New Construction Leads To Uptick in Absorption

The San Fernando Valley is the most populous region of Los Angeles and home to major motion picture, music recording and television production companies. Much of the industrial infrastructure is devoted to ancillary services for the entertainment industry and to 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 was flat at 1.9%. Vacancy remains tightest in Ventura County at 1.7% and slightly higher in the San Fernando Valley at 1.9%.

Industrial demand was positive 278,000 square feet, due to recently occupied new construction. Sales and leasing activity totaled 1,118,200 square feet this quarter. This was broken out into six sales (204,600 square feet) and 29 leases (913,600 square feet). Average asking rents held flat at $0.71 PSF NNN. Asking rents have surpassed their peak of $0.68 PSF NNN, which was seen in late 2007. Asking rents were highest in the East San Fernando Valley at $0.95 PSF NNN and lowest in West Ventura County at $0.60 PSF NNN.

About 450,800 square feet was added to the base this quarter, while 763,000 square feet of space remains under construction. 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:

  • New space totaling 450,800 square feet was completed this quarter, most of which was pre-leased prior to construction completion. 

  • Net absorption was positive totaling 278,000 square feet for the quarter.

  • Asking rental rates held steady at $0.71 per square foot (PSF) triple net (NNN). Rents have surpassed the previous peak of $0.68 PSF NNN set in 2007. 

  • Sales and leasing activity totaled 1,118,200 square feet, broken into six sales (204,600 square feet) and 29 leases (913,600 square feet).

Outlook:

This quarter saw the addition of 450,800 square feet of space, which was mostly pre-leased upon completion. 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. Industrial users looking to find the ideal space to meet their needs, 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.

Vacancy is likely to remain flat as demand for new space remains high. Absorption will likely be flat in future quarters as industrial space remains scarce. Rents have been increasing for the past six years and will likely continue to rise in future quarters, but at a slower pace than before. The vacancy rate remains fairly low, and quality industrial space and new construction will see the majority of future price appreciation. 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.

Space remains tight and land for industrial uses remains scarce and highly expensive. Once the current wave of properties finishes construction, there is not ready supply in the pipeline to replace them. Industrial real estate will remain in high demand, especially densely populated infill industrial sites.