Q2 2015 San Fernando Valley and Ventura County Office and Industrial Market Repor4

Vacancies Fall to Single Digits in Some Submarkets as Rents Rise and Sales Activity Escalates

A strong economic rebound in several industries is escalating leasing activity and rapidly filling office space in select submarkets. Business is particularly strong for media and tech companies, financial companies, especially those that support real estate, and professional services firms including accountants and attorneys. These companies are expanding and creating brisk demand for office real estate.

Vacancies declined by 80 basis points (bps) in 2015 as leasing remained consistently active. The Los Angeles North office market finished the year with a vacancy rate of 13.1 percent, the lowest level since the third quarter of 2008 when vacancies were 12.8 percent.

 Leasing activity for the full year totaled 4,366,248 square feet, with 1,873,763 square feet of gross lease activity occurring in the second half of the year. The activity drove quarterly absorption to the highest levels in 11 quarters. In the fourth quarter, 383,100 square feet of space was leased on a net basis compared with negative absorption of 83,324 square feet in the prior quarter and 270,484 square feet of net leasing in the year ago period.

For the full year, 580,900 square feet of space was absorbed on a net basis, falling short of the 954,500 square feet absorbed in 2014, but more than twice the amount of space absorbed in 2013.

New media and tech tenants in particular are driving office demand in a number of submarkets and pushing vacancy levels down to single digits. Downtown Burbank, with vacancies of 6.4 percent; Universal and Studio City with a vacancy of 7.9 percent, the East Valley with a vacancy rate of 8.5 percent, are among the beneficiaries of the increased demand.

As the market tightens, asking lease rates are rising to their highest levels since the second quarter of 2010. At year end, lease rates averaged $2.35 per square foot, up $0.02 per square foot from the prior quarter and $0.05 versus the year-ago period.

A total of 90 office building sales were transacted in the full year, more unit transactions than in any year since 2005. Sale activity has been limited only by the lack of available product and there continue to be many more buyers than sellers in the marketplace.

Leasing and Absorption Slow as Vacancy Rates Decline to a Historic Low of 1.9 Percent

As expected, leasing activity began to slow in the fourth quarter as industrial space became impossibly hard to find. Just 438,793 square feet of space was leased, compared with 778,854 square feet in the prior quarter, and barely one quarter of the 1,758,015 square feet leased in the comparable year-ago period.

Leasing has not been this slow since the fourth quarter of 2008 in the peak of the recession, but the slowdown is understandable given vacancy levels of 1.9 percent as of the fourth quarter. The tight market is also taking a toll on absorption which declined to 481,100 square feet in Q4 compared to 741,826 square feet in the prior quarter.

The recent announcement that Xebec and Cor­nerstone Real Estate Advisors will be construct­ing two warehouse buildings totaling 361,000 square feet in Sun Valley, was welcome news to this space constrained region, but the new buildings will do little to solve the challenges that most of the businesses in the area are fac­ing.

Average asking lease rates are not showing any statistical increases, but the data is somewhat misleading. In some submarkets such as Bur­bank, warehouse inventory is being taken over for creative office uses at rates considerably higher than the averages. The same is true for newer buildings where deals are being consum­mated at average rates closer to $0.80 - $1.00 per square foot compared to the overall, $0.69 per square foot averages.

The desire by business owners to control costs in this rising rate environment, coupled with the continuing low interest rates, is driving an extremely active sales market for industrial properties and, here too, the statistical mean prices don’t always reflect the real dynamics underway.

Still, even the data suggests that building prices are escalating dramatically. For the full year 2015, 172 sales took place at a median price of $142 per square foot, up 28 percent from pre-recession prices. The fourth quarter saw median prices rise 42 percent to $201 per square foot versus Q3 and 76 percent com­pared to the year-ago period.

Slow Job Growth Puts Ventura County Office Market Behind Its Neighbors

The Ventura County office market continues to make strides toward recovery. At the same time we are still seeing some volatility, and the office sector here is still lagging some neighboring markets.

