Industrial
The Los Angeles industrial market in the first quarter managed to outperform last year’s first quarter in many areas: vacancy and lease rates held steady and construction activity increased.
Undaunted by the multiple economic challenges during the first quarter, demand continued to move the region forward in most markets. Six of eight submarkets maintained vacancy rates of less than 3%, averaging 2.3%. Despite all the construction, quality space throughout the county remained an elusive and premium commodity.
The asking lease rate remained above 50 cents per square foot per month for the sixth consecutive quarter. The spread of high to low lease rates remained virtually unchanged over the past 12 months, from 65 cents in the San Fernando Valley to 44 cents in Commerce and Vernon. A temporary softening of lease rates is expected to thwart tenant hesitation during the balance of the year. An emerging trend has been the conversion of gross to net lease rates, shifting the energy burden to tenants.
A greater-than-usual seasonal decline in activity was experienced in the first quarter, to 8.4 million square feet, a level not seen since fourth quarter of 1996. South Bay and San Gabriel Valley accounted for 49% of the total sale and lease activity for the quarter.
Those same markets experienced great construction activity accounting for more than 64% of the total for LA County. Active projects under construction increased to 10.8 million square feet, the highest level in recent history, surpassing the fourth quarter by 4% and the first quarter of 2000 by 9%. More than 2.5 million square feet of new space were delivered to market in the first quarter, demonstrating the market’s strength.
Office
During the first quarter, the LA office market yielded to several external pressures, causing tenants, buyers and developers to hold off on real estate decisions.
Demand in the market decreased from the fourth quarter. Large portions of Class A space returned to the market were most affected. Although the average vacancy rate in LA County increased to 11% from 10.3% last quarter, a 7% up-tick, the increase was only half the national increase of 14.5%. Solid declines in vacancy over the past year were not enough to offset the recent pressures; the countywide vacancy rate rose slightly to 11% from 10.9% in first quarter 2000.
Yet another all-time-high average asking lease rate,$2.08 per square foot per month,was achieved for the third consecutive quarter, five cents higher than last quarter. Over the past year, rental rate appreciation was attained in all but one submarket, and four showed increases that surpassed 10%.
Negative net absorption was experienced for the first time in the past eight quarters. Most of the regained space was delivered by the conversion of sublet space to direct space, a byproduct of the dot-com shake-out. However, the new space helped ease the oppressive tightness in the premium Class A market, particularly in West Los Angeles, which may be the “silver lining” that facilitates new transactions.
The 200,000 square feet of new product completions delivered during the quarter had a respectable prelease rate of 39%. Huntington Millennium Center in Monrovia was completed with 75% of its 105,000 square feet committed.
Construction activity should remain stable for the rest of the year, unless the economic rebound is stronger and earlier than expected.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
