South Bay Records 8-Year High In Leasing Activity

The South Bay market saw an incremental decrease in rental rates, while vacancy made a modest drop from 18.3% to 17.4%. Construction completions in El Segundo came online this quarter, but there are currently no projects due to break ground in 2017. Leasing activity rose from last quarter to 763,100 SF and established an 8-Year high. Investment dollar volume increased as well, with both core properties and value-add creative conversions trading before year-end.

The South Bay continues to be a desired destination for tenants seeking alternatives to the higher-priced submarkets to the north, as well as companies that have grown organically within the market. Future demand, high-quality traditional and creative space, and rental rates that have seen steady, but not meteoric, increases will continue to attract a variety of media, technology and consumer product tenants.

Key Takeaways:

  • The El Segundo/Beach Cities submarket finished 2016 with momentum, recording market high numbers in overall asking rent, absorption and leasing activity.

  • Average asking rents for the overall market decreased for the first time after 13 straight quarters of increases. The decrease was minimal, dropping to $2.30 per square foot (PSF) Full Service Gross (FSG) from $2.31 PSF FSG.

  • Absorption gains were primarily split between Class A and B properties, with each recording positive absorption of 127,100 square feet (SF) and 121,600 SF, respectively.

  • 3 new properties delivered this quarter, totaling 235,300 SF of new inventory. The South Bay market still has 73,000 SF of inventory under construction, due to deliver in early 2017.

  • Several properties traded hands in second quarter, highlighted by Lincoln and Rockwood Capital acquiring the Gateway El Segundo campus for $120M ($344 PSF) from DivcoWest.

Outlook:

The outlook for the South Bay market remains positive. Vacancy should continue to decrease through 2017 due to strong leasing activity this year. Steady rental growth throughout 2016 will continue along the same arc in 2017, but rates might see some fluctuations as higher priced space comes off the market. In addition to core investment properties, value-add and creative conversion projects will remain part of the investment environment as sellers divest completed projects and buyers seek opportunities to enter the market.