The office market results reflect findings by economists that job growth in Ventura County has been very lackluster. According to the Center for Economic Research and Forecasting at California Lutheran University in Thousand Oaks, jobs will grow at a meager 1.1 percent for the remainder of the year. The report found that job growth is part of a larger picture of weak population growth related to high housing costs and little new housing construction in Ventura County

Just slightly more than 1 million square feet of space was leased over 2015, about 500,000 square feet less than in 2014, and while Q4 vacancy rates fell 130 basis points (bps) versus Q3, the current 14 percent level still fell short of the comparable year ago period when vacancies registered 13.3 percent.

A total of 252,800 square feet of space was absorbed in the fourth quarter, compared with negative absorption of almost the same amount, 252,770 square feet, in Q3, suggesting that at least some of the activity in the market reflects internal movement, not new leases. For the full year, absorption was negative 49,700 square feet, another indication that leasing activity is being driven by companies relocating within the area.

Nevertheless, lease rates are showing fairly steady increases. Direct asking rates averaged $2.01 per square foot in Q4, a $0.02 increase over Q3 and $0.04 per square foot more than the year-ago period.

As has been the case throughout the year, sales activity is very strong. The median price of buildings sold in the fourth quarter rose 33 percent to $260 per square foot, compared to Q3 and 53 percent versus the year ago period. For the full year, the median price of office buildings sold was $203 per square foot, a 20 percent increase over 2014’s median price of $169 per square foot.

Ventura County’s Industrial Vacancies Decline to 4.3 Percent Restricting Options for Tenants

More than 3 million square feet of industrial space was leased in 2015 pushing a 25 per­cent year-over-year increase in absorption and driving vacancy rates down to their low­est levels since the fourth quarter of 2008.

Although leasing was less active in the fourth quarter than it had been in the rest of the year, the activity throughout the year and par­ticularly in the first half of 2015, was enough to push absorption to 703,600 square feet for the quarter and 1,437,000 square feet for the year. (Leased space is not counted in absorption figures until the tenant moves into the space.)

Just 468,811 square feet of space was leased in the quarter, less than the 546,804 square feet leased in Q3 and a little more than half the space leased in the year-ago pe­riod. Indeed, the majority of the year’s leasing activity, about 2 million square feet, occurred in the first half of 2015. Along with the sharp decline in vacancies to 4.3 percent, the num­bers indicate that many tenants are choosing to remain in place as space becomes harder to find.

Vacancies have fallen nearly 200 basis points from the 6.2 percent registered in Q4 2014, and are just 3.1 percent in the Oxnard submarket, 2.1 percent in Newbury Park/ Thousand Oaks and 2.8 percent in Ventura.

Although average asking lease rates slipped to $0.62 per square foot versus $0.65 per square foot in the prior quarter, a look at ask­ing rents by size range paints a very different picture of the market. While average asking rates for spaces larger than 20,000 SF have decreased, rates for space in the 5,000 – 10,000 square foot range have soared near­ly 12 percent over the past year, and at the close of 2015 averaged $0.85 per square foot.

As with leasing, the sales sector reflects considerable strength in Ventura County’s economy. The median price of industrial buildings sold in Q4 was $115 per square foot, unchanged from the prior quarter and a 22 percent increase over the year-ago period when the median price of buildings sold was $94 per square foot. As is occurring in the leasing sector, sales activity was hampered only by availability.

Lee & Associates Commerical Real Estate Services - LA North/Ventura, Inc.

Q3 2015 San Fernando Valley Office and Industrial Market Report

Industrial Vacancy Rates in Los Angeles North Hit a 10-Year Low in the Third Quarter  

Industrial vacancies in the Los Angeles North market hit a 10-year low in the third quarter, declining to 2 percent from 2.4 percent in the prior quarter and 2.6 percent in the year-ago period.

Supply is even tighter when you consider that eight of the region’s 13 submarkets are op­erating with vacancy rates below 2 percent. Among them are Canoga Park, Burbank, Glen­dale, San Fernando/Sylmar/Pacoima/Arleta, Sun Valley and Van Nuys, communities with some of the largest concentrations of indus­trial space.

