Q2 2015 San Fernando Valley Office and Industrial Market Report

Office Market Recovery Strengthens for Leasing as Sale Prices Near Pre-Recession Levels

If the numbers for the second quarter are any indication, the Los Angeles office market recovery appears to be right on schedule. Fundamentals improved across the board in the quarter, and just as important, the data shows a consistent upward trend unbroken over more than four quarters.

Vacancies fell to 13.9 percent versus an adjusted 14.1 percent in the prior quarter and a 90 basis point (bps) improvement from the year ago period. The current quarter marks the first time vacancies, which have trended downward consistently since 2010, fell below 14 percent since Q4 2008.

On a net basis, 193,000 sf of space was leased in the quarter, a 135 percent improvement over the Q1 when 82,226 sf of office space was leased on a net basis.

Strong leasing activity is driving these improvements. In Q2, 1,238,378 sf of office space was leased, up from 976,350 sf of leasing in Q1 and bringing leasing volume for the first half of the year to 2,214,728 sf. With the exception of the first quarter of 2015 and the fourth quarter of 2014, leasing activity has exceeded 1 million sf in every quarter since Q1 2012.

As might be expected, the strong fundamentals have driven up lease rates, which in the current quarter rose by $0.03 to $2.28 per sf vs. $2.25 per sf in Q1.

Sales activity has been equally strong, and the median price of office buildings sold to date in 2015 reached $244 per sf, the highest since 2008 when the median price was $256 per sf.

There were 22 office building sales in Q2 achieving a median sale price of $235 per sf, somewhat less than the $245 per sf sale price in Q1 but an increase of 30 percent over the year-ago period when the median price of buildings sold was $181 per sf.

More office square footage is under construction than at any time in recent memory, thanks largely to 285,000 square feet of office space that has come out of the ground at The Village at Westfield Topanga and a 118,000-square-foot medical office building underway in Tarzana.

Industrial Lease Rates Now Just $0.04 PSF Off Pre- Recession Highs as Market Remains Exceedingly Tight

Lease rates continued to climb in the sec­ond quarter amidst strong leasing activity and exceedingly low vacancy rates.

The average asking lease rate for industrial properties rose another penny to $0.70 per square foot compared to Q1 and $0.06 per square foot compared to the year-ago pe­riod. Average lease rates are now as high as the market has seen since Q4 2008 and just $0.04 off the pre-recession high of $0.74 reached in Q3 2007.

The upswing in lease rates is no surprise considering that we have now seen sub- 3 percent vacancy levels for the past five quarters. In the current quarter, the vacancy rate measured 2.4 percent, 10 basis points (bps) above the 2.3 percent vacancy rate in Q1 and 50 bps below vacancy levels in the year-ago period. The slight uptick in no way indicates a change in the headwinds for the industrial sector as evidenced by continued strong leasing activity.

For the current quarter, 1,377,822 square feet of industrial space was leased in the region, 330,000 square feet more than the prior quarter. While the current level of leas­ing activity is below the 1,837,454 square feet leased in the year-ago period, the de­cline is understandably attributable to the sheer scarcity of available space.

Admittedly, absorption fell off in the quarter, but as with leasing activity, absorption can be expected to slow as the market tightens.

A total of 95 industrial building sales took place in the first half of the year, just 11 fewer sales than occurred in all of 2014. With the second half of the year traditionally seeing the larger portion of annual sales ac­tivity, this year promises to set a record for industrial sales in the region.

Median sale prices are already hitting new highs. The median price of buildings sold in Q2 was $142 per square foot, a dollar per square foot off the median in Q1 and an increase of 19 percent over the year-ago period.

The last time the median sale price ex­ceeded $140 was 2009 and only six sales were transacted at that time. Institutional investors continued to show interest in the submarket: Prologis acquired two buildings in the quarter.