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.