The severe space constraint is now beginning to affect leasing activity. Just 562,378 square feet of industrial space was leased in the quar­ter, the lowest level since the first quarter of 2009, and a 67 percent decline compared to the prior quarter’s 1,693,395 square feet of leasing.

Perhaps surprisingly, absorption held up in the third quarter with 716,800 square feet of industrial space absorbed. However, since space is not recorded as absorbed until the tenant moves in, current absorption levels re­flect leasing activity over the past several quar­ters, and it’s likely that we will see a substan­tial drop-off in absorption in coming months due to the constrained supply of inventory.

Average lease rates are now $0.71 per square foot, 22 percent above the lows reached dur­ing the recession. Landlords may push rates on a case-by-case basis, but the severe inven­tory shortage is likely to limit average increas­es for the region as we go forward.

Sales activity continues to be brisk although the number of buildings sold in the third quar­ter fell off compared to the prior two quarters of 2015. A total of 36 buildings traded in Q3 at a median price of $141 per square foot. That compares with 95 building sales at a median price of $133 per square foot in Q2 and 56 building sales at a median price of $141 per square foot in the first quarter of the year. The median price of industrial buildings sold in the current quarter reflects a 28 percent year-over-year increase.

Vacancies Continue to Decline and Lease Rates Rise as a Very Active Sales Sector Pushes Building Prices

Los Angeles North office vacancies dipped to 13.8 percent, a decline of 10 basis points (bps) in Q3 versus the prior quarter and 70 bps below levels in the year-ago period. The last time vacancy levels reached 13.8 percent occurred in Q4 2008 as the impact of the recession was just hitting the Los Angeles North office market. Ultimately, vacancy levels rose to 19.1 percent before beginning the current pattern of descent in 2010.

As space fills, landlords have become more willing to push rents, although the pattern of lease rate increases can best be described as cautiously assertive. In Q3 asking lease rates averaged $2.31 per square foot, $0.02 per square foot more than the average in Q2 and $0.05 per square foot above the year-ago period.

Lease rates in the region continue to remain well below pre-recession highs of $2.50 to $2.70 per square foot, an indication of the slower pace of job market recovery and the way office space is filling. Los Angeles County continues to underperform California and the country at large in employment and earnings recovery.

The spotty nature of the market’s performance can best be seen in absorption levels, which in the third quarter were a meager 61,800 square feet. That compares with absorption of 176,977 square feet in the prior quarter and 290,027 square feet in the year ago period. On a year-over-year basis, absorption was 342,892 square feet compared with 725,000 square feet in the same nine-month period in 2014.

While there has been a steady stream of leasing in size ranges from 2,000 to 5,000 square feet, the market also saw large blocks of space given back in some submarkets in the current quarter, among them, Burbank, North Hollywood and Warner Center, and to a lesser extent, Sherman Oaks and Encino. Except for Burbank, those submarkets all registered negative absorption levels in the quarter. That said, the pace of leasing activity in the last two quarters should push absorption levels up in Q4.

The sales sector continues to be the brightest star in the market with year to date median prices for office buildings rising to $223 per square foot, the highest levels since 2010, and the number of sale transactions on pace to exceed that of any recent year.

Lee & Associates-LA North/Ventura, Inc., a member of the Lee & Associates Group of Companies, is a full service commercial brokerage company with offices in Sherman Oaks, Calabasas, Ventura and Antelope Valley. LA North is celebrating its 20th anniversary this year. Additional in­formation is available at www.lee-associates.com.

Thousand Oaks Medical Office for Lease - Suite 205 Video Tour

Thousand Oaks Medical Office presents suite 205 at the Rolling Oaks Medical Center. The suite has a double door entrance off the second floor lobby, directly across from the elevator. The medical office has a private back entrance and exit, private waiting room for patients, medical staff administration room, 2 filing and lab rooms, 2 exam rooms, private restroom, consultation room and windowed office.  The medical suite is located at 425 Haaland Drive, Thousand Oaks.  

http://www.thousandoaksmedicaloffice.com/425-halland-drive/

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.

