Office
Patience may well be a virtue for the landlords in the Greater Los Angeles region, as the need for immediate occupancy in past markets has been replaced by ever increasing lease rates,rates that are expected to continue to an upward trend. As a result, concessions have not increased appreciable to increasing rents.
In many markets we have seen proactive tenants signing significant leases well ahead of their current lease expiration dates in expectation of rent increases.
With consolidation and acquisitions continuing as a significant variable in the market today, such as the recent $2 billion expansion of Arden Realty’s holdings, tenants have become increasingly wiser in preparation of their future occupancy. Investor appetite for office properties continues to be at an all time high especially from the ever growing funds and institutions.
Current absorption is being bolstered by strong demand for class A space, in what appears to be a shift away from class B buildings. Net absorption in the second quarter for class A space came in slightly more than 400,000 square feet in contrast to class B, which posted negative net absorption of 123,000 square feet. Overall the county performed well, posting a healthy 340,000 square feet of positive net absorption.
During the past five years, office growth has stood at roughly 3%. During the past year we have seen growth of more than four times this amount. With roughly 1.9 million square feet of office projects under construction and stabilized absorption, it will be difficult to curb present demand.
Industrial
Even as trade and distribution continue to fuel the need for industrial real estate in the Los Angeles region, the question of economic sustainability seems to shadow even the slightest upticks in vacancy. Los Angeles County’s vacancy increased to 1.6% in the second quarter, versus 1.4% in the first quarter.
Although the second quarter posted a gross activity increase of 1 million square feet from the first quarter of this year for Los Angeles County, net absorption for the second quarter was in the red, coming in at negative 1.4 million square feet.
One major factor continuing to drive uncertainty stems from the fallout in the housing market, which appears to have had little initial impact on industrial real estate. But companies largely dependent on the housing market and those that provide construction materials (wood, cement, appliances, floor tiles) account for nearly 6% of the goods shipped in the U.S. This has generated mild concern that any softening in demand for those goods will negatively affect the industrial market.
Industry experts remain bullish. Several expect rental rate increases to more than $9 per square foot annually by the close of 2008 with demand staying healthy.
Vacancy will continue to be low with companies consolidating operations and generally changing the way they handle logistics. Even with capacity challenges, Los Angeles will continue to see constraints in industrial supply with asking rates trending upward.
Data & Analysis provided by CB Richard Ellis Group Inc.’s Research Department.
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