By Tucker Hughes

The office and industrial space markets throughout Los Angeles have remained almost completely unchanged in their fundamentals over the past six months. Vacancy for office space is static at 10.7% across the county, a rate at which it has hovered since late 2016. Industrial space is in a similar situation, with vacancy rates continuing to hover between 2.2% and 2.3%. Even rent increases were relatively flat.

What is new? The pipeline for the future delivery of new office space is at a decade high with a total of 5.8 million square feet of new development under construction throughout the county. Perhaps even more interesting is that the number of industrial buildings in existence despite the 2.2% vacancy rate, has actually gone down. As of 2014 there were 34,573 industrial and flex buildings. Now there are only 34,449. While the decrease in number is miniscule, it is worth noting what is happening. Industrial buildings are being converted to more profitable uses where possible, such as in more urban located centers. Examples of this would include the conversion to creative office space or into multifamily residential units. This helps explain why there isn’t more industrial development. The land is simply too expensive to purchase when the industrial developers are competing with those that can afford to pay way more as a result of their proposed building plans.

The prospect of additional inventory hitting the market is good news as far as most tenants are concerned. Additional supply should be a welcome headwind to continued rent increases from landlords. That said, should the greater economy be nervous that we are at peak development levels? In the short term, no. The additional supply is not significant relative to the total size of the market, and will serve as a relief value to a tightening market. However, if this rate of building continues for a prolonged period of time, it is possible that we would get into a position of overbuilding. Even so, it is highly unlikely for developer activity to accelerate without good reason for doing so, as many investors are cautious in their investments, knowing that recessions have tended to affect real estate every seven to eight years for as long as they can remember.

Some of Los Angeles’ largest property owners have continued to acquire additional properties. For example, Brookfield recently bought California Market Center for approximately $440M from Jamison Services. The project which is located in Downtown will be converted from mostly showroom space into mixed use and creative office. Brookfield, who already owned upwards of 8.6 million square feet prior to this purchase, continues to bolstering their already leading position in the Downtown market. In Santa Monica, Douglas Emmett acquired 429 Santa Monica and 1299 Ocean Avenue from Equity Office, a subsidiary of Blackstone Group, who is also one of the largest owners in Los Angeles. With Douglas Emmett’s recent purchase they now own over 70% of Downtown Santa Monica, as well as having a virtual monopoly in Westwood, and a strong foothold in Century City, Brentwood, Beverly Hills, as well as Culver City. Expect to see the owner of institutional quality real estate throughout California continue to convergence in the coming months and years.

Major macro events notwithstanding, we expect that the current state of the market will remain relatively static for the duration of the year.