restaurant spaces, Morris said.

“We’re starting to see sprouts,” he said.

The growth, he noted, will likely happen in properties that are already set up for gastronomy use, many of which have become vacant as the economic pressure of the pandemic became too much for their previous occupants to bear.

“Existing infrastructure spaces are getting lots of attention,” Morris said. Spaces that need a lot of upfront investment—not so much.

“The savvy restaurateurs have had a rough year,” he noted. “They’re dealing with their existing locations.”

Instead, the market offers opportunities for those hoping to try out new concepts, without putting up the money to build out a restaurant from scratch.

The site of the now-shuttered Rock Bottom Brewery as well as the former BurgerIM location in Downtown Long Beach are examples of sites that have generated some interest, according to Morris.

Because of the sheer volume of small retail spaces—many of them owned by independent landlords—it’s difficult to find comprehensive data on the status of the retail real estate market in Long Beach, Morris said.

According to Colliers’ reports on the retail real estate market in the Los Angeles basin, vacancy rates saw the widest increases of the past three years during the pandemic, reaching a 6.2% vacancy rate for the Greater LA region in the second quarter of 2020.

Since then, vacancy rates have slowly decreased again, coming in at 5.9% in the third quarter of the year, the last published by the real estate brokerage and investment management firm.

Brick-and-mortar, non-restaurant retail will remain in a tough spot, as it has been for years, Morris projected.

“It’s difficult for the small retailers to succeed right now,” he said. “Some of these guys—they just got absorbed by the internet.”

The overall vacancy for office space in downtown Long Beach increased from 19.5% at the end of 2019 to 22.1% at the end of 2020, according to reports by Cushman & Wakefield. Photo by Brandon Richardson.

Office

The future of office space, another problem child of the commercial real estate market during the pandemic, remains uncertain.

For the time being, the numbers reflect a fear among companies to commit to additional office space in Downtown and suburban Long Beach.

Lease rates have remained stable at $2.52 and $2.61 per square foot, with landlords offering other perks such as rent-free months or improvement allowances instead of lowering the asking rent, according to Dave Smith, senior vice president at CBRE’s South Bay office.

Net absorption for both Long Beach submarkets, however, reflects the low interest in office space at the moment. Both the downtown and suburban market have seen negative net absorption last quarter, at -8,924 and -26,866, respectively, according to CBRE.

How this submarket will fare in the future will depend largely on whether companies will continue remote work policies beyond the restrictions of the pandemic.

“Those who have found that they no longer need a traditional office space are looking to either downsize or get rid of their office space,” Eddy said.

Further, many companies have spent significant amounts of money to make sure their employees were equipped with the right technology and furniture to work from home. “They’re invested in the home office now,” he added.

Garey, of Cushman & Wakefield, projected that the office market will bounce back, albeit with some changes. “I don’t think that office is dead,” he said.

But, companies are likely to reimagine and possibly cut down on their office space, turning it into a space where company culture is created, maintained and passed on, Garey said.

“Companies have cultures and those cultures need to be nourished,” he said, something that will be especially relevant for new hires. “You can’t learn the culture working remotely.”

Residential

Whether remote working arrangements prevail on a large scale will also have an impact on the residential real estate market, said Phil Jones, managing partner at Coldwell Banker Coastal Alliance.

Some homebuyers, with the anticipation of working from home moving forward, have set their sights toward the mountain ranges and beyond. More affordable markets outside of LA County, where single-family homes currently fetch an average price of $709,500 according to the California Association of Realtors, have become even more attractive to buyers as a result of the pandemic.

“People being sheltered at home, working from home, realized that the home wasn’t enough for them,” Jones said. In search of a better deal, some are heading east, to the Inland Empire for example. “You’ll start seeing a flight to more affordable housing areas, out of the coastal cities,” Jones said.

But the sheer lack of inventory means the local market for single-family homes has remained as hot as ever, with a single listing attracting 20-30 offers, Jones said. As of Feb. 15, there were 247 single-family homes and 250 condominiums on the market in Long Beach, a number that is subject to fast-paced change, as the average home currently spends only 10 days on the market.

The year-over-year development in home prices reported by the state’s Realtors association is equally indicative of demand—buyers in December 2020 paid an average 10.6% more for their home than they did the previous year.

And high prices didn’t slow down sales in LA County either—or anywhere in Southern California. Sales in the LA area were up 30.5% year-over-year, second only to the 39% increase in home sales in Riverside County.

The competitiveness of the market favors wealthier buyers who are able to make concessions, such as allowing the previous owner to stay in the home rent-free for a while or waiving appraisals meant to protect their financial interests.

“It’s that competitive,” Jones said. “It’s not a buyer’s market by any stretch of the imagination.”

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