U.S. and Los Angeles economic conditions steadily have improved during the first half of the year.
The recession had hit the office market particularly hard during the past couple of years, illustrated by a sharp rise in vacancy rates and steady decline in average asking lease rates.
However, during the past few months, the overall office market is trending toward stability with modest job growth numbers and increased tenant confidence.
Although there are a fair amount of new deals driven by tenants taking advantage of lower rates in nicer buildings, renewal activity has been the norm for most markets across the U.S.
This trend also is occurring in greater Los Angeles as tenants attempt to capitalize on the favorable market conditions with lower lease rates and generous concession packages. In many cases, these tenants also are signing longer lease terms versus shorter extensions.
At the end of the second quarter, the overall office vacancy rate in greater Los Angeles increased for the 11th straight quarter to 17.4%., an 11.1% increase from a year earlier.
Absorption during the second quarter totaled nearly 600,000 square feet of negative activity, bringing the year-to-date total to more than 1.5 million square feet. This was the 12th consecutive quarter with negative growth as the office market continued to feel the impact from the economic downturn.
In fact, four of the eight submarkets witnessed negative absorption greater than 175,000 square feet.
In contrast, only three submarkets—led by Ventura—absorbed more than 212,000 square feet.
Due to the lack of tenant demand and available funds for development, office construction has been slowing for the past few years.
Projects under construction total about 980,000 square feet; a year earlier, construction totaled roughly 1.7 million square feet.
Although market fundamentals appear to be improving, there still is a lot of vacant space available for lease. Combined with the modest job growth forecast, it appears that the recovery process will be relatively slow.
Until a significant amount of vacant space has been absorbed, lease rates will continue to decrease or remain flat.
Industrial Market
At the end of the second quarter, the direct vacancy rate in the greater Los Angeles industrial market held at 3.5% from the first quarter, but was up from 3% a year earlier.
Absorption during the second quarter totaled more than 888,000 square feet. In fact, four of the eight submarkets witnessed absorption greater than 100,000 square feet.
In contrast, only three market areas totaled negative absorption. But year-to-date absorption still is negative at 1.2 million square feet.
Industrial construction has been slowing for the past few years. Toward the end of 2009 and during the first half of 2010, the greater Los Angeles market continued to see a similar pattern.
Current projects under construction total 153,000 square feet, considerably lower than the same time a year earlier when construction projects totaled roughly 1.1 million square feet.
Additionally, there were no new construction deliveries during the quarter.
Data and analysis provided by CB Richard Ellis Group Inc.
The Real Estate Watch Chart
Net Absorption, Rates, etc. is provided in a Adobe Reader .pdf print-friendly file.
