Heading into 2010, there are a few market dynamics that will continue to have an effect on the office market. While some companies started to hire in late 2009 and early 2010, the job market has a long way to go. The lag time between positive job growth and decreased office vacancy can be anywhere from 6 to 18 months
Additionally, the impact of sublease space cannot be underestimated.
During the first quarter, the greater Los Angeles office market saw its direct vacancy rate jump to 15.3% from 14.8% in the fourth quarter. The overall vacancy rate, which includes sublease space, increased from 16.6% to 17.1% over the same period. This was the 10th straight quarterly increase. As a result, seven of the nine submarket areas in greater Los Angeles saw negative absorption for the quarter with four of them totaling more than 200,000 square feet of negative absorption.
The average asking lease rate for office space dropped during the first quarter to $2.45, a 2 cent decrease compared to the fourth quarter rate of $2.47 and a 15 cent decrease from a year earlier.
Due to the lack of tenant demand and available capital for development opportunities, office construction activity has been slowing for the past few years. Current projects under construction total some 1.2 million square feet, considerably lower than the same time a year earlier, when construction projects totaled roughly 3.1 million square feet. The bulk of new construction is occurring in West Los Angeles with roughly 777,000 square feet of activity, accounting for about 67% of the total.
Industrial Market
During the first quarter, the industrial market saw its direct vacancy rate jump to 3.5% from 3% in the fourth quarter. The overall vacancy rate saw a similar trend, increasing to 3.8% from 3.5% over the same period. As expected, market growth has been negative as more tenants reduced their occupancy needs or vacated existing space. Net absorption totaled negative 2.1 million square feet at the end of the quarter, approximately 80.5% of which occurred in three market areas.
The greater San Fernando Valley submarket saw the most negative growth with 570,000 square feet of negative absorption during the quarter. The other submarkets with the largest amounts of negative absorption include San Gabriel Valley, with negative 520,000 square feet, and South Bay, with negative 514,000 square feet. Only one market area saw positive absorption: Los Angeles, with more than 59,000 square feet. As a result, the overall vacancy rate dropped from 2.4% to 2.3% during the quarter.
The average asking lease rate for industrial space remained steady during the first quarter at 56 cents per square foot. This was a 6-cent decrease from a year earlier. Due to the difficult economic climate, the asking rate has steadily declined since the first quarter of 2008, when the rate was 73 cents per square foot.
Industrial construction activity has been slowing for the past few years. Projects under construction total approximately 153,000 square feet, considerably lower than the same time a year earlier, when construction projects totaled roughly 2.1 million square feet. All of the new construction is occurring in two submarkets: Ventura, with roughly 106,000 square feet, and the greater San Fernando Valley, with more than 46,000 square feet. There was about 213,000 square feet of construction deliveries during the first quarter—roughly 107,000 square feet in Los Angeles and 106,000 square feet in greater San Fernando Valley.
Data and analysis provided by CB Richard Ellis Group Inc.
The Real Estate Watch Chart – Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
