The SFV & VC Market Continues Its Positive Stride

The San Fernando Valley and Ventura County office market recorded positive movement, while net absorption recorded at 165,300 square feet as vacancy declined by 60 basis points in the second quarter. Asking rental rates recorded $2.48 PSF FSG, a 6.9% 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 positive. Given these market conditions, San Fernando Valley and Ventura County office market trends are expected to witness positive tenant demand.

Overall vacancy for the market decreased from 13.4% to 12.8% during the third quarter. A longer historical perspective shows that the vacancy rate a year ago stood at 13.9%. Total vacancy rates were highest in West Ventura County at 20.5%. The submarket with the lowest vacancy was Central San Fernando Valley at 7.2%. A comparison by class illustrates that vacancy rates were highest for Class A (13.3%) and lowest for Class C (8.5%), with Class B space (12.4%) in between. Net absorption recorded positive movement at 165,300 square feet; the highest amount of absorption recorded since third quarter 2014. Leasing activity totaled 899,100 square feet for the quarter, breaking above a five-year historical average of 640,000 square feet. The largest lease transaction was Anthem Blue Cross signing 167,700 square feet to relocate to 21215-21255 Burbank Blvd. in Woodland Hills. The weighted average asking rent for direct space increased to $2.48 PSF FSG from $2.40 one quarter ago. This marks a high point for average asking rental rates since the mid-2010 rate of $2.28 PSF FSG. Class A asking rents recorded at $2.76 PSF FSG compared to $2.54 one year ago, a 8.7% year-over-year increase. 

No new office buildings were delivered during the third quarter. There is approximately 1.7 million square feet of proposed inventory expected to deliver to the market within the next year. 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. Both projects are expected to be completed within the next 3 to 6 months. Sales volume decreased from the second quarter for buildings over 25,000 square feet recording $70.9 million in sales volume, down from $118.8 million. The largest transaction recorded during third quarter was Peregrine Realty Partners acquiring the Carlton Plaza at 20750 Ventura Blvd., in Woodland Hills for $34.4 million ($222 PSF). The five-year average historical capitalization rate for the San Fernando Valley and Ventura County office market is 6.4%.

Key Takeaways:

  • The San Fernando Valley and Ventura County office market closed the third quarter with positive movement as net absorption recorded 165,300 square feet.

  • The office market vacancy rate decreased by 60 basis points to 12.8%.

  • Rental rates increased by $0.08 from the second quarter to $2.48 per square foot (PSF) full service gross (FSG).

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

  • The Los Angeles County unemployment rate declined to 4.5%, a decrease of 10 basis points from last year. Leisure and hospitality listed the largest year-over-year employment gain by adding 21,800 jobs. Education and health services posted the second largest job growth, adding 15,300 jobs.

Outlook:

Heading into the end of 2018, Vacancy rates in the San Fernando Valley and Ventura County market are expected to continue to fall due to the lack of new construction. As vacancy continues to fall, both absorption and leasing activity are expected to remain positive through the end of 2018. As available space options become more limited, asking rental rates will continue to rise. 27566 Woodfall Road (Phase 1) in Santa Clarita, consisting of 57,600 square feet, is expected to be completed in December of 2018. While interest rates continue their ascent and capitalization rates slowly inch up, the investment environment has become more prudent as of late.