What Is the Future of Commercial Real Estate Post COVID?

As we are now over two years since the first lockdowns in March, 2020, the commercial real estate community remains in a state of flux and uncertainty.

As everyone who deals with Commercial Real Estate knows, while there were changes occurring between office, industrial, and retail prior to the commencement of the COVID lockdowns the Pandemic has clearly stirred the well and created not only realignment, but also uncertainty.

A recent presentation of the Santa Clarita Valley Market by Craig Peters of CBRE, Jim Backer of JSB Development and Dale Donohoe of Intertex provides some useful data for the Commercial Real Estate Market.

The one aspect of Commercial Real Estate which has boomed since the Pandemic is Industrial. The bottom line is there is practically speaking no vacancy in North LA County and the San Fernando Valley. In Santa Clarita the vacancy rate is at .17%, in theSan Fernando Valley 1.1% and in the Antelope Valley 1.0%. In Santa Clarita in fact the vacancy rate has been quite low for the past decade and peaked between 4 and 5%in 2018. While at the beginning of the Pandemic there was an increase again to over 5% it has steadily decreased since 2021 to its current level of .17%. With the lack of property to lease, the lease rates have increased by almost 100% and Sales Price between 40 and 50%. This has occurred while some new projects have been developed and put on the market. These new projects include the Center at Needham Ranch near Eternal Valley, Saugus Station in north Newhall, Southern California Innovation Park at the former Mann Facility in Valencia, and the continued buildout of Valencia Commerce Center in unincorporated Los Angeles County.

There is some future Development on the horizon, but they are a significant number of years in the future. These would include the Whittaker Bermite 998 acres in the middle of the City and a proposal in Los Angeles County for use of excess Honor Rancho property in Castaic.

The Office market has a 13.21% vacancy rate and is basically stagnate with lease rates and sales prices. There has been some increase in activity and the vacancy rate may continue to grow. The uncertainty of when, or if, workers will return on a regular basis back to offices remains which will continue to impact the need for a company to either keep its current office size, or decrease it. We have also seen stories of workers not being allowed to continue to work remotely leaving for companies which provide that flexibility. This situation will continue to evolve in the next several years. In spite of the uncertainty in the Office Sector, some of the hot spots are in planned mixed use communities like Vista Canyon and expansion of Medical Office. One of the trends in medical office is for the offices to be sold as office condominiums and not leased. This was recently done successfully at Orchard Village Medical Center, the former site of the Viewpoint School.

There has been a lot of discussion during the Pandemic about the shift of Retail to the Amazon mode of purchasing and that as we have known it is dying and will be converted to other uses. There have event been efforts in Sacramento to pass legislation making it easier for property owners to convert Retail properties to other uses including housing (to help meet the housing deficit) without having to go through the usual changes to the General Plan and or Zoning. While these discussions have continued, the vacancy rate is really not that bad. It is 4.9% in Santa Clarita less that LA County rate of 5.5%.

So what uses are in our retail centers? They are being driven by things you need everyday, such as Markets, Drug Stores, health/beauty and restaurants/food outlets. Some newer Centers like Plum Canyon are fully leased, but some existing centers like the CVS on Orchard Village continue to face challenges in leasing out the center after the departure of Ralphs years ago. To use an old quote “The rumors of the death of retail centers has been greatly exaggerated (thank you Mark Twain!)”

However, the future of retail malls remains very uncertain. In Santa Clarita Westfield’s Valencia Town Center decided not to proceed with its approved expansion adding a large COSTCO, upgraded movie theatres and a upscale gym. Now it appears that all of the US Westfield Properties are on the market to be sold creating even for retail malls such as Valencia Town Center.

However, a major bright spot in local commercial development is Film/TV Studios. The Santa Clarita Valley is currently home to 56 Sound Stages with an additional 34 under construction. Another 24 stages are being processed for planning approval, including the Blackhall Full Purpose Studio north of 13^th Street in Newhall which this firm is representing. In addition, we have numerous Movie Ranches throughout the Santa Clarita Valley which allow for a great deal of location filming. Santa Clarita Valley is becoming known as Hollywood North.

Finally, owners of commercial property are now facing the reality that the various commercial eviction moratoriums have been lifted and they can once again try to evict tenants for nonpayment. However, the time for a tenant to repay past due rent depends on the jurisdiction the property is in. In addition, with the demand lagging in Office and Retail, we continue to recommend that landlords and property owners continue to try and work with their tenants to lessen their uncertainty. Our firm remains available to advise clients in all of these areas of development, entitlement and commercial leasing.

Has we move back into a full economy, Landlords and Property Owners need to continue to be aware of the changing Commercial Real Estate Market and the efforts from Sacramento and local jurisdictions to change how their properties can be utilized.