The disconnect between owners and users continues in the Greater Los
Angeles office market as the area remains mired in economic uncertainty and
apprehension.
Although demand for office space is strong, some tenants are electing to downsize with market conditions. Most users have adopted a “less-is-more” philosophy, preferring shorter leases and flexible terms. Existing tenants are consolidating offices and entering into short-term renewals.
In either scenario, the priority is to minimize rent and maintain flexibility. Most major submarkets are seeing declines in absorption, with the exception of South Bay and Downtown Los Angeles, which saw increases over the previous quarter.
Expansion activity decreased 22.5% in Los Angeles County and 17.5% nationally during 2007, a trend expected to continue throughout 2008. Rental rates remain at first-quarter levels.
Although average lease rates, absorption and other leasing fundamentals indicate a slight decline, a more substantial correction can be seen in investment activity, with total dollar volume decreasing by 72.7% from first quarter deals.
While average price per square foot has decreased from $268 to $250, it is the decrease in the quantity of transactions to which this pullback is attributed. During the second quarter, 14 office buildings larger than 10,000 square feet were sold, compared to 26 in the previous quarter and 40 a year earlier as sellers continue to outnumber buyers.
Industrial Market
The economic woes from the unraveled housing market have begun to impact the Greater Los Angeles industrial market. Waning confidence and less consumer spending are leading industrial users to curtail expansion plans and downsize space. Accordingly, the second quarter marks another period of sequential contraction, with net absorption of negative 3.5 million square feet, the lowest
on record.
Sales activity has decreased 52% from last year’s levels. Gaps on industrial pricing are placing persistent pressure on buyers and sellers to agree, where risk aversion is becoming prevalent. The ongoing disconnect between buyers and sellers continues to exist, but that’s not to say deals are not getting done.
In response to record oil prices and a growing concern over climate change, Los Angeles passed the green building plan initiative last quarter that will require all new commercial buildings larger than 50,000 square feet to adhere to Leadership in Energy and Environmental Design standards. The initiative will give building incentives that aim to reduce construction costs for developers. This initiative comes at a time when industrial users are feeling the pinch from record
oil prices and are looking for lower
cost options.
Data and analysis provided by CB Richard Ellis Research.
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