Real Estate Watch: Los Angeles County
Industrial Picking Up, Office Sublet Bubble Bursts
For the second consecutive quarter, the amount of vacant sublease space in the Los Angeles office market decreased, indicating that the sublet bubble may have burst.
The sublet vacancy rate fell to 2.8% in the quarter,down from 3.0% in the December quarter and 3.2% in the third quarter last year. Despite these gains, demand could not keep up with the excessive volume of new office space that flooded the market during the first quarter.
About 1.6 million square feet of new construction unloaded more than 1.3 million square feet of vacant space into an already saturated market. The influx of mostly class A space forced the direct vacancy rate up to 13.3% from 11.9% last quarter. The combined sublet and direct vacancy rate stood at 16.1%, up from 14.9% at the end of 2001.
While many local businesses remained healthy, their “wait and see” strategy adopted at the onset of the recession kept them sidelined. A majority of the deals in recent months have been small and short term. Diminished activity kept demand to a minimum, causing quarterly net absorption to plummet to negative 550,000 square feet.
Although landlords are becoming more aggressive with incentives, prospective tenants are reluctant to commit. The pervasive attitude: time is on their side. They have become spectators rather than participants. As the economy heats up, companies will be forced to expand due to their own space constraints, which will fuel the demand that kickstarts the next expansion cycle.
The appetite for vacant industrial space in Los Angeles County returned during the first quarter. Industrial sale and leasing activity jumped 24% above the level recorded last quarter and even posted a 17% increase compared to the first quarter last year.
The 9.8 million square feet of activity during the first quarter marked the highest level in six quarters. Transaction activity somewhat resembled a checkerboard pattern. Pockets of activity surfaced sporadically in different parts of the county at different times during the quarter.
But the increase in first quarter activity, combined with sharp decreases in construction starts experienced during the last six months, reduced the amount of both vacant and available space. A quarterly upswing of 50% in transactions greater than 100,000 square feet, particularly in Vernon, Carson and Torrance, drove 3.6 million square feet of net absorption. The South Bay sub-market accounted for 45% of the quarter’s net absorption.
The fundamentals of the Los Angeles industrial market remained solid. As activity declined, so did construction starts, and eventually lease rates, which kept vacant space to a minimum. Industrial market observers expect activity to gradually grow in the near term, with the pace, volume and velocity of activity increasing as the year wears on.
Data and analysis provided by CB Richard Ellis’ Global Research & Consulting.
