Vacancy Drops As Rents Continue To Rise

The South Bay market saw rental rates continue to rebound with positive growth for the fifteenth time in sixteen quarters. Vacancy made a modest drop from 16.5% to 15.6%. There was one owner-user construction delivery, and three projects totaling 349,100 SF are expected to deliver in late 2017 and early 2018. Leasing activity held relatively steady from last quarter, recording 484,100 SF.

The South Bay market continues to be a desirable 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 moderately increasing rental rates will continue to attract a variety of media, technology and consumer product tenants.

Key Takeaways:

  • Leasing activity fell year-over-year by 17.8%, the third consecutive quarter of negative activity after eleven straight quarters of positive growth.

  • Average asking rents for the overall market rose from last quarter, climbing to $2.43 per square foot (PSF) full service gross (FSG) from $2.38 PSF FSG.

  • Class A and B vacancy decreased for the quarter, registering drops of 80 and 110 basis points, respectively.

  • The 73,400 SF Trisonic campus delivered as an owner-user property. The South Bay market still has 349,100 SF of inventory under construction, due to deliver in late 2017 and early 2018.

  • Sales activity in the second quarter was highlighted by Starwood Capital Group acquiring 300-400 Continental Blvd. in El Segundo for $168.9 million ($345 PSF) from DivcoWest.

Outlook:

The outlook for the South Bay market remains positive. Vacancy should continue to decrease through the end of 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.