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.