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.

Q 1 2014 Office and Industrial Market Report San Fernando Valley

Q1 2014

Market Moves a Tad Slower in Quarter, But Longer Term Trends Remain Positive

The Los Angeles North office market quieted down somewhat in the first quarter, although leasing activity continued to exceed 1 million SF.

Vacancy levels remained unchanged at 16.2 percent compared to the fourth quarter, and have fallen nearly 100 basis points (bps) compared to vacancies of 17.1 percent in the same period last year.

Just over 1 million SF of office space was leased in the quarter, about 38 percent less than the 1,624,000 SF leased in Q4 and down from the year ago period as well. The slowdown in velocity seems to have impacted absorption during the quarter, but it’s equally important to note that leasing has been strong now for the past nine quarters, an indication that the recovery in the office market is proceeding at a pace consistent with the economic growth we are seeing.

Only 31,200 SF of space was leased on a net basis during the quarter, down significantly from Q4 when net absorption totaled 298,035 SF. However, over the past 12 months, 504,000 SF of space has been leased on a net basis, amounting to a solid 1.1 percent growth in occupied space over that period.

With that level of progress, developers are reentering the market. Although the 200,000 SF of office space currently under construction is probably insufficient to make any real impact on available inventory, it is indicative of a return of confidence. Not to be overlooked, Laurel Canyon Plaza, a 90,000 square foot office building in North Hollywood and a neighboring retail building, was acquired by Goldstein Planting Investments for redevelopment.

Indeed, the Allen Matkins/UCLA Anderson Forecast Commercial Real Estate Survey released late in January showed that sentiment in the office market is highest in Southern California. About 70 percent of the survey respondents in the region said they planned to commence one or more projects within the next 12 months.

Sales activity too slowed in the quarter with just 10 sales taking place, compared with 19 in the year-ago period. With fewer transactions, the median price of office buildings sold declined to $205 PSF in Q1 from $257 PSF in Q4 and $212 PSF in Q1, 2013. Still, several trophy properties changed hands including Tower Burbank and Westlake Park Place.

Industrial Absorption Rises to Pre-Recession Levels and Vacancies Fall Below 4 Percent

Following four quarters of robust leasing activity, absorption has risen to pre-recession levels and vacancy has fallen to the lowest levels the market has seen since 2009.

With little new construction and a resurgence of demand for industrial space, the upward trajectory of the Los Angeles North industrial market seems here to stay, at least for the time being.

Some 1,100,404 SF of industrial space was leased in the quarter, bringing vacancy levels down to 3.8 percent, the first time vacancies have fallen below 4 percent since the fourth quarter of 2009. Current vacancy levels have fallen 40 basis points (bps) compared with the prior quarter and year ago period, which both registered vacancies of 4.2 percent.

Not surprisingly, leasing velocity has slowed somewhat from the prior quarter when 1,475,538 SF of space was leased, as well as the year ago period when 1,824,794 SF was leased as options for businesses become extremely constrained. Eight of the 13 Los Angeles North submarkets now are operating with vacancy levels below 3 percent. In the North Hollywood/Universal City submarket, vacancy is 0.9 percent. In Northridge it is 1.2 percent and in Reseda/Tarzana it is 1.5 percent. Only the Antelope and Santa Clarita valleys show vacancy rates above 5 percent.

On a net basis, some 625,600 SF of industrial space was leased, more than in any quarter since the first quarter of 2006 when 645,688 SF of space was absorbed. Admittedly, we are still seeing some fluctuation in absorption rates, and negative 135,923 SF was registered in Q4, but given the solid leasing activity, the volatility is more likely due to the lapsed time between space leased and occupied.

Similarly the sales sector was more active than it has been in any first quarter since 2009 with 23 industrial buildings changing hands in the quarter. The median sale price rose 19 percent to $130 per square foot, compared with $109 per square foot in Q4.

Although there are still some distressed assets being cleared in the region, their numbers are minimal. In the current quarter, just two distressed properties changed hands, compared to six in the first quarter of 2013.

Q4 San Fernando Valley Office and Industrial Market Report

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.

Shamrock Plaza Professional Office - Agoura Hills & Calabasas Chamber Event

San Fernando Valley Lee & Associates - LA North/Ventura News

Here we are on Bisnow.

http://www.bisnow.com/

San Fernando Valley Office & Industrial 4th Quarter 2010 Market Analysis

Declines leveling off, some small improvements

Stabilization in office rents are to be expected by 3rd Quarter 2011. Rent Concession, Tenant Improvements, Free Parking and 6 month Teaser Rates are taking over reduced rents.

Q4 2010-LAN Office



Sluggish recovery means little change for industrial market

Leasing activity remains constant while absorption has improved since last quarter.  Still a soft business climate, but the most sales activity continues to come from Owner-Users taking advantage of SBA Financing and low interest rates.

Q4 2010-LA Industrial


San Fernando Valley Industrial Properties Recently Sold

San Fernando Valley Office Rental Market Picking Up Slowly

Year end 2010 left us with conservative but encouraging recovery in the office sector.  Still the fourth quarter left landlords with presistent challenges ahead.  With multiple spaces for quality tenants to choose from, low market rents coupled with high improvement cost have pushed majority of the smaller landlords without deep pockets out of this leasing market. Not to mention the need for many existing tenants that has excess space trying to downsize.

The pace of lease transactions have picked up toward the end of the year as confidence in our economy is slowly recovering.   Over the course of this year, we should see a stabilization of rents as we have seen a decline for 12 straight quarters.  New employment and business growth is certainly the leading factors to stabilization of rents and absorption of excess space.

Eric Nishimoto

Eric K. Nishimoto, an associate at Lee & Associates-LA North/Ventura Inc., a full-service commercial real estate company and member of the Lee & Associates group of companies, specializes in investment brokerage throughout the Los Angeles area with a focus in the San Fernando and Conejo valleys. A seasoned sales and marketing professional, Mr. Nishimoto’s real estate expertise includes the pricing, underwriting, leasing and sales of retail, industrial and office properties as well as the development of long-term investment strategies for his clients.