Investors are relishing the prospect of investing in commercial real estate (CRE) in Los Angeles, one of the most active and attractive markets in the world. While the tech surge is primarily associated with the Bay Area, Southern California has experienced a tech boom of its own, with plenty of Silicon Valley companies opening offices in Los Angeles and the greater Los Angeles area, while other startups are opting to open their doors in the City of Angels over San Francisco.
Los Angeles is now the second most active global CRE investment market in the world, behind only London. The California hub recently overtook New York in the world rankings, reaching $22.9 billion in transactions in 2017 alone. Despite the fact that real estate prices are on the rise in Los Angeles, the city is still relatively affordable compared to London and New York.
Office & industrial property markets are thriving in LA
In addition to the strength and size of its local economy, Los Angeles has benefited from national trends that are contributing to the overall strength of the CRE space, including recent tax reform, a healthy gross domestic product and continued job growth. These factors have helped create a bullish CRE investing environment in Los Angeles and Orange County over the coming years, according to the latest Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey.
In particular, the panel is especially optimistic about office, multifamily and industrial locations in Orange County. And, as more gaming and tech jobs become available in Los Angeles, demand for office is expected to remain robust for years to come. The city’s local office market rebounded following a slight drop two years ago.
Orange County’s strengths come from its diverse mixture of jobs that are slated to boost demand and increase rental rates, while vacancy rates are projected to fall by 2020. The industrial sector will benefit greatly from this trend thanks to the rise of imports from Asia, as well as the e-commerce explosion that requires warehouses.
Also, California remains a safe haven for foreign investors as tech along brings in billions of dollars in foreign investment each year. The CBRE’s most recent Global Investors Intentions Survey ranked Los Angeles as the number one city in the world in anticipated foreign CRE investment.
The legalization of marijuana is also making waves in the City of Angels as the industry will have a massive impact on industrial warehouse spaces. Since the November 2016 bill that legalized marijuana in the city passed, there’s been a higher demand for bare land zoned for industrial use, driving the price of such land from $50,000 to $300,000 per acre.
Not everything is sunny is SoCo as retail may not be the best investing option in the near future. The rise of e-commerce and the abundant retail supply is taking a toll in the industry as traditional retail malls are adjusting their sails to attract more visitors with more restaurants, entertainment and experiential opportunities for consumers.
Can supply meet demand?
What ultimately makes Los Angeles so attractive in the CRE space is how diverse its investor activity is as the industrial sector comprised 30% of flows in 2017, while retail made up 17% and hotels 6%. Office investment was especially strong then, amounting to 47% of the total flows, but this boom has resulted in a low number of office opportunities compared to the city’s high CRE investment demand.
Moving forward, this lack of supply will pose a challenge for Los Angeles investors. There’s an abundance of capital in the city, but only a limited amount of new offerings. Nevertheless, investors will still flock to Los Angeles in search for easy money amidst a time of record-setting prices. The Westside alone has seen prices in some locations sell for more than $1,200 per square foot.
The threat of inflation is real as wages continue to rise and unemployment declines, which could take a toll in Los Angeles’ economic growth. Nevertheless, the city’s transaction volumes are still expected to expand, inviting more investors to consider the SoCo city as an attractive CRE investment opportunity.