As 2009 came to an end, the Los Angeles office market saw initial signs of stabilization. Although the investment market remains relatively inactive, the leasing market appears to have begun leveling out. Earlier trends, such as an increasing vacancy rate, asking lease rate declines and increasing negative net absorption, tapered off in the fourth quarter.
That said, until Los Angeles County sees a return to job growth, the market will continue to be tested.
The rate of increasing vacancy slowed in the fourth quarter, as the vacancy rate in the Greater Los Angeles market increased by only 20 basis points. Even available sublease space growth slowed in every submarket but the San Fernando Valley.
Monthly asking rates dropped by only 3 cents per square foot in the fourth quarter, compared to an 18 cent per square foot drop seen a year earlier.
While the asking rates may not show much of a change, the effective lease rate has been significantly altered due to the increasing amounts and types of concession packages included. It is not uncommon to see free rent being credited at different points in the lease term or for specific amounts of the overall space being leased.
Total negative absorption for the fourth quarter in the greater Los Angeles area was 171,359 square feet, down from the 723,347 square feet seen in the third quarter.
Looking at 2009 quarter by quarter, negative absorption was its highest in the first quarter, at 2.6 million square feet. Negative absorption progressively decreased each quarter.
For the year, negative absorption totaled about 4.9 million square feet. While any amount of negative absorption still indicates a decline in occupied space, that significantly less and less space was vacated each quarter proves that the market is at least starting to stabilize.
Unemployment in Los Angeles County was 12.4% for the end of 2009. This was a slight increase from the 12.3% seen in the third quarter. And it is still much greater than the 9.5% unemployment rate seen a year earlier.
The delayed hiring on the part of tenants in this market will intensify the lag seen during the recovery period. It will take time for employers to hire enough workers to fill the already existing vacant space, let alone initiate the demand for new office construction.
Industrial Market
The greater Los Angeles industrial market continued to show signs of stabilization in the fourth quarter. Industrial availability is up 46% and gross activity is down 12.5% on an annual basis.
But, the greater Los Angeles industrial market remains soft even with its promising fourth quarter activity.
The industrial market has 35 million square of total vacant industrial space and an overall total vacancy rate of 3.5%. Industrial vacancy decreased 3.6% from the third quarter.
Industrial asking rents ended the fourth quarter at 56 cents per square foot, per month. Absorption ended the quarter at negative 48,547 square feet, which was promising but still marked the eighth consecutive quarter of negative absorption. Year-end total absorption for greater Los Angeles was negative 6.4 million square feet.
Industrial gross activity was colored by the San Gabriel Valley, Vernon and Mid-Counties submarkets, which showed the most activity. Industrial availability is up in all greater Los Angeles industrial submarkets—up 45.6% on an annual basis.
The Los Angeles and Long Beach harbors continue to record inconsistent activity, and job losses continue to contribute to the low inventories of manufacturers and distribution firms.
Data and analysis by CB Richard Group Inc.
