Vacancy Flat While Rent Increase

The Central Los Angeles industrial vacancy rate was flat at 1.4%. The availability rate remained stable at 4.1%. Vacancy remained tightest in the Commerce submarket at 0.7% and higher in the Vernon submarket at 2.2%. Industrial demand was flat at 16,800 SF for the quarter. Sales and leasing activity totaled 2,043,200 SF this quarter. This included 16 sales (666,000 SF) and 39 leases (2,043,200 SF). Average asking rents increased $0.01 PSF NNN to $0.67. Average asking rents reached their highest recorded point. Completed construction totaled 95,000 SF this quarter, and
433,900 SF of space still under construction is expected to be completed in the next 12 months.

Key Takeaways:

  • The overall vacancy rate recorded 1.4%, unchanged over the previous quarter.
  • Asking rental rates increased $0.01 per square foot (PSF)triple net (NNN) to $0.67. Asking rents hit their highest recorded point despite having only slightly increased over the past year. Much of the gain in asking rents was seen in the infill Central Los Angeles submarket.
  • Sales and leasing activity totaled 2,043,200 square feet (SF), broken out into 16 sales (666,000 SF) and 39 leases (1,377,200 SF).
  • Net absorption totaled 16,800 SF for the quarter.
  • Only 433,900 SF of space remains under construction, a very low number for a 248 million SF market.

Outlook:

Space remains scarce in the Central Los Angeles market and few development options exist for tenants looking to expand. Absorption is likely to be flat in future quarters as there are few available spaces on the market. Rents will remain high by historical standards but appear to be stuck at their current rate. Marginal products that continue to linger on the market will put a strain on further increases to the average asking rate. Tenants who signed leases five years ago can expect their rent to increase roughly 20-30% upon renewal. Construction will remain subdued for the foreseeable future, limited to build-to-suit projects or creative rehabilitation of functionally challenged industrial sites. The full impact of the GOP tax bill looks to place new deductions for pass-through entities and make value-add strategies even more appealing. This will benefit real estate investment vehicles and will likely lead to a flood of private capital into commercial real estate in the following years.