Across the United States in 2019, commercial real estate was considered a safe and reliable investment for developers and businesses seeking to grow their enterprises in business districts. However, the trend has sharply reversed in 2023, and now commercial real estate is considered a much riskier endeavor for builders and investors, as the return to office trend has tapered out and many companies are staying out of the Financial Core here in Los Angeles.
Now, it is important for developers and commercial landlords to reconsider their holdings and prospective projects, taking into account the new reality and adapting to these new challenges.
The landscape has changed for commercial real estate
There are few historic shifts in real estate that can compare with what has happened in commercial real estate over the last three years. Last month, Los Angeles’s Downtown hit a record of 30% vacancy rate for commercial real estate as many employers continue to use work-from-home models, and the value of the LA commercial real estate market has dropped nearly 40% in the past three years.
How developers and landowners respond to these challenges is important, and there are several options that can be explored to help combat this trend.
The best option for property owners with high vacancy rates is to reinvest in the property, updating the facilities and amenities to create a more desirable property for commercial renters still in the market. New, and recently renovated properties are still performing well in most markets, and this can help turn the trend around for individual owners.
Another option that commercial landowners can pursue is to retrofit their properties to attract a different type of client. Many office jobs are still remaining on the sidelines of the commercial market, so retrofitting the property into a flexible work environment may be a good opportunity to capture a growing market of commercial renters.
In some cases, a drastic change may be necessary to reinvigorate growth, and for that, a complete remodel of the building for a different purpose such as residential use may be appropriate. While not possible in all areas due to zoning and land use restrictions, it can open up an entirely new field of renters for the commercial landowner to target.