Record Low Vacancy On Strong Fundamentals

The Los Angeles Basin industrial market is the largest market in the United States, totaling over 1.56 billion SF. It also has some of the highest asking rental rates and as well as one of the lowest vacancy rates of any market in the US. Major industrial drivers for the region continue to be imports at the twin ports of Los Angeles / Long Beach, which handle roughly 40% of all imports into the country. In addition, the region is the largest manufacturing center in the United States, with more manufacturing jobs than the entire state of Illinois. In first quarter 2017, the Downtown Los Angeles office market recorded negative absorption for the second straight quarter. The delivery of 2 vacant office buildings contributed to the uptick in vacancy. Leasing volume recorded 641,300 SF. Asking rents continued to climb, recording growth of 0.2% year-over-year. While positive, growth was flatter than the previous 3 quarters, which saw growth rates of 1.5%, 1.9% and 1.4% respectively.

Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. This, combined with a wave of deliveries in the next year, will put pressure on the market as more space becomes vacant.

Key Takeaways:

  • The Greater Los Angeles Basin industrial market absorbed 6,883,600 SF of industrial space this quarter, bringing the yearly total for 2016 to 26,056,500 SF of positive net absorption.

  • This strong industrial demand has led the overall vacancy rate to fall 20 basis points to 2.2%. This is the lowest the vacancy rate has ever been for the Greater Los Angeles Basin industrial market.

  • This quarter there was 3,947,400 SF of industrial space that finished completion, the majority of which was leased before completion. For 2016, there was a total of 25,239,500 SF of space added to the market, which is less than the 27,932,400 SF added in 2015. Despite the current construction boom taking place, actual construction completions are only on par with those of previous years.

Outlook:

The Central Los Angeles market remains at a post recession peak with low vacancy rates and rising industrial rents, despite the condition of much of the functionally obsolete and older buildings. The South Bay market remains the premier market for distribution companies and sea and air cargo centered industrial users. We are likely to see investments remain active in the San Fernando Valley as a lack of available product in nearby markets is driving up sales prices throughout the Los Angeles Basin.