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The Year Ends Strong for Los Angeles’ CRE Market, but Will it Continue?

By Tucker Hughes

The Los Angeles office market ended 2018 on a pronounced high note, which represented one of the strongest performing quarters in recent history.

Overall vacancy countywide dropped from 10.2% to 9.7% from the end of the 3rd to 4th quarter. The vacancy rate is now the lowest that it’s been since the 4th quarter of 2008 when it was a mere 7.3%. The availability rate, which is a measure of all vacant space as well as occupied space that will become available in the future, dropped in a similar manner from 13.9% to 13.3% from the 3rd to 4th quarter.

While an impressive amount of space was leased in the 4th quarter, which contributed to the lower levels of available space, we also saw an unusually low amount of new space delivered to the market at just 177,000 square feet countywide. The average amount of office space delivered per quarter for the prior two years is 648,000 square feet. This is somewhat of an anomaly, and is unlikely to be experienced again, as there is currently 6.3 million square feet of office space under construction, which is the highest we’ve seen in at least 25 years.

Rental rates are also the highest they’ve ever been—ending the year at an average of $3.13 per square foot on a gross basis. This is up from the pre-recession peak of $2.67 per square foot, which was logged in the 3rd quarter of 2008. While there have been widespread rental rate increases in most office submarkets due to lower vacancy, a non-trivial amount of the price increases is the result of premium prices for new construction being averaged into the existing base of office buildings.

The fundamentals experienced in the industrial real estate market have been relatively consistent for the prior 36 months. 2018 ended at a countywide vacancy rate for all industrial product of 2.4%. This was down nominally from the prior two quarters which were both up from the 2.2% vacancy rate experienced in the 1st quarter of the year. It’s important to remember that industrial vacancy rates have always been much lower than office vacancy rates in Los Angeles county. The peak amount of vacancy we’ve seen for industrial is 5.7%, which was in the 1st quarter of 2010. Since then we’ve seen a steady decrease and then a flatlining since 2016.

While occupancy levels are stable, rents have grown much more aggressively. 2018 ended at an average triple net rental rate of $1.02 per square foot. Since the start of 2011, this represents a nearly 8% rental growth rate, seriously exceeding most annual rental rate increases found in industrial leases, which generally are around 3% per year.

More interestingly than Los Angeles County’s industrial real estate market is the Inland Empire’s blossoming inventory of logistics and manufacturing buildings, presently consisting of 615 million square feet of industrial space. This is the release valve for Los Angeles County industrial users, and we’ve seen a sharp decline in vacancy rates over the last nine years, as the market has moved from a 12.0% vacancy rate in the beginning of 2010 to 4.8% as of the end of the 4th quarter of 2018. Average rental rates have more than doubled over the same period, increasing from an average triple net rate of $0.35 per square foot to $0.71 per square foot. The amount of space under construction remains at one of the highest levels we’ve experienced at nearly 27 million square feet.

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 tucker@hughesmarino.com.

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