Office Market
The greater Los Angeles office market continues to feel the impact of the global and national recession. Office vacancy rates are increasing as companies downsize and economic forecasts don’t predict a significant recovery until 2010 or later.
News on employment, dismal local and national forecasts, distressed assets and state and local budgetary issues have made it difficult for investors and users to determine when the time is right to strike on real estate.
The Los Angeles County unemployment rate rose to 12.3% and the California unemployment rate to 12.2% in the third quarter. There has not been a definite growth industry in the local market but the entertainment, government, medical and education industries may take the lead in the market recovery.
Statistically, greater Los Angeles asking rental rates declined to $2.50 per square foot, per month. Direct vacancy rates in L.A. County rose to 13.8% in the third quarter, up 34% from a year earlier. Greater Los Angeles’ total vacancy rate ended the quarter at 16.3%.
Concessions continue to set new benchmarks with commercial property owners wanting to retain their current tenant base and make their assets financially attractive to any tenants in the market. Free rent and aggressive lease concessions—including free parking and tenant improvement allowances—are being introduced to entice and retain tenants.
Absorption for the greater Los Angeles office market ended the third quarter at negative 723,347 square feet. This was the ninth consecutive quarter of negative absorption. The Ventura County submarket defied the trend and posted positive absorption of 195,189 square feet.
Distressed assets have begun to surface in the greater Los Angeles office market. Some commercial real estate owners with loans coming due in the near term are weighing all of their options. Banks have seen some commercial properties come back to them but not en masse.
With limited office buildings under construction and a balanced pipeline of office deliveries in the short term, the Los Angeles office market fundamentals still are strong. The greater Los Angeles office market is not overbuilt. There is pent-up demand for tenants and businesses to move to more favorable Los Angeles office submarkets at lower lease rates and there is still institutional interest in investment ownership.
Industrial Market
The greater Los Angeles industrial market is beginning to show signs of early recovery. Industrial availability is up 47% and activity is down only 1.1% on an annual basis.
The greater Los Angeles industrial market has 36.3 million square feet of vacant space and an overall vacancy rate of 3.7%. Although the industrial vacancy rate increased 6.4% from the second quarter, overall activity increased 32.2% quarter-over-quarter.
Industrial asking rents ended the third quarter at 64 cents per square foot, per month. This asking rent was the same as the second quarter. Absorption ended the quarter at negative 2.2 million square feet, marking the seventh consecutive quarter of negative absorption in the industrial market. Year-to-date absorption in the greater Los Angeles industrial market is negative 10.3 million square feet.
Industrial gross activity was up in most of the greater Los Angeles submarkets from the second quarter, most noticeably in the Commerce, Mid-Counties, greater San Fernando Valley and Ventura submarkets. Most of this industrial activity continues to be based upon renewals and lease extensions.
Even with limited financing and above market asset pricing, the limited industrial supply and proximity to the ports continue to generate some stability in asking lease rates and a sub 4% total vacancy rate across greater Los Angeles.
Data and analysis by CB Richard Ellis Group Inc.
