Q2 2014 Office and Industrial Report San Fernando Valley
Thursday, July 17, 2014 at 3:21PM A Surge in Leasing Activity and Marked Improvement in Employment Drives Vacancies Down and Lease Rates Up
Another surge of leasing activity and marked improvement in employment levels drove office vacancy rates down to 15.5 percent in the second quarter compared to 15.8 percent in the prior period. Vacancy has improved by 150 basis points (bps) compared to the year-ago period.
There were 1,355,898 square feet leased in the quarter, up nearly 20 percent over the prior quarter although 365,762 square feet less than the space leased in the year-ago period. Velocity declined 18 percent from the first half of 2013 as well. A total of 2,492,863 square feet was leased in the first half of 2014 versus 3,039,301 square feet leased in the first half of 2013.
But the modest slowdown comes as lease rates show increasing strength. The average lease rate in Q2 was $2.27 per square foot, up $0.03 per square foot from the prior quarter and $0.05 per square foot compared to the year-ago period. Indeed, much of the pressure landlords were feeling to lease their buildings last year has subsided, and the average asking rate in the current quarter is the highest we have seen in the market since the fourth quarter of 2010.
It should be noted however, that average asking rates are still16.5 percent off their highs of $2.72 per square foot in Q2 2008
Absorption has been positive for the past four quarters with another 210,100 square feet absorbed on a net basis in Q2. This follows a Q1 absorption rate of just 59,131 square feet and a significant improvement from the year ago period when 179,715 fewer square feet were leased than were vacated.
Median sale prices for office buildings have been trending upward for the past three quarters and registered $196 per square foot in Q2 with a total of 10 buildings sold. Including distressed sales and those for which no sale price was reported, the median price was $230 per square foot with a total of 12 building sales.
Year to date the median price of buildings sold in the region was $190 per square foot. There were 22 office buildings sold in the period. Prices have risen 6 percent compared to 2013 when the median price of buildings sold was $179 per square foot.
Industrial Vacancies Continue to Fall and Sales Momentum Builds
Vacancy levels in the Los Angeles North industrial market fell even further and the steady pace of absorption continued in the second quarter.
Vacancies declined to 3.4 percent in the quarter, down 20 basis points (bps) from the prior period and 110 bps compared to the year-ago period. Nine of the area’s 13 submarkets are now showing vacancy levels below 3 percent leaving few options for tenants looking for industrial space.
Absorption has been very strong, and in Q2 2014 354,300 square feet was leased on a net basis. By comparison, 423,752 fewer square feet were leased than were vacated in the second quarter of 2013. For the year to date, 1,034,000 square feet of space was absorbed versus 233,723 square feet of absorption in the first half of 2013.
With the steady pace of improvement, landlords are beginning to increase rents. After more than two years with little change in lease rates, the average rate rose by $0.02 per square foot compared to the prior three quarters to $0.64 per square foot and by $0.03 per square foot versus the year ago period. The last time average lease rates were $0.64 was the third quarter of 2009.
While rock-bottom vacancy levels and expectations that lease rates will continue to rise are fueling investment activity, the shortage of suitable buildings is spurring more business owners to opt for purchasing rather than leasing their space. In the year-to-date period 42 industrial buildings were sold at a median price of $128 per square foot, an increase of 17 percent in the price of buildings sold compared to 2013. Sale prices have risen 28 percent over the past two years.
For the most recent quarter, 19 buildings were sold at a median price of $120 per square foot. Including distressed properties and those for which no sale price was reported, 25 buildings were sold at a median price of $119.
Much has been written recently about the constrained supply for industrial buildings, and nowhere is that more true than in the Los Angeles North market. The conversion of much of the area’s manufacturing real estate to multifamily or retail space and scarcity of raw land has left few opportunities for the development of new inventory, and a mere 59,000 square feet of new industrial construction is currently underway.
