As we enter 2025, I am thinking a lot about what’s ahead for the retail commercial real estate market. The market is far too complicated to make specific predictions so instead I will share where we are as of January 1, 2025 and what variables I will be paying most attention to as we move throughout the year.
While Progressive Real Estate Partners also serves eastern San Gabriel Valley and North Orange County, our primary market is the Inland Empire (San Bernardino and Riverside counties combined). For clarity purposes the figures I’m sharing here are specific to the Inland Empire.
Employment & Unemployment (Source: CA Employment Development Department)
The Inland Empire’s unemployment rate as of November 2024 is 5.3% while a year ago it was 5.1%. Despite the higher rate, the total number of jobs in the Inland Empire is 1,740,900 which is an increase of 27,300 jobs over the prior 12 months. The biggest winners in terms of job growth include health services, local government, and trade/transportation/utilities. The biggest losers were manufacturing and construction.
From my perspective this is not positive news. Health services and local government do not have much of a multiplier effect compared to manufacturing, professional/business services, and leisure/hospitality which frequently take dollars from other parts of the state and country and bring them to the region.
It is worth noting that the Inland Empire’s total civilian labor force is 2,195,000. It is my understanding, the difference between 2,195,000 and 1,740,900 (454,100) represents the net number of those who live in the Inland Empire, but work in Los Angeles, Orange, or San Diego Counties. This helps explain all the red lights on the freeway at 5PM.
From a retail perspective, notably the largest loss of employment in the past 12 months across ALL categories is in the health and personal care retailer category (aka drug stores closures) which was down 7.9%.
Housing Market (Source: IE Board of Real Estate, CA Association of Realtors)
For the year ending 2024, approximately 28,500 homes will have sold. Although a little higher than 2023, this is down from about 41,000 in 2021. Furthermore, from 2015 to 2021, the sales averaged about 37,000/year. Home sales are hugely beneficial to the retail marketplace as they spur furniture, home improvement, appliance, electronics sales, and more.
Home prices continue to increase. In November 2024, the median home price was $510,000 in San Bernardino County representing a 12.1% increase from 2023 and $628,000 in Riverside County representing a 2.9% increase from 2023. This is relatively positive news, as rising equity builds consumer confidence which benefits retail sales.
Retail Sales (Source: CA Department Of Tax & Fee Administration)
The latest data shows that retail sales have been declining slightly in Riverside County and San Bernardino County is more of a mixed picture. Riverside County’s retail sales declined by 1.26% for the year ending December 31, 2023. This was after phenomenal growth of 31% in 2021 and 11.85% in 2022. Then in the first 3 quarters of 2024, decreases have been .36%, 1.88% and 3.97% respectively over the 2023 figures.
San Bernardino County saw a decrease of 3.42% in 2023 compared to 2022. Growth in 2022 was 8.3% and 2021 was 28%. The first 3 quarters of 2024 were more mixed. The 1st quarter saw an increase of 2.6% followed by decreases of .10% and .52% respectively.
I am certainly quite curious to see 4th quarter 2024 results.
Overall, the softening of retail sales likely reflects the elimination of stimulus checks, higher interest costs, the repayment of student loans, and other items that are decreasing discretionary income.
The Retail Real Estate Market (Source: Costar)
Here are the quick facts:
- Vacancy is 6.04% compared to a low of 5.3% in the 4th quarter of 2023 and a high of 7.8% in the 4th quarter of 2020.
- Asking Rent per square foot across all retail was $1.84/SF which is down from $1.88/SF a year ago, but is 20% higher than the 2nd quarter of 2020.
- Net Absorption over the past 12 months is negative 907,294 SF. Every quarter in 2024 experienced negative absorption with the 2nd quarter being the worst due to the 99 Cent Only bankruptcy. It will be interesting to see if this trend continues into 2025.
- New Construction Delivered was 632,283 SF which is the lowest of the past decade, but considering that the highest was 1.8M in 2018, the amount is not very consequential when you have a base of approximately 200M square feet across the two counties.
- Cap Rates across all retail was 6.25% reflecting the highest average cap rates across all product type in the past 10 years and up about 1% from the record low 5.22% recorded in mid-2022.
- Sales Volume was $1.186B which was slightly lower than 2023. It was 22% less than the last 10-year average and off 45% from 2022’s $2.146B.
What I Am Watching in 2025
There are certainly plenty of other metrics, but the above tend to be the ones I most frequently monitor. In addition to these metrics, I will also be watching these variables in 2025:
Industrial Development: Industrial development is an indicator of industrial job growth. Furthermore, industrial construction creates many jobs. Currently there are 13.2M square feet under construction. That number is massive, but when you realize that a year ago it was 30.9M you quickly realize the economic impact of industrial development on the region.
Short Term & Long Term Interest Rates: Short term rates affect items like construction loans, home equity lines of credit, auto loans, and working capital loans. The more the Fed reduces short term rates, the more these economic boosters will improve the economy. Long term rates most affect people wanting to buy homes, investors wanting to buy commercial real estate, and companies that want to borrow or refinance their corporate debt.
Immigration & Deportations: Immigration is an important contributor to California’s growth both along the coasts and inland. Stricter legal immigration policies will likely have a negative affect on California. California needs people from throughout the world to continue to grow. Deportations of illegal immigrants will have a negative affect on the Inland Empire. There is plenty of reason to believe that the IE has more than its share of illegal immigrants. I have no idea how many, if any, will be deported, but if they are our region will suffer. It will remove population, a labor force, buying power and more.
Effects of the Increased Restaurant Minimum Wage: It has been about 9 months since fast food restaurant workers received the wage increase from $15.50/hour to $20/hour. I do not think the results of this wage increase have been fully baked into the industry. I think there are far more restaurants that are teetering than the vacancy reflects. It is clear to me that technology is becoming more important to all retail and restaurant operations as evidenced by the increase in self-checkout and the trend towards online ordering for in store pick up.
Tax Policy: The expiration of the 2017 tax act and the negotiations that will ensue under the new administration will involve a lot of issues that may affect the commercial real estate industry directly and then indirectly through shifts in economic winners and losers.
Inflation Policies: I will be paying close attention to both the inflation figures and those policies that affect inflation. So far, there is very little that I am hearing out of the new administration that leads me to believe that their policies will not contribute to more inflation. Tariffs, reduced immigration, potential deportations, more spending with less taxes, are all inflationary and I will be watching carefully.
Stock Market: Over the past 2 years, it was difficult for commercial real estate to compete with both a booming stock market and high yields on cash. The direction of the stock market along with the yield on cash will impact the flow of capital to CRE.
Homelessness: Retail property owners are tired of having to protect their properties from homeless individuals. This is a very big and complicated issue, but clearly cities that can provide properties owners with protection against homeless people interfering with their retailers and customers will attract and keep more of their retail.
I look at 2025 with a great bit of uncertainty. Please note that I said uncertainty and not trepidation. I think there are more factors affecting the direction of the commercial real estate markets than usual as we enter this year.
As always, I enjoy your feedback. You can reach me at brad@progressiverep.com.
I wish you a great 2025!