Positive Market Activity Continues For Second Quarter

The San Fernando Valley and Ventura County office market recorded positive net absorption at 121,000 square feet as vacancy declined by 40 basis points in the second quarter. Asking rental rates recorded $2.40 PSF FSG, a 5.7% year-over-year increase. With only two new projects under construction on the horizon, the market will remain supply-constrained and absorption is expected to remain flat to slightly positive. Given these market conditions, San Fernando Valley and Ventura County office market trends are expected to move at a slow rate.

Overall vacancy for the market decreased from 13.8% to 13.4% during the second quarter. A longer historical perspective shows that the vacancy rate a year ago stood at 14.0%. Total vacancy rates were highest in West Ventura County at 20.5%. The submarket with the lowest vacancy was Central San Fernando Valley at 7.3%. A comparison by class illustrates that vacancy rates were
highest for Class A (14.1%) and lowest for Class C (7.2%), with Class B space (12.9%) in between. Net absorption recorded positive movement at 121,000 square feet in the second quarter, compared to last quarter’s negative 108,700 square feet. Three submarkets recorded positive absorption: West San Fernando Valley (123,800 square feet), Central San Fernando Valley (96,900 square feet), and West Ventura County (19,600 square feet). Leasing activity totaled 694,600 square feet for the quarter. The largest new direct lease transaction was Amerihome Mortgage signing two lease deals totaling 145,700 square feet in Westlake Village.

The weighted average asking rent for direct space increased to $2.40 PSF FSG from $2.39 one quarter ago. This marks a high point for average asking rental rates since the mid-2010 rate of $2.28. Class A asking rents recorded at $2.61 PSF FSG compared to $2.52 one year ago, a 3.6% year-over-year increase. No office buildings were delivered during the second quarter, and no buildings are currently under construction. Approximately 1.2 million square feet of office space is proposed for development in the San Fernando Valley and Ventura County market. Two projects totaling 274,300 square feet are currently under construction at 6150 Laurel Canyon Boulevard in North Hollywood and 27566 Woodfall Road in Santa Clarita.

Investment sales activity for buildings over 25,000 square feet decreased from the first quarter, recording $32.1 million in sales volume, down from $62.4 million. The largest transaction recorded was K&A Investments, LP acquiring 20151 Nordhoff Street in Chatsworth for $18.2 million ($246 PSF). The five-year average historical capitalization rate for the San Fernando Valley and Ventura County office market is 6.5%.

Key Takeaways:

  • The San Fernando Valley and Ventura County office market closed the second quarter with positive movement as net absorption recorded 121,000 square feet.

  • The office market vacancy rate decreased by 40 basis points to 13.4%.

  • Rental rates increased by $0.01 from the first quarter to $2.40 per square foot (PSF) full service gross (FSG).

  • No new projects were delivered in the second quarter. Two projects are currently under construction totaling 274,300 square feet.

  • The Los Angeles County unemployment rate declined to 4.4%, a decrease of 40 basis points from last year. Leisure and hospitality listed the largest year-over-year employment gain by adding 5,700 jobs. Professional and business services posted the second largest job growth adding 2,800 jobs.

Outlook:

Vacancy rates in the San Fernando Valley and Ventura County market are expected to remain stable in the second half of 2018 due to the lack of new construction. As vacancy remains stable, both absorption and leasing activity are expected to remain positive through the second half of 2018. As vacancy rates remain stable, asking rental rates will continue to increase. The 56,000 square-foot office building at 27566 Woodfall Road in Santa Clarita is expected to be completed in fourth quarter of 2018. Real estate is proving to be a desirable asset as investors continue to look for stable income-producing assets.