Vacancy Drops As Rents Continue To Rise

The South Bay market saw rental rates continue to rebound with positive growth for the fourteenth time in fifteen quarters. Vacancy made a modest drop from 16.8% to 16.5%. There was one construction delivery, but 4 projects totaling 422,100 SF are expected to deliver in 2017 and early 2018. Leasing activity slid from last quarter to 476,500 SF.

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:

  • Leasing velocity fell year-over-year by 30.8%, the second consecutive quarter of negative velocity after 11 straight quarters of positive growth.

  • Average asking rents for the overall market rose from last quarter, climbing to $2.38 per square foot (PSF) Full Service Gross (FSG) from $2.34 PSF FSG.

  • Class A vacancy decreased for the quarter, registering a drop of 110 basis points.

  • 10,900 SF in one property delivered this quarter. The South Bay market still has 422,100 SF of inventory under construction, due to deliver in late 2017 and early 2018.

  • Sales activity in the second quarter was highlighted by CalSTRS acquiring 1700 E. Walnut Ave. in El Segundo for $48.5 million ($207 PSF) from Roxborough Group.

Outlook:

The outlook for the South Bay market remains positive. Vacancy should continue to decrease through the end 2017, although movement will be incremental due to lessened leasing activity in the beginning of 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.