The diversified complexion of industries that comprise the Los Angeles business community may be a key factor in moderating the effect of the economic slowdown on the LA office market. A wait-and-see approach adopted by many local businesses in response to the uncertainty of the mixed economic reports has substantially reduced office transaction activity. The implementation of prudent and cautious strategies has postponed the expansion and/or relocation plans of many healthy businesses throughout the Los Angeles basin. Although substantial amounts of sublease space have entered the market, particularly on the Westside and in South Bay, the county as a whole experienced positive net absorption during the second quarter. Average asking lease rates continued to rise. Four of the seven submarkets saw vacancy rates drop. Almost 800,000 square feet of new construction broke ground, 44% pre-leased; and 640,000 square feet of completed construction arrived, nearly two-thirds occupied.
Renewed interest in the central business district continued to make Downtown Los Angeles a top performer in the Los Angeles County office market. While the Westside captured the spotlight during 2000, the commercial real estate klieg lights have re-focused on downtown for the first half of 2001. The average vacancy rate has fallen 8% in 2001 and 13% in the past year. Year-to-date net absorption of almost 400,000 square feet is the highest in the county, and lease rates approaching $2 per square foot have appreciated 13% in the past year.
As in the office market, implementation of prudent and cautious strategies in response to the uncertainty of the mixed economic reports that permeated the press during the last couple of quarters has substantially reduced industrial transaction activity. Opting to err on the side of caution, many healthy industrial businesses throughout the Los Angeles basin have postponed or temporarily sidelined their expansion or relocation plans. The wait-and-see approach adopted by local industrial businesses has produced a two-fold effect. Availability of industrial space has increased, and pent-up demand continues to accumulate. Most accounts describe the curve of this cycle as shaped like a bathtub. A relatively sharp drop in activity, a longer period of reduced activity followed by an equivalently sharp increase in activity to former levels.
Total gross activity in Los Angeles of 8.5 million square feet during the second quarter was slightly higher than the 8.4 million square feet in the first quarter. Pockets of strong activity continued with substantial quarter-over-quarter gains in Tri-cities, Vernon and San Fernando Valley. Although vacancy rates across the county edged up, none was higher than 5.6% and the county average for the second quarter was 3.5%. The second-quarter industrial availability rate settled at a county-wide average of 6.6%, which was well below the national average of 8.1% for the same period. In a healthy reaction to the reduced activity, the volume of new space under construction tapered as well. The lower volume of construction should help to modulate an increase in availability. Easing the constriction may actually be a silver lining that positions the market with enough product to accommodate the requirements of the pent-up demand once the economy waves the green flag and the race for space begins anew.
Analysis provided by CB Richard Ellis’ Global Research and Consulting.
