Southern California Commercial Real Estate Update

June 25, 2014

Investment activity in the Southern California commercial real estate market, particularly the greater Los Angeles area, has shown significant increases through the first six months of 2014. Much of this increase can be attributed to the lack of property coupled with foreign investors chasing attractive returns. The influx of foreign capital throughout the Southern California commercial real estate market is creating a very competitive landscape which has resulted in positive absorption and increased valuations among office, retail and industrial properties.

The Los Angeles area retail market is strong. Vacancy has continued to trend downward and is expected to continue that trajectory through the second half of the year towards 6%. We have seen five consecutive quarters of positive net absorption. After a mostly flat Q1 2014, rental rates are showing signs of a small increase due to the limited supply of product in the market. Although development is showing signs of activity, the addition of one million sqft of space set to come on line is still only about half leased. Many experts believe that increased tourism in the greater Los Angeles area will continue to drive vacancy down in core areas and the majority of improvement for the Southern California region retail sector will take place in outlying areas where the housing market is starting to take flight again.

Despite some minor signs of improvement the office market remains largely unchanged. Vacancy for the L.A. basin continues to hover around 17%, with the Westside market leading the absorption and downtown area adding some space. Rates are on the rise, with the most significant increases coming in class B product. Significant growth from servicing sector employment over the past 12 months is expected to contribute to modest gains in key submarket occupancy in the north part of Los Angeles due to its large concentration of medical services during the second half of the year. The Downtown and Hollywood areas should continue to see an increase in demand for financial and legal service tenants, while the Westside and South Bay markets will see an influx of entertainment, media and advertising industries.

The L.A. industrial market continues to perform at a very high level. With vacancy currently hovering around 2%, and very little supply coming on line over the next six months, it is expected that rents will continue their gradual rise and vacancy should remain very low. Although development is heating up with about three million sqft currently under construction, most of the space coming on line is geared toward build to suits, so there would be no additional impact on vacancy. Central Los Angeles, South Bay and the San Gabriel Valley markets will see muted activity due to supply constraints and limited product coming on line, but overall fundamentals will continue to strengthen as vacancy is absorbed and rental rates show modest increases.

by Michael Kaplan, COO