Regional Update: Los Angeles
The LA commercial market is amidst a recovery, with some sectors and property types improving faster than others. While there are positive indicators in the industrial, retail and office markets, there remains a sense of cautious optimism given the uncertainty in the broader economy.
Industrial:
The greater Los Angeles industrial market has continued to improve during the third quarter of 2013. Currently the overall vacancy rate in the region is 4.5% according to the Cushman & Wakefield Q3 industrial report. Vacancy and availability have continued to decrease in most submarkets from a year ago. Rental rates have modestly increased over last year as demand for industrial space continues to outpace growth in supply. Development activity remains active with approximately 1.6MM square feet currently under construction.
The demand for investment and owner/user sales remains strong in the industrial market. Due to the lack of inventory for sale, investment sales have declined from last year. However, owner/user sales have increased over the same time period.
Retail:
The LA retail market continues to gain traction with vacancy and availability trending down from the previous quarter and year. According to the Voit Q3 Retail Market Report, vacancy at the end of the third quarter was 5.26% (taking into consideration various retail segments including freestanding general purpose commercial buildings, shopping centers inclusive of strip, neighborhood and community centers, malls, power centers and specialty centers).
In an effort to keep up with shopper expectations landlords of large retail properties are revamping existing properties by focusing on tenants that complement each other, and by adding more entertainment options and restaurants to further attract consumers with a vision that these properties will become community gathering spots. A continuing development trend in different submarkets is for retail to be part of a larger mixed use development that includes living space, office space, and in some cases other expanded components.
From a financing perspective, it’s important for lenders to recognize that there are various dynamic submarkets within the Los Angeles area, particularly on the Westside that warrant traditional lending parameters to be adjusted to conform to the area’s specific trends and features.
Office:
The office market has been the slowest to recover from the recession. Overall vacancy in the greater Los Angeles area averages 16.5%, with a modest increase in absorption for the third quarter. Class A office rents have seen a mild increase in the third quarter.
The Westside continues to lead the region in activity as demand for creative office space has continued, resulting from the expansion of entertainment, digital media, and tech companies. Creative office space is prevalent in the Westside Submarkets of Santa Monica, Culver City, Playa Vista, and Marina Del Rey. According to the Studley 3Q Office Report, about 70% of the quarter’s biggest leases were signed in the Westside. Leasing activity in the rest of the region has been moderate as renewals accounted for much of the market activity. While there is a fragmented office market recovery, investors both large and small continue to be interested in acquiring well located office properties in Los Angeles.