By Tucker Hughes
The Los Angeles office space market concluded the third quarter with no change in vacancy for both direct and sublet space, which continues to hover at an aggregate of 10.2% countywide. The amount of vacant space has continued to trend downward from a post-recession peak of 12.4%, which the market experienced in the fourth quarter of 2010. While a reduction of 2.2% over the past eight years may not seem like a lot, in order to chip away at vacancy, the market also needs to absorb all of the new buildings brought to market over that same period. From the fourth quarter of 2010 to the end of the third quarter of 2018, over 13 million square feet of office space have been delivered, in addition to the market absorbing approximately 9 million square feet of space on top of the added square footage.
The availability rate also remained completely flat at 14.0%. Available space includes all of the vacant space in addition to space that is going to become vacant in the future, such as new construction or spaces that are going to be left behind by the existing tenant in the coming months. Across the whole county there is a total of 59.3 million square feet of office space available, yet only 42.6 million square feet that is truly empty, which roughly amounts to 1 out of 10 floors of space.
Since hitting a peak amount of “under construction” inventory in the first quarter of the year, we have seen a steadily decreasing amount of new office space added to the market as the amount of space coming online exceeds that which is being added to the pipeline. This could be a temporary swing down, or, more likely, a tempering of risk as developers are nervous to kick off new projects so late into this cycle.
Rental rates also increased yet again, rising to $3.07 per square foot on a gross basis, which was up from just $3.02 last quarter.
The industrial/flex space market also experienced rental rate growth yet again. Since Q1 of 2011, rates have increased from a low of $0.56 per square foot triple net, all the way up to $1.00 per square foot triple net in the most recent quarter. If we isolate just industrial buildings, the average rental rate is $0.92 per square foot. The combined average of industrial/flex is pulled up by “flex” space, which often times has a significantly higher percentage of office, and therefore garners much higher pricing. For example, flex rates are $1.77 per square foot triple net now on average.
Rental rates continue to run upwards despite a completely flat vacancy rate of 2.7%. That equates to a total of 25.3 million square feet of empty industrial/flex space across the county. Interestingly, the availability rate has increased from 4.4% in the second quarter to 4.7% in the third quarter. When available space is increasing faster than vacant space, it usually means that there is a lot of new development coming on the market, or there are a number of end users of space that are leaving their facilities in the near future, perhaps to move farther east. New development peaked in the second quarter of 2017 at 8.0 million square feet, which has now descended down to 2.1 million in the second quarter of this year and 3.68 million in the most recent quarter. While the spike between the second and third quarter has contributed to the increase in availability, there is also a lot of space coming online that was previously occupied.
Overall, the industrial/flex market is exceptionally healthy though. Vacancy rates are at a record low and future development has been tempered as a result of such limited remaining buildable land existing. While landlords have pricing power, which they are taking advantage of to raise rents, tenants also have the option of moving elsewhere. Be sure to stay tuned next quarter to see how this all plays out.
Tucker Hughes is managing director at Hughes Marino, an award-winning commercial real estate firm with offices across the nation. As head of Hughes Marino’s Orange County and Los Angeles offices, Tucker specializes in tenant representation and building purchases throughout Southern California and beyond. Tucker makes frequent media appearances to speak on the future of commercial real estate, and is also a regular columnist for Entrepreneur.com. Contact Tucker at 1-844-662-6635 or firstname.lastname@example.org.