Favorable investment fundamentals such as continued business expansion, rising rental rates, constrained supply and abundant capital have investors pursuing an increasing number of properties for sale.
Additionally, widespread ownership change continues to put tremendous upward pressure on rents.
For example, Blackstone Group LP and its acquisition of Equity Office Properties Trust,whose portfolio at the end of 2006 included ownership or interest in 103.1 million square feet of space (543 office buildings),incorporated aggressive underwriting assumptions in its recent acquisitions, causing tenants to face increasingly difficult market conditions.
Landlords now are willing to let space sit vacant for longer periods of time and are speculating that rental rates will continue to trend upward. Due to this, tenants are open to longer lease terms and fewer concessions in order to lock in rates in a rapidly increasing market. All indicators point to a continuation of this trend.
Year over year, vacancy in Los Angeles County has decreased 13.5%. In the first quarter, vacancy was at 8.7%, versus 10.1% a year earlier. Currently, 1.5 million square feet of space is under construction and approximately 38% has been preleased.
One determinant of demand is unemployment, which now is 4.7%. The Los Angeles Economic Development Corp. is forecasting non-farm employment in Los Angeles County to grow by 1.1% or 43,700 jobs this year and continued demand for quality office space is expected.
Los Angeles County absorbed 797,256 square feet of class A space in the first quarter. Factoring in the absorption number is the recently completed 2000 Avenue of the Stars in West Los Angeles where 410,035 square feet has been leased.
Class B space posted negative net absorption of 593,386 square feet, which offset class A’s healthy number, for total positive net absorption of 203,870 square feet in the first quarter.
Industrial Market
Economic and employment generators, the Los Angeles and Long Beach port complex, had a combined increase of 19.5% to 1.19 million TEUs (twenty-foot container equivalent units) in February.
Although there have been increases of usage in competing ports along the West Coast that have expanded to accommodate increased activity, Los Angeles and Long Beach still are the primary ports, due to the fact that there are 32 million consumers within 350 miles of it.
That said, even with an uptick in vacancy in the first quarter to 1.4% from 1.3% in the fourth quarter, tenants continue to find space and location options increasingly limited. This impacted net absorption with the first posting a negative 1.2 million square feet, a negative increase of nearly 700,000 square feet from a year ago. More significantly, from 2005 to 2006 the annual change in net absorption was a decrease of 70.6% with 2006 posting an annual net absorption of 3.7 million and 2005 coming in at 12.3 million square feet.
Low vacancy coupled with little new space,nearly 5.4 million square feet is under construction to date,and the continuing influx of Asian imports will create some challenges for Los Angeles and Ventura counties.
Data & Analysis provided by CB Richard Ellis Group Inc.’s Research Department.
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