By Tucker Hughes

Here we are at the mid-point of the year. The Los Angeles commercial real estate market is behaving in a unique manner. Office space has performed quite well, delivering attractive net absorption numbers, which is a metric that tracks the total change in occupied space. In the first two quarters alone we have seen 2 million square feet of positive net absorption compared to a total of 2.2 million square feet for all of 2015. These are strong numbers, but they pale in comparison to the 3 million square feet of net absorption we experienced in 2014. On the industrial side of the asset market we have seen a very different story unfold. Despite an extremely strong 2014 and 2015, which delivered 11.6 and 8.5 million square feet of net absorption respectively, 2016 is approximately 1 million square feet into negative territory for the year.

We are definitely at an inflection point in the real estate cycle. Having been on the upswing for numerous years, the concern that a pullback might be just around the corner is a real one for many property owners. Even more interesting is what the above market data illustrates. Industrial real estate is often considered a leading indicator for future office space demand, just as retail is a barometer for the greater industrial market. Given the current circumstances, one can’t help but wonder whether the trends the industrial product is experiencing will be short-lived or long-lasting and, if it’s the latter, how long until the office asset class is materially affected.

The stakeholders who would really value an answer to the above question are those with literally billions of invested dollars on the line in their developments. There are many all across the country, with some areas being more concentrated than others. For example, take the Arts District in Downtown LA. There are four large-scale and noteworthy projects under construction for well over a million square feet of space, with even more in the pipeline. The product being delivered is extremely attractive for creative users, but is there really sufficient demand for every development to be successful? Time will tell, but macro level factors will have a big impact on the success of each project regardless of their unique offerings. El Segundo has a similar landscape, with over a million square feet under development.

Given the current circumstances of the market, tenants who are contemplating their lease renewal negotiations may question whether it is worth waiting to see how the market plays out or if moving forward sooner rather than later is the optimal path. The answer depends on multiple factors, but for the most part sooner is better. While the rate of growth may be slowing, it’s unlikely to reverse in the immediate future. New supply will need to sit stagnant for a period of time before price reductions begin affecting existing inventory. More important than market conditions is maximizing your negotiation position and leverage when you need it most. Waiting too late can be disastrous given the relatively lengthy time it takes to facilitate a seamless relocation; once you no longer have time to relocate, you are somewhat captive.

The second half of the year will be telling in terms of future conditions. We are actively representing approximately 150 companies throughout Los Angeles. Most that are in the market for new space are in expansion mode, but the vast majority continue to renew their leases given their mature space needs and the lack of business disruption.