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As Rents Continue to Increase, CRE Markets Remain Flat in Los Angeles for Q3

By Tucker Hughes

The Los Angeles office, industrial and flex markets all finished the third quarter nearly flat by all metrics.

For office space, countywide vacancy remained unchanged from the prior quarter at 9.7%, where it has hovered for more than a year’s time now. The ratio of direct and sublease space available also has remained healthy and consistent, with sublease space representing about 9% of the total inventory on the market.

Construction activity decreased slightly, with the square footage under construction decreasing from 7.45 million to 7.25 million from the 2nd to 3rd quarter. This is still up materially from the 6.59 million square feet of under construction product we saw in the 4th quarter of 2018.

Rental rates continued to increase, although only slightly. The average gross rental rate countywide was up to $3.23 per square foot at the end of the 3rd quarter. This is up from $3.18, $3.16 and $3.14 from the 2nd and 1st quarters of 2019 and 4th quarter of 2018, respectively.

For industrial space, vacancy increased by 0.1% to 2.3% total. Industrial vacancy has only slipped above 2.5% once in the last four years, and it was only for a single outlier quarter. Sublease inventory remains static as well, comprising about 12.7% of total space availability.

The amount of space under construction was also completely flat compared to earlier quarters this year, but at a total of 5.2 million square feet being built, space construction was still well above the average of 4.4 million experienced in 2018. For perspective, this is well below the peak of construction activity we’ve seen in the last five years which occurred in 2017 with an average amount of space under construction reaching 6.7 million.

Industrial rental rates continue to increase, just as they have virtually every quarter since 2011. The average triple net rental rate countywide is now $1.08 per square foot, which is up an additional $0.02 per square foot from the end of the 2nd quarter, and up from the $0.53 per square foot average we experienced at the end of 2012.

For flex space, which are hybrid office and industrial buildings, we saw more volatile quarter over quarter vacancy, specifically in regard to sublease space. The 3rd quarter overall ended with vacancy at 6.2%, up from 5.8% compared to the prior quarter. Over 75% of this increase in vacancy was the result of increasing sublease availabilities across the flex sector. While this might seem startling, the flex segment of real estate product is by far the smallest at approximately 58 million square feet of space, compared to 420 million square feet for office and 873 million square feet of industrial, so a single large user of flex space deciding to sublease can heavily influence the vacancy levels.

Flex rental rates have continued to rise in a similar manner to industrial buildings, increasing to $2.01 per square foot triple net in the most recent quarter. Rents have nearly doubled since the lows following the 2008 recession. There is currently no flex space under construction, which will likely contribute to increasing rents.

With another stable quarter in the books, we are eager to see what the final months of this decade will bring.

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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