Q4 San Fernando Valley Office and Industrial Market Report
Wednesday, February 5, 2014 at 12:48PM 
Vacancies Decline to Lowest Levels in More than Four Years as Leasing Activity Remains Brisk
Office leasing activity spiked again in Q4 to 1,359,421 square feet, the highest levels in the past four quarters. In all, 4.6 million SF of space was leased in 2013, the second straight year of solid activity. (Last year, 5.3 million SF of office space was leased in the region.)
A total of 272,000 SF of office space was absorbed in the quarter, down 30.5 percent from 391,444 square feet in the prior quarter. For 2013, a total of 241,400 SF of office space was absorbed, also down from 2012 when just over 1 million SF of space was absorbed.
While there is some evidence that at least a portion of the activity in the market represents tenants trading off one space for another, it is also clear that the market’s inventory of office space is slowly filling up.
Vacancies, which have been trending downward for over a year now, dipped to their lowest levels since Q1 2009. The vacancy rate in Q4 was 16.2 percent, an improvement of 50 basis points over Q3 and 40 basis points over the year-ago period. Vacancies in the Los Angeles North market have declined more than 200 basis points since Q4 2011.
With landlords still facing competition for tenants, we are not seeing the tighter vacancy rates reflected in rental rate growth. Average asking lease rates fell by $0.01 to $2.24 per square foot in Q4, and are up by $0.02 per square foot compared to Q4 2012. It is important to note however, that some submarkets are showing rates well in excess of those levels, and we are seeing variations from one building to the next, even within the same submarket, depending on individual factors impacting each property.
Sales activity picked up dramatically compared to 2012. A total of 49 office buildings were sold in 2013 compared to 2012 when 26 office buildings were sold. The median price of buildings sold in 2013 was $186 per square foot, however, the full-year median sale price was adversely impacted by the first half of the year, and prices have been increasing significantly since then. The median price of buildings sold in Q4 was $255 per square foot, a 12 percent increase over the prior quarter.
Economy at a Glance
INVESTMENT: Record highs in the DJIA index and strong stock market returns along with low inflation and minimal interest rate increases are driving near-record high real estate prices, according to a report in Commercial Real Estate Executive. The story cited $660 PSF paid for the Hollywood & Highland Center in L.A. among others.
RENTS: Brokers polled by National Real Estate Investor expect the national office market to shift in favor of landlords in 2014. On a national basis, the office market has registered occupancy gains for 14 consecutive quarters, vacancy fell to 15.1 percent and lease rates inched up 3.5 percent in the fourth quarter of 2013, CPE reported.
STUDIOS: Warner Bros. topped the worldwide box office in 2013 with $4.95 billion in sales. Walt Disney Co. was second with about $4.68 billion in sales and Universal City was third with $3.68 billion in worldwide sales.
RENEWALS: Companies are using lease renewals as an opportunity to downsize in order to conform to today’s workplace dynamics, National Real Estate Investor reported. The office space utilized per employee is estimated to have fallen to 172 SF from 255 SF in 2000 and estimates are that space used per employee will fall to 145 SF by 2018.
Extremely Tight Market Limits Options and Curtails Leasing Activity
Following three very busy quarters that removed a good deal of the industrial inventory from the Los Angeles North market, industrial leasing activity slowed in Q4, declining more than 60 percent compared to Q3 and off 22 percent from the comparable year-ago period.
A total of 943,620 square feet of industrial space was leased in the quarter, compared to 1,539,000 square feet in Q3 and 1,213,000 in the fourth quarter of 2012.
The strong activity that preceded the fourth quarter has brought vacancy rates down and limited options for businesses. Overall, the vacancy rate for the current quarter was 4.1 percent, unchanged from Q3. It is also noteworthy, however, that seven out of the 13 submarkets in the Los Angeles North industrial market finished the year with vacancy rates under 3 percent and vacancies were below 2 percent in several markets.
In Woodland Hills, where much of the industrial inventory has been converted to multifamily use, the industrial vacancy rate is 1.4 percent. Glendale’s vacancy rate is 1.7 percent and the North Hollywood/Universal City submarket has a vacancy rate of 1.9 percent.
Just 23,300 square feet of industrial space was absorbed in the region, compared with 488,300 square feet in Q3 and 551,766 square feet in the year-ago period. Chatsworth experienced the highest absorption rate for the year with 695,000 square feet of industrial space absorbed
With so little space available, asking rents rose to $0.63 per square foot in the quarter, a penny per square foot more than the prior quarter and a $0.03 increase over the year ago period. At $0.63 per square foot, asking rents are the highest they have been since Q3 2007 when the rate averaged $0.75 per square foot.
As the industrial market came back with a vengeance so too did sales activity. There were 86 industrial buildings sold in 2013, the largest volume of sales since 2006 when 118 buildings changed hands.
Median sale prices, however, are still lagging the activity we are seeing. In 2013, the median price of buildings sold was $109 per square foot, off 20 percent from the height of the last real estate cycle when the median industrial building price was $137 per square foot.
Economy at a Glance
GDP: The Commerce Department revised third quarter economic growth to 4.1 percent, the strongest growth in nearly two years, the New York Times reported. Previous estimates were 3.6 percent. The increase was attributed to a rise in healthcare, housing and cars as well as exports, state and local government spending and investment in new factories and inventories.
BENTLEY: A record 10,120 Bentleys were sold last year, the luxury maker’s best performance in its 95-year history, according to a report in Bloomberg Businessweek. Bentley said the stock market run-up fueled some of its sales increases, but the company also rolled out a new, lower priced model at the bargain price of about $200,000.
DEMAND: Industrial demand is expected to remain strong over the next two years, with availability rates nationally falling to 11.1 percent, according to CBRE research reported in GlobeSt. Researchers anticipate that the demand will drive rent growth of 4.4 percent in 2014 and 4.6 percent in 2015.
FILMING: L.A.’s location film production increased 19 percent last year to 6,972 days for features and 11 percent to 18,590 days for television, compared to 2012, the Los Angeles Business Journal reported. Commercial shoots were up 5 percent for the same period. The bad news? L.A.’s feature film production is down 50 percent from peak levels in 1996 and TV production is off 38 percent from its peak in 2008.
