Q3 2014 Office and Industrial Market Report San Fernando Valley
Thursday, November 13, 2014 at 3:28PM Market Now Just Inches From Pre-Recession Highs as Dramatic Improvements in Absorption and Vacancy Levels Continue
The office market continued to make strong improvements in the third quarter with the highest absorption levels seen in several years, a dramatic drop in vacancy levels and healthy increases in median sale prices.
A total of 381,600 square feet of office space was leased on a net basis in the quarter, 85,562 square feet more than was absorbed in the prior quarter and the strongest absorption since the fourth quarter of 2012 when 396,740 square feet of net space was leased.
With strong absorption continuing now for five consecutive quarters, office vacancy rates fell another 60 basis points (bps) to 13.8 percent compared to the prior quarter, and are now nearly 200 bps below year-ago levels. Vacancies have been falling consistently for five quarters and in Q3 reached the lowest levels since Q3 2008.
Even Warner Center, where vacancies had reached peak highs during the recession and were very slow to recover, saw dramatic improvement with vacancy falling 130 bps to 13.1 percent in the quarter compared to Q2 and 140 bps compared to the year ago period.
Average asking lease rates seem to be recovering at a slower pace. Still, the average lease rate in the current quarter was $2.25 per square foot, down $0.01 from the prior quarter and an increase of $0.03 per square foot compared to two years ago.
Sales velocity has doubled since the height of the recession. In the year-to-date period, 33 office buildings changed hands driving the median price of buildings sold to $181 per square foot.
There were 13 office buildings sold in the third quarter at a median price per square foot of $251, compared to nine building sales at a median sale price of $181 per square foot in Q2.
Third quarter median prices were just 15 percent off their pre-recession highs of $295 per square foot in Q3 2007. Although sales velocity was far stronger in Q3 2007 with 36 buildings sold, it is important to note that the for-sale inventory in the Los Angeles North market is extremely constrained. In other words, sales velocity is limited not by demand but by the inventory available.
Virtually No Room Left at the Inn-dustrial Table as Vacancies Tighten to 3 Percent
To say that the industrial market continued its upward trajectory in the third quarter may be understating the case quite a bit.
Vacancies declined another 30 basis points (bps) in the quarter to 3 percent compared to the prior quarter and are now 100 bps below the already tight market of a year ago. In nearly half of the region’s submarkets—Canoga Park, Glendale, North Hollywood/Universal City; Northridge, Reseda/ Tarzana, Sun Valley and Woodland Hills – vacancies are sub-2 percent, offering very few options for tenants.
Average asking lease rates reached $0.65 PSF in the quarter, an increase of $0.01 PSF over the prior quarter and $0.03 more than the year ago period. Average lease rates have risen 16 percent since Q4 2011.
A total of 1,132,278 square feet of space was leased in the quarter, so far ahead of pre-recession levels that the year-to-date activity in 2014 (4,143,562 square feet) surpassed the full year activity in both 2007 (3,617,589 square feet) and 2006 (2,675,497 square feet).
Still, the current quarter activity was a considerable 45 percent below the year-ago period when 2,067,768 square feet of industrial space was leased, and absorption slowed proportionately to 353,200 square feet, almost 143,000 fewer square feet leased on a net basis than in the comparable 2013 quarter and an indication that the tight market is having an adverse impact on these fundamentals.
As space becomes harder to find, we see a number of tenants opting to acquire facilities when they find suitable buildings. There were 43 industrial buildings sold in Q3, a 68 percent increase over the prior quarter and 61 percent more than were sold in the year-ago period. The increased demand has pushed the median sale price of industrial buildings to $121 per square foot for the year-to-date period, an 11 percent increase over the median price of $109 per square foot in 2013. Although the median sale price for Q3 registered only $110 per square foot, that figure (and the year-to-date median) would likely be considerably higher had pricing been available for 16 of the 43 buildings sold.
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