South Bay Rents Accelerate Amidst Velocity Gains

South Bay market rental rates exhibited growth for the 18th time in 19 quarters. Vacancy dropped from 16.2% to 15.8% on the strength of move-ins in LAX/Los Angeles/Westchester, Downtown Long Beach and El Segundo/Beach Cities. About 135,200 square feet of product remains under construction and is expected to deliver by the end of the year. Leasing activity almost doubled last quarter’s total, recording 840,300 square feet. The NFL’s lease at the Kroenke Group’s stadium development site in Inglewood accounted for nearly a quarter of that total. Investment activity rebounded from last quarter’s total volume of $77.9 million to $310.6 million.

The overall vacancy rate for the South Bay market decreased by 40 basis points from the prior quarter to 15.8%. Vacancy was down 540 basis points since the same period four years ago. Healthy demand in LAX/Los Angeles/Westchester and Downtown Long Beach drove vacancy rates down. Absorption for the South Bay recorded positive for the quarter at 98,700 square feet. Aside from the NFL deal, other leasing highlights for the quarter included DaVita/HealthCare Partners leasing 80,600 square feet at 19191 S. Vermont Avenue in Torrance, as well as Cetera Financial Group signing a sublease for 36,300 square feet at 100 N. Sepulveda Boulevard in El Segundo. Among the major move-ins for the quarter were co-working company Spaces setting up shop in 37,400 square feet at 360 N. Sepulveda Boulevard in El Segundo, as well as the California State University expanding by 14,700 square feet at 310 Golden Shore in Long Beach.

Class B rents increased by $0.11, followed by increases of $0.09 and $0.04 for Class A and Class C, respectively. While overall rent growth in El Segundo/Beach Cities increased by 10% year over year, ancillary submarkets such as Long Beach Airport/Lakewood and Central Torrance have also experienced brisk growth of 9.1% and 6.8% over the same period. Every submarket in the South Bay saw rents increase for the quarter. NSB Associates’ 80,000-square-foot 2330 Utah Avenue, an expansion of Utah Campus, is the largest remaining project in the pipeline and is due to deliver next quarter. With news that Sares Regis’ purchase of the former Toyota headquarters in Torrance will be primarily mixed-use residential and retail, Hackman Capital’s purchase of Northrup Grumman’s facility at 888 Douglas Street stands as the only major potential office project in the South Bay.

Investment activity for properties over 25,000 square feet logged $310.6 million in volume across five transactions. Fully occupied by DirecTV and Raytheon, the three-building
AirFlyte campus sold for $167.5 million, or $305 PSF. CalPers disposed of the property after making extensive renovations and leasing up the property since its acquisition in 2013. The Torrance Technology Campus, 91% occupied, traded from PM Realty Group to FRM Associates for $124 million ($216 PSF). Its major tenant, L3 Technologies, had recently executed a lease extension, keeping them there until 2031.

Key Takeaways:

  • After five consecutive quarters of contraction, leasing activity rebounded to record 840,300 square feet owing mainly to the NFL’s 200,000-square-foot lease at 3883 W. Century Boulevard in Inglewood. 

  • Average asking rents for the overall market rose, climbing to $2.58 per square foot (PSF) full service gross (FSG) from $2.49 last quarter.

  • Class B vacancy benefitted the most from modest demand this quarter, registering a 50-basis-point drop. 

  • Inventory totaling 135,200 square feet remains under construction, all of which is slated to deliver in 2018. 

  • Sales activity continued to be robust with $310.6 million in transaction volume for the quarter. The trade of The AirFlyte campus in El Segundo from CalPERS to Swift Real Estate Partners was the highlight for the quarter.

Outlook:

The outlook for the South Bay market remains positive. Vacancy should decrease through late 2018, although movement will be incremental due to lessened leasing activity in 2017 and projected deliveries of new inventory. Similar to West Los Angeles in the past couple of years, the South Bay has managed to defy rental rate expectations, routinely posting year-over-year growth in the 6%-8% range. While most of the rate growth has been seen in Central Torrance and El Segundo/Beach Cities, often overlooked markets such as LAX/Los Angeles/Westchester will see heightened investor interest and increasing rental rates. The attractiveness of the market, both in terms of office inventory and quality of life, should continue leading to rising rates and declining vacancies. In addition to core investment properties, value-add and creative conversion projects will remain part of the investment environment as the market continues to attract institutional quality investors.

Sliding velocity and new construction deliveries through the middle of 2018 will temper major vacancy gains in the South Bay market. Overall, demand will lessen proportionally to decreased leasing velocity in late 2017. However, in what amounts to somewhat of a reversal of trends, shifting federal policies have also led to increased demand for defense/aerospace industry-specific build outs. After a period of measured rental growth in late 2016 and early 2017, South Bay rents have exceeded 5% growth in the last few quarters. This is expected to continue
throughout 2018, particularly in secondary markets. Construction will lag behind the boom the market saw in the past few years. However, all current projects, which account for 3% of all construction activity in the county, are due to deliver within the year.

The South Bay market has seen rising costs for industrial sites and obsolescent office inventory. The subsequent returns for those early into the market will continue to draw interest from investors, both local and institutional, in areas not traditionally known for office product.