Activity picked up for the Greater Los Angeles office market in the second quarter after a positive yet slower start to the year. Occupiers in every key office-using industry expanded operations, adding employees and taking up more space. The Los Angeles office market tightened, vacancies began to fall below historic averages, and construction was held in check, resulting in annual rent growth that averaged mid- to high single digits since the second quarter of 2014.
Foreign and domestic institutional investors took notice of the favorable supply-demand dynamics and continued to place capital across the greater Los Angeles office market, which includes Ventura County. The economic uncertainty that peaked in the first quarter waned in the second, only to return at the time this article was being written. The short- to medium-term outlook for the office market, though, remains positive.
The Greater Los Angeles overall monthly asking lease rate increased slightly. Asking rates in the West Los Angeles submarket jumped 7.6% after an uncharacteristic decline in the first quarter. Overall momentum remained strong there, and for anyone concerned about a tech bubble, the slower rent growth rates were a welcome sign.
Strong absorption in the Greater Los Angeles market was double the quarterly average of 523,339 square feet since the first quarter of 2013. Just over 2.3 million square feet of office space are under construction in the region, unchanged from the first quarter.
Industrial Market
The region’s industrial market remained strong despite market tightness. Vacancy declined further as rental rates rose, though submarkets’ activity levels continued to fluctuate quarter to quarter, pending the amount of available space. Supply levels were at historic lows across the region, and class A buildings and those with high, clear heights remained in demand. Interest in class B product therefore increased, causing upward pressure on rents and further shrinking available supply. Tenants that signed leases near the bottom of the market in 2010 found that lease rates had grown by 33% over the period.
Average asking lease rates have incrementally increased each quarter. The absence of available class A product caused rental rates for class B and C product to increase. Applied annual increases on lease terms also contributed to rental growth. Typically lease terms apply a 3% annual increase, but some landlords are now pushing for 4% and 5% hikes and longer terms.
Vacancy dropped to a new all-time low. A key factor was tenant retention due to the proximity of the ports and the region’s other logistics advantages. Newly completed construction did little to alleviate supply constraints. Limited availability hampered tenants’ ability to locate in preferred submarkets or cities. CBRE EA predicts that availability be at 4.4% at year-end as completions slightly outpace net absorption.
E-commerce, third-party logistics, entertainment, aerospace and general merchandise helped propel gross activity to 10.4 million square feet, pushing year-to-date figures to over 17.5 million square feet. Manufacturing slowed slightly in certain submarkets due to increases in the minimum affecting competition. The strong activity from an array of industries resulted in positive net absorption for the ninth consecutive quarter.
Development activity in the region continued to gain momentum as construction levels increased for the sixth consecutive quarter. Preleasing activity remained strong. Approximately 39% of projects in the construction pipeline at quarter’s end were preleased.
Data and analysis provided by CBRE Research
