By Tucker Hughes

The real estate space market has continued to tighten across both office and industrial asset classes. Office vacancy rates countywide are currently at 10.6%. The last time they were this low was back in 2008. Industrial is a similar story, with an exceptionally low 2.3% vacancy rate. This is competitive with pre-recession vacancy levels. For example, industrial vacancy was at 2.9% in 2006 and 3.0% in 2007. Should this be a concern for tenants? Absolutely. Statistically, the vast majority of tenants renew, and are faced with even less inventory to consider for a relocation. As a result landlords feel empowered to dramatically raise rental rates and eliminate tenant concessions given the hostage-like situation that some companies are finding themselves in space-wise.

The total office market countywide is comprised of 432 million square feet of space. In the most recent quarter we saw a total net absorption (total net space filled) of 1.4 million square feet. This amount may seem nominal in relation to the hundreds of millions of square feet of inventory. However, considering only 45 million square feet of the total market is available, it represents that 3% of the total remaining space available to tenants to lease vanished in a single quarter.

The good news is that we have nearly 3.6 million square feet of office projects currently under construction, with many more ready to move forward in the near future. While these buildings will definitely provide relief to tenants by increasing the supply side of the space market, most of the new product under construction will be accompanied by high rental rates. Consider what’s being built. Whether it’s creative office space in the Arts District or a high-rise building like the Wilshire Grand that is delivering a portion of their building as office space, new space is expensive, whether it be ground up or adaptive re-use of an existing structure. Not to worry though – as tenants move into these new buildings, they leave huge amounts of second generation space available for other tenants to secure at favorable prices. Warner Music just signed a quarter million square foot lease in the Arts District, leaving behind their Burbank space for a to be determined future tenant.

Switching gears back to industrial, we currently have only seen 5.7 million square feet of projects under construction relative to a total market size of almost a billion square feet. This is a pretty nominal amount considering we have seen upwards of 4 million square feet of absorption in a single quarter, like in the fourth quarter of 2015. These numbers are misleading though. Why isn’t more property being developed given the limited supply? The new industrial product being built to serve the Los Angeles market isn’t in the county. The Inland Empire currently has 15.4 million square feet of space under construction, and just last quarter experienced 8.4 million square feet of positive absorption. That is a staggering number relative to Los Angeles, especially considering the relative increase in supply in that market, as the Inland Empire’s total square footage is only 574 million square feet compared to nearly a billion square feet in Los Angeles.

Strong fundamentals exist in today’s market in terms of vacancy relative rental rates. What will be the catalyst to eventually reduce rents? Likely overdevelopment, which is unlikely for now given the focus of developers on apartments and for-sale housing, or a macro level pull back or trend in the amount of space being utilized by companies. Economic or otherwise, market cycle declines always come, it’s only a matter of when.