Vacancy & Rents Start The Year Flat

Vacancy remained tightest in the Commerce submarket at 0.8% and higher in the Central Los Angeles submarket at 2.2%. Industrial demand was negative 114,700 square feet for the quarter. Sales and leasing activity totaled 3,091,900 square feet this quarter. This included 18 sales (592,300 square feet) and 47 leases (2,499,600 square feet). Average asking rents held steady at $0.67 PSF NNN. Average asking rents remained at their highest recorded point. Sales prices and asking rents continue to rise as nontraditional industrial users move into industrial space in desirable areas. This is especially noticeable in the Central Los Angeles submarket, where asking rates are 30% higher for comparable industrial space in the Commerce and Vernon submarkets. With only a few planned projects in the pipeline, land prices continued to increase to more than $2 million per acre. Development is exceedingly difficult in the downtown industrial core of the Central Los Angeles industrial submarket due to the encroachment of residential, retail and especially creative office development.

Key Takeaways:

  • The overall vacancy rate recorded 1.4%, unchanged over the previous quarter.
  • Asking rental rates were also flat for the quarter at $0.67 per square foot (PSF) triple net (NNN). Asking rents remain at 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 3,091,900 square feet, broken out into 18 sales (592,300 square feet) and 47 leases (2,499,600 square feet).
  • Net absorption totaled negative 114,700 square feet for the quarter.
  • Only 540,700 square feet of space remains under construction, a very low number for a 247.6-million-square-foot market.

Outlook:

Last-mile fulfillment has become a major driver for infill development as more companies are looking to expand logistics operations into the Central Los Angeles marketplace. Being near multiple freeways and also a large population has made the Central Los Angeles industrial market a desirable location for e-commerce companies as they continue to push for same-day delivery. Construction will remain subdued for the foreseeable future, limited to build-to-suit projects or creative rehabilitation of functionally challenged industrial sites.

Space remains scarce in the Central Los Angeles market and few development options exist for tenants looking to expand. Much of the leasing activity this quarter was subleases, which did not impact net absorption. 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.