The Greater Los Angeles office market continues to slide into market conditions last seen in 2001 and 2002, when vacancy rates increased and asking rents declined quarterly.
Absorption ended the first quarter at negative 3 million square feet, with development stable at 3 million square feet under construction.
Asking rental rates dropped to $2.61 per square foot, down 8% from a year earlier. Market activity has slowed to a crawl as sales and leasing have been dormant, with the exception of renewals and lease extensions.
Tenants are seeing market concessions including free rent and tenant improvement dollars. Many active tenants are hesitant to lock in rents in this dynamic market environment. Some tenants are opting for short term leases (two- to three-year terms) or sublease space, also with short terms.
Many active tenants with decent financial forecasts are looking at moving to more favorable office space within the market. We believe that unlike prior cycles, where tenants and businesses left the market for other states due to real estate costs and taxes, Los Angeles-based companies have stayed within the market,but have taken the opportunity to upgrade their building or location.
The financial and business sectors of the Los Angeles office market have gone through cycles of downsizing and have contributed to the abundant “shadow” and sublease space on the market. Greater Los Angeles ended the quarter with 3.6 million square feet of vacant sublease space. Law firms also are seeing significant downsizing.
In summary, the Greater Los Angeles office market is stalled with significantly less sales and leases. Lease rates and commercial values are declining as the vacancy rate is moving steadily upward. The market is weathering the economic storm through lease renewals and extensions.
Industrial Market
The Greater Los Angeles industrial market has seen the second consecutive quarter of lease rate decline to 63 cents per square foot. Direct vacancy ended at 3% while total vacancy ended the quarter at 3.3%.
Absorption ended the quarter at negative 3.2 million square feet. Gross activity has dropped by 35% annually.
The industrial market continues to be impacted by the recession.
Manufacturers have reduced their inventories and have reduced their orders on a national level. The impact can be felt through the layoffs and significant slowdowns in the ports of Los Angeles and Long Beach.
Industrial owners have become increasingly more aggressive with concessions in free rent,sometimes up to one year,tenant improvements and broker incentives. Although asking rents have not declined significantly, the effective rents have dropped significantly due to the market concessions.
Industrial availability has increase to 6.7%. Availability is up 33% annually and up 17.5% from the fourth quarter. The submarkets that saw the largest annual increase in availability were the San Gabriel Valley, at 74%, Commerce, at 58%, and South Bay, at 31%.
Activity declined 35% throughout the area with the most significant annual decreases in the San Gabriel Valley at negative 76% and the Greater San Fernando Valley at negative 63%.
Unemployment has impacted the Greater Los Angeles market in all real estate specialties and has affected the manufacturing sector significantly.
Analysis by CB Richard Ellis Group Inc.
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