Vacancy Rises As Rents Remain Flat

The vacancy rate for second quarter rose 20 basis points to 1.6% in Central Los Angeles, and the availability rate increased 30 basis points to 4.7%. Vacancy remained tightest in the Vernon submarket at 1.3% and higher in the Central Los Angeles submarket at 2.1%. Industrial demand was negative for the quarter by 260,300 square feet and negative 375,000 square feet for the year so far. Sales and leasing activity totaled 1,589,800 square feet this quarter including seven sales (476,700 square feet) and 32 leases (1,113,100 square feet). Average asking rents held steady at $0.67 PSF NNN, 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.

A single fully leased build-to-suit project was completed this quarter, which totaled 310,700 square feet of space. There remains 230,000 square feet still under construction expected to be completed in the next six months. 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. Capitalization rates increased 140 basis point this quarter, averaging 5.8% in the second quarter of 2018. Average sale prices rose over the quarter to $188 PSF.

Key Takeaways:

  • The overall vacancy rate in the Central Los Angeles Market recorded 1.6%, up 20 basis points over the previous quarter.

  • Asking rental rates were 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 1,589,800 square feet, which breaks out into seven sales (476,700 square feet) and 32 leases (1,113,100 square feet).

  • Net absorption totaled negative 260,300 square feet for the quarter.

  • Only 230,000 square feet of space remains under construction, a very low number for a market with upwards of 248 million-square-feet.

Outlook:

Space remains scarce in the Greater Central Los Angeles market, which has few development options for tenants looking to expand. Much of the activity this quarter was for a build-to-suit project. With dwindling construction, future quarters may see lower amounts of sales and lease activity. Rents will remain high by historical standards but appear to be stuck at their current rate. Marginal space that continues 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. Industrial real estate will remain in high demand, especially densely populated infill industrial sites. 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.