Q3 2013 San Fernando Valley Office & Industrial Market Report

Leasing Activity Takes a Breather and Fundamentals Show Marked Improvement  

Leasing activity fell back a bit as the office market absorbed the considerable space leased over the last four quarters. A total of 898,773 square feet of office space was leased, down 22 percent from the prior period and off roughly by the same amount compared to the year-ago period.

You might say it was bound to happen as the market absorbed nearly 2.7 million of square feet leased in the first half of the year. Indeed, vacancy rates fell to 16.7 percent in the quarter, down from 17.4 percent in the second quarter and 17.3 percent in the year-ago period. Even Warner Center, among the slowest submarkets to recover due to its relatively large inventory and its traditional tenant base of financial services firms, which were hardest hit in the recession, has seen its vacancy levels plummet. Last year at this time Warner Center’s vacancy rate was 17.3 percent, and as of the current quarter it stands at 13.8 percent.

As might be expected given the strong leasing activity for the better part of the year, absorption improved considerably in the quarter. A net 370,300 square feet of space was absorbed in the quarter, compared to negative 18,700 square feet in the second quarter and negative 40,200 square feet in the year ago period.

Asking lease rates rose to $2.27 per square foot from $2.23 per square foot in the prior quarter and $2.21 per square foot in the year ago period. It is the highest lease rate we’ve seen in the LA North market in six quarters. Although rates are still off dramatically from the high of $2.72 per square foot at the height of the last real estate cycle, there are some markets and buildings, especially in the Sherman Oaks submarket and some areas of Burbank that have pushed into the $3.00 per square foot range.

Only seven office buildings were sold in the quarter, however, on a year-to-date basis, the number of building sales so far in 2013 is ahead of the number sold in all of 2012, and median sale prices jumped dramatically. The median price of buildings sold in the quarter was $232 per square foot, 27 percent higher than last quarter’s $183 per square foot and a 23 percent increase over the year ago period.

Economy at a Glance

BUDGET: Bank of America Merrill Lynch sliced its domestic growth forecast for Q4 to 2 percent from 2.5 percent because of the government shutdown, according to a report in Bloomberg News. One example: Grant Thornton LLP put 120 of its 600 federal contract employees on hiatus, and said the shutdown was costing $500,000 a week because it continued to pay those workers without getting paid by the government.

SMALL BUSINESS: Revenue at companies with less than $10 million in sales increased 8 percent annually in the past two years, but the pace slowed by 2 percent so far in 2013, according to data from Sageworks reported in BusinessWeek.

HOLIDAY: A National Retail Federation poll found almost 80 percent expect to spend less during the coming holiday season. Respondents plan to spend $737.95 on gifts, décor and other holiday purchases, off 3 percent from last year when they shelled out $752.24, according to a story in the Los Angeles Times.

OBAMACARE: California’s new insurance exchange received 95,000 applications for health insurance in the first two weeks of open enrollment, according to a report in the Los Angeles Times.

RETIREMENT: A poll of American workers aged 50 and above by the Associates Press-NORC Center for Public Affairs Research found four in five plan to keep working during their latter years, the Los Angeles Times reported. The results indicate that traditional retirement is out of reach for many, the survey found.

Activity Surges, Driving Vacancy Levels Down And Lease Rates Up

A flurry of leasing activity in the third quarter drove up absorption rates and pushed vacancy rates down as the industrial market continues to show resiliency and strength.

Nearly 1.5 million square feet of industrial leases were transacted in the quarter, a 32 percent increase over the prior period when about 1.1 million square feet of space was leased, but somewhat less than the 1.8 million square feet of leases signed in the comparable period a year ago.

The activity pushed vacancy levels down 30 basis points to 4.4 percent from 4.7 percent in the prior quarter and absorption has vastly improved, compared to the prior quarter as well as the year-ago period.

Nearly 387,000 square feet of space was absorbed in the quarter, up from negative 77,000 square feet in Q2 and up dramatically from the third quarter of 2012 when 230,000 fewer square feet were leased than were vacated in the region.

The continued strengthening of the market is slowly pushing lease rates up. The average direct asking rate was $0.62 per square foot in Q3, up from $0.60 per square foot in Q2 and Q3 2012. Currently rates are at their highest levels since the fourth quarter of 2009, and the increases are even more dramatic in smaller size ranges. The average lease rate for buildings in the 5,000 – 10,000 square foot range was $0.72 in the quarter, and it was $0.66 per square foot for buildings ranging from 10,000 square feet to 20,000 square feet.

With a limited inventory supply, we are seeing more owners opt to purchase their facilities as a way to ensure that they have the space they need for their operations, control costs and avoid costly relocation, and industrial building sales have been brisk as a result.

A total of 25 industrial buildings were sold in the quarter at a median price of $119 per square foot, the highest per square foot price registered for industrial buildings in the region since Q2 2009. Although the number of building sales was down from the prior period, when 34 industrial buildings changed hands, the data indicate that fewer distressed sales are taking place. Only one of the sales that took place in the current quarter was an REO, compared with the prior quarter when 17 percent of the building sales were distressed assets.

Economy at a Glance

BUDGET: Bank of America Merrill Lynch sliced its domestic growth forecast for Q4 to 2 percent from 2.5 percent because of the government shutdown, according to a report in Bloomberg News. One example: Grant Thornton LLP put 120 of its 600 federal contract employees on hiatus, and said the shutdown was costing $500,000 a week because it continued to pay those workers without getting paid by the government.

HALLOWEEN: Nearly 66 percent of adults celebrate Halloween, resulting in some $6.9 billion in sales, according to a survey by the National Retail Federation reported in BusinessWeek.

E-COMMERCE: U.S. spending by online shoppers reached $290 billion in 2012, and is expected to reach $500 billion by 2020. The growth is creating dramatic changes in the way industrial warehouse space is used and configured, according to a report from DHL Supply Chain, said National Real Estate Investor. Although retailers are still looking for the right formula, strategies include building smaller regional warehouse centers and converting a portion of retail stores to fulfillment centers.

SMALL BUSINESS: Revenue at companies with less than $10 million in sales increased 8 percent annually in the past two years, but the pace has slowed in 2013, according to data from Sageworks reported in BusinessWeek. Sageworks found sales at these companies are running 2 percent less so far in 2013.