Real Estate Watch: Los Angeles
Dearth of Big Deals Hampers Core L.A. Office Markets
Office
The suburban Los Angeles office markets pushed net absorption back into positive territory in the second quarter despite negative absorption of 450,000 square feet in the traditional strongholds of office space on the west side and downtown.
Sublease space held steady at about the same level as last quarter.
A couple of 100,000-square-foot deals in Mid-Wilshire and the Miracle Mile propelled the Hollywood-Wilshire corridor sub-market to post the greatest volume of positive net absorption in the county at 210,000 square feet. This offset declines in West Los Angeles, particularly the 150,000 square feet of space vacated by the Candle Corp.
The sustained dearth of large transactions and shift toward smaller, short-term deals continued to hamper performance in the core Los Angeles office markets.
For the second quarter, the county had slightly positive net absorption of about 128,000 square feet. That marked a reversal from the nearly half million square feet of negative net absorption last quarter. There was about 250,000 square feet of net absorption in the second quarter last year.
While competitive pressure in many sub-markets triggered big decreases in lease rates, the average asking lease rate for office space in Los Angeles County leveled off at $2.19, the same rate as last quarter.
The direct vacancy rate rose to 13.7% from 13.3% last quarter, thanks primarily to the 600,000 square feet of vacant new space that completed construction. An additional 2.8% of vacant sublease space pressed the combined vacancy rate to just over 16.5%. Since the beginning of the year, new construction has dumped about 2 million square feet of vacant space onto the market.
Industrial
Sale and lease activity approached a level not seen since mid-2000 as local companies jockeyed to capitalize on the recent downturn. Some businesses leveraged the falling lease rates to refinance lease payments; others parlayed the low interest rates into purchases, transitioning from lessee to landlord.
This “flight to quality” generated a big upswing in activity. Sales and leasing activity in the county jumped 19% to 12.1 million square feet vs. the first quarter. That’s up 31% from last year’s quarter.
Activity in the San Gabriel Valley jumped 61% to 2.9 million square feet in the prior quarter. Gains of 25% and 22% were achieved in the Mid-Counties and South Bay regions, respectively. Collectively, these three sub-markets contributed nearly two-thirds of the second quarter activity.
While all this activity produced substantial movement within the market, there was net absorption of just 1 million square feet, compared to 3.6 million square feet last quarter and 2.3 million square feet a year ago.
The high activity and low absorption means that lessees and buyers capitalized upon the dip in the market to upgrade or purchase but not necessarily expand.
The industrial availability rate dropped to 7.1% from 7.4% last quarter, despite 7.2 million square feet of new industrial projects under construction.
Meanwhile, the vacancy rate remained unchanged at 3.5%. The average asking lease rate actually declined slightly to 48.9 cents from 49.2 cents last quarter and 49.4 cents in the fourth quarter.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
