Los Angeles Wildfires Disaster to Reshape CRE Landscape

While the Los Angeles wildfires earlier this year primarily impacted residential structures, the rebuilding effort is likely to have broad impacts on the commercial real estate industry, according to a JLL analysis of the disaster’s impact.

With low-end cost estimates of $250 billion, the wildfires will almost certainly exceed Hurricane Katrina’s adjusted cost of $201 billion, making it the costliest disaster in U.S. history. The fires burned nearly 40,000 acres of land, damaged or destroyed nearly 11,000 single-family homes, and displaced 24,000 families. The fires also destroyed 97 schools and 15 churches.

Residential was the primary sector impacted by the fires, with some communities losing half of their housing stock. Less than 400 multifamily structures were destroyed, but more than 40,000 units were in the fire evacuation zones.

These losses add to Southern California’s housing shortage and will drive local rents up in the near term as demand increases for single-family rentals during the coming rebuilding phase. Income levels and household size of displaced residents will likely result in a trickle-down demand dynamic where households with the highest incomes will absorb the single-family rentals first, pushing others to multi-housing, the report said. In addition, JLL found an increase in demand for ultra-luxury space following the fires, with occupancy increasing 10.3 percentage points in five major high-luxury multi-housing buildings in West Los Angeles.

Meanwhile, commercial real estate structures were largely spared, although about 2% of the structures destroyed by the fires were CRE buildings, including about 200 structures that housed primarily retail and food & beverage establishments. About 34% of the retail space in the Palisades and Eaton fire areas was destroyed, including locations in the upscale Palisades Village, along Sunset Boulevard, and the Lake Avenue and Fair Oaks areas.

Remaining retailers may see increased demand for goods supporting replacement and rebuilding in the area, including home centers, hardware stores and appliance retailers, at the expense of food & beverage and entertainment establishments. Over the long-term, mixed-use developments may prove useful in replacing retail space and alleviating housing shortages in the area, said JLL.

L.A.’s office inventory suffered little damage during the fires and overall headwinds are expected to be minimal, however the entertainment industry, which is still recovering from the 2023 strikes, is likely to experience some drag.

“Potential return to office gains from displaced hybrid workers will remain marginal,” said JLL. “It will be a while before we see where impacted workers will migrate to.”

Demand for industrial space is expected to increase during the rebuilding phase. An estimated 200 million board feet of lumber may be required to rebuild damaged and destroyed structures, which will meaningfully increase demand for industrial outdoor storage and warehouse space. Industrial vacancies are expected to drop as replacement items, including furniture and day-to-day necessities, move into the area.

In addition, demand for construction labor and materials during rebuilding will add cost pressure, which will result in higher replacement costs for CRE across the board. This could make existing buildings more attractive to investors, said JLL.