By Tucker Hughes
The Los Angeles office and industrial markets had an almost entirely flat year in 2019, which is a reversal from prior years where we saw more volatility and rental rate growth countywide.
The office space market held its vacancy rate at 9.4% for each quarter end for the entire year. While net absorption was slightly negative, to the tune of approximately a half million square feet, this is a tiny amount in the context of an office market that has 422 million square feet of space. It is worth noting; however, that this is the first year since 2011 when we have had overall year-end negative absorption. This is an indicator that the robust growth we’ve experienced the prior years has slowed and a tenant/landlord equilibrium may be on the near horizon. While net absorption for the year was negative, we saw 2.3 million square feet of new inventory delivered to the market, which is the primary contribution to the net absorption numbers being negative.
The average gross rental rate across the county was relatively stable all year, ending at $3.26 per square foot as of year-end.
The industrial market closely mirrored the office market; however, we saw vacancy nominally increase from the first quarter, to second, to third, to fourth from 1.9%, 2.1%, 2.1% and finally ending at 2.3%. We have generally seen vacancy hover right around these levels, so a fifth of a percent increase is not unusual. That said, it is likely that the first quarter of 2020 will bring the first vacancy jump of a full half of a percent due to a material amount of new product being delivered to the market in February and March.
We also saw industrial rents decrease from an average countywide triple net rate of $1.08 in the third quarter for $1.07 per square foot in the fourth quarter. This is the first time we’ve seen a decrease since the fourth quarter of 2012, when rental rates were a mere $0.53 per square foot.
2020 will be an inflection point for landlords, who will need to decide whether or not they believe the slowing, and in certain cases, even retreating market fundamentals can support continued rental growth.
Tucker Hughes is managing director at Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. As head of Hughes Marino’s Orange County and Los Angeles offices, Tucker specializes in tenant representation and building purchases throughout Southern California. 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.