Westlake Village Office For Lease - North Ranch Atrium Suite 240

The North Ranch Atrium office in Westlake Village is pleased to present suite 240 available for lease. The as-built office floor plan is a very functional space with private reception area, 3 windowed offices, bullpen area with natural light,  kitchen/break area and storage. The efficient office works well for a variety of professional uses looking for office space in Westlake Village.   

The New Standard - Marketing Commerical Real Estate

The opportunity came my way from my best friend. I was about to learn from a test project about social media marketing in real estate.  Still to this day, majority of the commercial real estate broker dismiss most of the forwarding thinking technology that is already here. This is due primarily to their long client based relationships and tenner in the industry.  

The test project was to assist in the marketing efforts towards exposing an estate to the digital world. Already was an amazing video tour with aerial views taken from a private aerial videographer and a visually appealing web site. The challenge was that there were not many views or visits to the website. The plan was to create a full circle using the other social media platforms such as Facebook and Twitter and utilize all the social media vehicles in sequence to lead followers to the web site.  The truth was that I didn't completely understand how everything was going to work out.  Setting up the accounts were fairly easy and the rests was manpower. The plan was to make as many authentic connections and continue to post daily relevant posts.  The Facebook advertising dollars also assisted greatly. Facebook advertising has a user friendly demographics targeting strategy. Without a doubt, this made a significant difference in targeting new traffic to the site.  The end result was success. I was able to significantly increases to the landing page visiting and expose the estate to a much larger digital world.

Through this experience, I learned a valuable lesson about the social media world and how it might work in commercial real estate.  The next project that I would experiment with would be for an office building in Woodland Hills. When traditional commerical real estate marketing efforts needed some additional support, this is what happened. Stay Tune. http://woodlandhillsoffice.com/

Simi Valley Office For Lease - Simi Valley Business Center

40 West Cochran Street is a professional office building for lease in Simi Valley. The building offers a variety of functional suites. Several of the office suites have terrific windowline, reception area, conference room, open cubical area, storage closets and more. The building can provide up to 4 per 1,000 parking and is elevator served. Additionally the building provides 5-day suite janitorial service and utilities.
Located across the street from Costco, 40 West Cochran has excellent freeway access to the 118 Freeway. This Simi Valley office for lease is located near Wood Ranch and the Conejo Valley and is centrally located between Santa Barbara and the Los Angeles Counties.

Q4 2014 Office and Industrial Market Report San Fernando Valley

Office Market Makes Significant Strides as Absorption Rises Three-Fold vs. 2013

What a difference a year makes! The banner recovery in the office market was marked by huge improvements in absorption and a steep drop in vacancy rates compared to 2013.

For the full 2014 year, absorption increased nearly three-fold to 954,500 square feet compared to 241,400 square feet of net absorption for 2013. Vacancy rates, which have been declining for seven straight quarters, ended the year at 13.1 percent, down 180 basis points (bps) over the fourth quarter of 2013; and the median price of buildings sold in 2014 increased 17 percent to $189 per square foot compared to a median sale price of $161 per square foot in 2013.

Leasing activity slowed in the fourth quarter, with 676,067 square feet of office space leased compared to 949,761 square feet of leasing in Q3, and 1,699,334 square feet of leasing in the year-ago period. However, current leasing activity more closely approximates the leasing levels we saw quarterly prior to the recession, indicating that the market is simply returning to more stable, prerecession levels.

Similarly, average asking lease rates are not showing a great deal of movement. The average asking rate was $2.26 per square foot in the fourth quarter, unchanged from the prior quarter and just one penny more than the rate in the year ago period. But the averages do not reflect the recovery in some Class A buildings in primary submarkets such as Sherman Oaks, Calabasas, Studio City and the East Valley where landlords are commanding lease rates in excess of $3 per square foot.

