2017 Ends With Rents At Highest Point Ever

The San Fernando Valley is the most populous region of Los Angeles and home to the major motion picture, music recording and television production companies. Much of the industrial infrastructure is devoted to ancillary services for the entertainment industry and for serving the local population. The San Fernando Valley has recently seen an influx of value-add investors continuing to purchase properties in the region.

Vacancy decreased 20 basis points to 1.7%  and remains tightest in the Simi Valley/Moorpark area at 0.9% and highest in the Santa Clarita Valley at 4.3%. Industrial demand was positive 394,400 SF for the quarter. Sales and leasing activity totaled 1,495,600 SF this quarter. This was broken out into 11 sales (509,700 SF) and 28 leases (985,900 SF). Average asking rents increased $0.01 PSF NNN to $0.70.

Key Takeaways:

  • Asking rental rates rose $0.01 per square foot (PSF) triple net (NNN) to $0.70. Rents have surpassed the previous peak of $0.68 PSF NNN set in 2007.
  • The vacancy rate decreased 20 basis points to 1.7% as industrial demand has remained strong. The vacancy rate remains near historic lows.
  • Sales and leasing activity totaled 1,495,600 square feet (SF), broken out into 11 sales (509,700 SF) and 28 leases (985,900 SF).
  • Net absorption totaled 394,400 SF for the quarter and ended 2017 with 1,930,300 SF of positive net absorption for the year.
  • Construction activity remained strong at 757,000 SF.

Outlook:

The San Fernando Valley is at the tail end of a building boom. Tight market conditions and rising rents are leading to a much needed increase in supply. As these newly completed buildings are leased up, we expect to see increased investor activity on these newly leased buildings. For industrial users looking to find the ideal space to meet their needs, they will likely have to expand their industrial footprint by taking additional space in soon to be constructed speculative buildings or in build to suit projects, as quality space remains hard to find in this market.

There remains 757,000 SF of space under construction, which will likely increase the vacancy rate in future quarters. Future quarters will likely see more net absorption as new, larger buildings under construction come to market. Rents will continue to rise in future quarters but increases will not be uniform. The discrepancy between rents in Los Angeles and Ventura Counties will likely increase in future quarters as asking rents are rising faster in Los Angeles County compared to Ventura County. Many of the existing buildings in the San Fernando Valley are ill-suited for modern distribution or e-commerce tenants. This will start to change as new development begins addressing the needs of modern industrial tenants. The next few years will bring an increased supply of competitive space to the San Fernando Valley.

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.