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2019 Off to a Slow Start-What is on the Horizon for Los Angeles?

By Tucker Hughes

The Los Angeles office market is off to a very slow start to the year. After ending 2018 on a pronounced high note with a record setting quarter in terms of rental growth and reduction in county-wide vacancy, we have seen a much more relaxed first quarter of the year.

The amount of vacant space increased from 9.8% at the end of the 4th quarter to 9.9% by the end of the 1st quarter. Already within the first few weeks of April, vacancy was back down to 9.8%. While some may point to this as an indicator of a softening in the market, a single large company’s real estate decision can easily skew the numbers by a tenth of a percent. The foregoing said, if the previous several years are any indication, we will continue to see downward pressure on vacancy countywide this year, with especially concentrated pressure in certain areas of the market.

Overall gross rental rates also were flat, moving from $3.13 to $3.14 per square foot as an average of the entire county. Similarly to vacancy, it would be overly dramatic to cite this as statistically relevant given the nominal increase. For context, this time last year, rental rates were $2.99 per square foot, which amounts to approximately a 5% increase in rents in just a 12- month period.

The total space under construction remained relatively static too, moving from 6.41 million square feet to 6.51 million square feet. When all of this space is delivered it will increase the total office square footage across the county of Los Angeles by 1.56%.

Similarly to the office market, the industrial and flex sectors of Los Angeles county were also flat despite a strong 4th quarter.

The total vacancy rate for industrial and flex buildings decreased from 2.4% to 2.3%, an amount that is somewhat irrelevant in the big picture of the market. For perspective, vacancy has consistently hovered between 2.2% and 2.8% since the beginning of 2016. While it is an extremely tight market, there still is 22 million square feet of available space, in addition to tens of millions square feet of space available further east in the Inland Empire.

Despite relatively static vacancy, we did continue to see material rental growth on the industrial side of the real estate economy, with the average triple net rate increasing from $1.02 to $1.11 between the end of the 4th quarter and the end of the 1st quarter. This time last year, average rents were $0.94 per square foot triple net.

The amount of industrial space under construction also reached a slight 12-month high, swelling to 4.68 million square feet.

Even without material changes to the supply/demand equation in the industrial market, we continue to see real rental growth. In a market that has seen such rapid appreciation, many users are trying to get in front of further rental growth, which becomes a self-fulfilling cycle of continuous increases in rent.

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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