Industrial and office markets close to L.A.’s core performed well during the second quarter, but conditions were tougher for outlying regions. Tenants again had a difficult time hunting for space throughout the San Fernando Valley’s 90 million-square-foot industrial market, as less than 1 percent was vacant, according to Colliers International in Irvine, which provided second-quarter data for the Business Journal’s Real Estate Quarterly Special Report. The East Valley is the thinnest sub-sub market with nearly zero space available. In turn, rents there jumped four pennies to 79 cents a square foot year-over-year. Still, there was activity over the quarter, and 451,000 square feet was sold or leased. John DeGrinis, senior executive vice president with Colliers, said tenants are facing a 20 to 30 percent increase in rents when it’s time to renew their lease. “It’s like a brick in the face for anyone not paying attention to rents,” DeGrinis said. “Supply and demand are very much in play.” With little inventory, sales activity has dimmed, he added. Brokers in the Santa Clarita Valley thought the lower Valley’s challenging market climate would drive tenants to pre-lease several new buildings there that have started construction. But that didn’t happen, DeGrinis explained, and vacancies rose in the second quarter to 3.2 percent from 1.5 percent a year ago. One reason is that the likely tenants for the warehouses – logistics companies interested in last-mile delivery – feel the Santa Clarita Valley is too far from the densest population markets within Los Angeles. “Traffic in the morning screws up the logistics of these companies,” DeGrinis explained. But, he added, “we believe it’s just a matter of time before users realize they have to go where the buildings are.” Between the San Fernando and Santa Clarita valleys and Ventura County, 1.3 million square feet is under construction, according to Colliers. The high rents and little available space is discouraging building owners from selling, said Daniel Frees, an associate vice president with Daum Commercial Real Estate. “There are some really old buildings that should be scrapped, but it doesn’t make sense for owners to scrap a building if it’s 100 percent leased and rent is at all-time highs,” Frees said. Newer buildings are selling at high markups when compared to recent years. For example, one client’s 20,000-square-foot building bought in 2014 for $146 a square foot is now in escrow for about $225 a square foot. Capitalization rates – the rate of return for real estate investors – are shrinking toward 3 to 4.5 percent, Frees explained. Office As office rents continue their upward climb in downtown Los Angeles and surrounding areas, vacancies are shrinking in Valley submarkets. Out of the 22 million square feet of office product in the Valley, only 11.6 percent is vacant, compared to nearly 19 percent a year ago. Tenants took more space than they gave up across the West, Central and East valley markets. Contributing to the quarter’s leasing activity was Jacob Mumper, associate vice president for Colliers, who brokered lease deals with media and production companies at the Ranch, the 11-acre creative office campus in Van Nuys. Tenants are starting to look beyond the Warner Center in Woodland Hills for cheaper rates to areas as far out as West Hills, he said. Glendale is a hotspot for investor sales activity, according to Troy Pollet, senior vice president with CBRE Group Inc. in Los Angeles. Over the last two years, 60 percent of the Class A office buildings that have been bought and sold in the greater Valley area has been in Glendale, Pollet said. And tenants have taken more space there than anywhere else in the Tri-Cities, he added. The activity continues to reverberate from roughly 3,500 new apartment units. “There’s been an incredible amount of investment activity in that market, due to the timing from the lifecycle of (investment) funds that own buildings in that market,” he explained, “and we’ve seen a lot of positive drivers driving rent – it’s gone up 10 percent year-over-year,” Plus, with vacancy hovering around 10 percent, supply starts to get constrained, opportunities for tenants shrinks, and landlords start to push rents while pulling back on concessions, Pollet said. “(Office) rents in Glendale – they are only on the front end of a rental increase, and we expect them to rise 10 to 20 percent in the next 18 months,” Pollet said. According to Colliers, office rents in the city rose to $2.65 a square foot, continuing its status as one of the priciest market in the Valleys, up from $2.58 a year ago, and 4 cents up from the prior quarter. Times are not so bright elsewhere. Sherman Oaks is still suffering the loss of Vubiquity Inc. – which left in 2016 for Burbank – and Prospect Mortgage, which was acquired. Together, they gave back about 125,000 square feet when they moved out – and big vacancies remain, Pollet said.
