Vacancy Declines To Lowest Rate Ever

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 fell 30 basis points to 1.6%, which is the lowest rate on record. Vacancy remains tightest in Ventura County at 1.0% and slightly higher in the San Fernando Valley at 1.8%. Industrial demand was positive 274,900 square feet as the region had higher than normal leasing activity. Sales and leasing activity totaled 1,636,000 square feet this quarter. This was broken out into eight sales (342,300 square feet) and 42 leases (1,293,700 square feet). Average asking rents increased over the quarter to $0.73 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 Central San Fernando Valley at $1.06 PSF NNN and lowest in West Ventura County at $0.61 PSF NNN.

There were no construction completions this quarter and several new projects have broke ground this quarter to move construction activity to 824,700 square feet. This quarter, ProLogis completed its acquisition of DCT Industrial in an 8.4 billion dollar stock-for-stock transaction. Many of the desirable Class A properties were located in Southern California, driving average sales prices for the quarter to $216 per square foot. Rising sales prices led to further compression of cap rates to 5.0%. No other property type has seen such continued compression in cap rates, especially at a time when 10 year treasury rates have increased over the past year by 70 bps.

 

Key Takeaways:

  • The vacancy rate fell 30 basis points to 1.6%, which is the lowest recorded vacancy rate ever recorded for the San Fernando Valley & Ventura County marketplace. 

  • Net absorption was positive, totaling 274,900 square feet for the quarter.

  • Sales and leasing activity totaled 1,636,000 square feet, broken into eight sales (342,300 square feet) and 42 leases (1,293,700 square feet).

  • Asking rental rates increased $0.02 per square foot (PSF) triple net (NNN) to end the quarter at $0.73 PSF NNN. Rents remain at an all time high and have surpassed the previous peak of $0.68 PSF NNN seen in 2007.

Outlook:

The San Fernando Valley remains in the middle 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. As industrial vacancy rates are at historic lows, industrial users seeking larger spaces are having to go further north into neighboring Kern County and particularly, the Tejon Ranch Commerce Center which has attracted increased attention as market conditions continue to tighten.

Vacancy may rise in future quarters as new industrial space is delivered to the market. Conditions remain tight and tenants are finding it difficult to find space that meets their needs. Absorption will likely be positive in future quarters as new space comes to market and should be quickly leased or sold as industrial demand remains high. 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 has hit historic lows and quality industrial space remains hard to find. 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.

Industrial demand remains high and infill industrial demand remains higher still. Future quarters will likely see greater construction activity as rents hit new highs and vacancy rates are at historic lows. Investors remain attracted to the industrial sector due to continued shifts in consumer behavior and a growing economy. Southern California remains the premier industrial investment market due to low vacancy rates and continued rising rental rates.