Heightened Investment Activity Highlights Year End

The South Bay market saw rental rates continue to rebound with positive—albeit minimal—growth for the sixteenth time in seventeen quarters. Vacancy made a modest drop from 15.6% to 15.2%. While there were no construction deliveries, three projects totaling 349,100 square feet are expected to deliver in early 2018. Leasing activity held relatively steady from last quarter, recording 583,900 square feet.

Investment activity of $1.1 billion more than doubled that of any quarter in the past eight years and highlighted the potential the South Bay market has presented to investors as of late. 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 23.5%, the fourth consecutive quarter of negative momentum after 11 straight quarters of growth.

  • Average asking rents for the overall market rose minimally from last quarter, climbing to $2.44 per square foot (PSF) full service gross (FSG) from $2.43.

  • Class B vacancy decreased for the quarter, dropping 70 basis points, while Class A increased by 20 basis points.

  • No projects were delivered to the market. The South Bay market has 349,100 square feet of inventory under construction, all of which is slated to deliver in the first half of 2018.

  • Sales activity ramped up to close the year, highlighted by Starwood Capital Group acquiring Pacific Corporate Towers in El Segundo for $605.5 million ($381 PSF) from General Motors Pension.

Outlook:

Sliding velocity and new construction deliveries through early 2018 will temper major vacancy gains in the South Bay market. With leasing velocity tailing off to end the year, look for demand to lessen accordingly throughout 2018. South Bay rental growth had been steady through 2017 but has started to show some softness at the end of the year. Through 2018, rental growth will be minimal until new projects deliver to push rents upward again. Construction will lag behind the boom the market saw in the past few years. However, all current projects, which account for 9% of all construction activity in the county, are due to deliver within a year.

The outlook for the South Bay market remains positive. Vacancy should continue to decrease into the first half of 2018, although movement will be incremental due to lessened leasing activity in 2017 and projected deliveries of new inventory. Likewise, rental growth will increase at a more measured pace than in previous years. 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.