For the year, 65 office buildings traded, somewhat less than the 83 buildings sold in 2013, but the sales sector was far more active than it had been earlier in the recovery. There were 47 building sales in 2012 and just 31 in 2011.

A total of 10 buildings traded in the fourth quarter at a median sales price of $225 per square foot, a 49 percent increase over $151 per square foot for the fourth quarter of 2013. Among them, the 44-acre Northridge Business Center which will undergo redevelopment.

Severe Shortage of Product to Lease Contributes to Most Robust Sales Activity Since 2006

 The Los Angeles North industrial market has become impossibly tight, leading to a falloff in leasing activity and with it, weak­ening absorption rates. On the other hand, sales activity has been robust as compa­nies unable to find space to lease are turn­ing to acquiring facilities, especially with today’s low interest rates.

The vacancy rate in the fourth quarter dropped to 2.4 percent from an adjusted 2.7 percent in the third quarter and 3.9 percent in the year-ago period. Even more telling, if you remove the space available in the Antelope Valley and the Santa Clarita Valley, vacancies would be 1.6 percent.

Considering the tight market, leasing activ­ity held up pretty well in the fourth quarter with 1,013,034 square feet of deals trans­acted, just slightly less than the 1,247,788 square feet of space leased in the prior quarter, but nearly one half million square feet less than the year-ago period. Lease rates have risen 8 percent compared to the year-ago period and are now averaging $0.67 per square foot.

Last year at this time the market was still giving back space with a number of sub­markets reporting more space vacated than was leased. Just 283,100 square feet of space was absorbed in the full 2013 year as a result. By comparison, full year absorption for 2014 was 1,842,100 square feet, with virtually no negative ab­sorption anywhere in the region. But ab­sorption has been trending downward on a quarter-to-quarter basis as the market has tightened. In Q4, 319,100 square feet of space was leased on a net basis compared with 373,472 square feet of absorption in Q3.

There were 104 industrial building sales in the region in 2014, more than in any other year since 2006 when 117 buildings traded hands.

While median sale prices have been ris­ing steadily since 2011, prices have still not caught up with the market peak. For 2014, the median price of buildings sold was $118 per square foot, an 8 percent increase over 2013 and 12 percent high­er than 2012 when the median price of buildings sold was $105 per square foot.

Q3 2014 Office and Industrial Market Report San Fernando Valley

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.

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.

What is a 1031 Exchange?

1031 tax deferred exchange is a way to postpone capital gains or loss from a sale of property through purchasing another like-kind property within a certain time frame. Although there are several kinds of 1031 exchanges, the Delayed Exchange is the most common.  

“Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.” http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

1031 tax deferred exchange is a way to postpone capital gains or loss from a sale of property through purchasing another like-kind property within a certain time frame. Although there are several kinds of 1031 exchanges, the Delayed Exchange is the most common.  

“Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.” http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

Through the 1031 tax deferred exchange program, property investors are able to reinvest the sale proceeds into another property of equal or larger value.  This has been a common platform property investors have been using over time to create great wealth.

Before the property is sold, escrow will make the necessary arrangements for the 1031 exchange.  At the close of escrow, the proceeds from the sale will be transferred to an Accommodator also known as a Qualified Intermediary.  (A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.) http://www.1031.org/about1031/faq.htm

The investor will have 45 days from the date the downleg(relinquished property) is transferred to identify potential exchange properties. There are several different rules on property identification but the 3-property rule seems to be most popular. Within 180 days from the close of escrow of the downleg, one of the three identified properties must be purchased.

Most investors selling their investment property will begin looking for an exchange property from the moment they put their own property up for sale. So in general, if the sale property takes approximately 90 days to close escrow(30 days of marketing & 60 day escrow), they would have additional time to identify several replacement properties and close escrow on the upleg(replacement property).   

Here is a great place and resource to learn more http://www.ipx1031.com/reexchanges.aspx

Eric Nishimoto Commerical Real Estate - San Fernando Valley and Conejo Valley

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