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Valley Economic Forecast

Our review of San Fernando Valley commercial real estate activity includes data through the third quarter of 2019. The office marketspace appears to have been impacted by a change in the type of space available for lease in 2019. The industrial marketspace was impacted by a lack of inventory for the most recent measurement period. As we argue for residential real estate, we call for greater development of industrial space in the San Fernando Valley. We applaud the renaissance in hotel development, as this will benefit future business development activities in the San Fernando Valley. Office space The San Fernando Valley’s net absorption, an important indicator of market activity, turned a corner for the worse for the first three quarters in 2019. On the face of it, this is not congruent with our analysis of the Valley’s jobs and GDP data, which have continued to exhibit strength. However, office specialist brokers in the San Fernando Valley assure me that the Valley’s office market is doing well despite certain shifts in the data presented here. This downturn was accompanied by a jump in the Valley’s office space lease rates. In the same quarters as the absorption slowdown, quarters 1, 2 and 3 of 2019, the Valley’s lease rates jumped 10 percent from the prior year. The type of space that has become available can impact these data. If there was office space that came open for leasing that was not absorbed, this would push net absorption down. And if this newly available space was expensive relative to the other space open for lease, then we would see a bump in the asking rates as mentioned above. The Valley’s office-space vacancy rate continues to tighten relative to its neighbors. While Los Angeles and the Conejo Valley vacancies stayed in the 14-15 percent range during 2018 and 2019, the San Fernando Valley’s rate fell from a 12 percent average in 2018 to 10.8 percent in 2019. Industrial space The San Fernando Valley’s 2019 industrial vacancy rate fell yet again, which is remarkable given that it was already very tight in 2018. The 2019 three-quarter average was 0.8 percent. It is very uncommon for a rate like this to fall to less than 1 percent and then stay at that level, given the time it takes for establishments to make the decisions necessary to leave, move or enter new space. L.A. County’s vacancy rate is double the San Fernando Valley’s rate. The Conejo Valley’s rate has consistently risen for more than a year now and was almost 3 percent by the third quarter of 2019. A market this tight calls for the development of new industrial space. As we have pointed out before, it is not just traditional industrial space users in these buildings, but also various non-traditional entities. Examples include Cross-Fit gyms, indoor rock-climbing facilities, wine tasting rooms, and more. These companies can get into industrial space for a per-square-foot cost that is less than half the available office space cost. Lease rates for industrial space have continued to rise during most of 2019, relative to 2018, with asking rates well over $1 a square foot in the second quarter of 2019. 2019 sales and leases picked up to 2.3 million square feet, in the first three quarters, up from 1.2 million for all four quarters of 2018. These data are a testament to the ongoing vitality of the Valley’s economy. Hotel space The Valley is set for a hotel building boom in the next few years. There are five properties in the planning stage near the Warner Center, and a Home2 Suites is already under construction nearby. Sherman Oaks has two hotels in planning stages, and Glendale has eight new hotels in early development planning. Burbank has seven hotels in planning stages, and the AC Hotel Burbank is already under construction. The broader region is set to be a new hotel space leader in 2020, with Los Angeles County having more hotel rooms under construction than any other California county, ending 2019 with 3,166 rooms. A brief comment on Woodland Hills retail The owner of the Westfield Topanga complex plans to redevelop the former Sears store into a dining and entertainment complex in Woodland Hill. Old and dormant retail spaces that have fallen out of favor with the market are found all across the state and are detrimental to their communities. The projected completion date of late 2021 for the dining and entertainment complex is great news for Woodland Hills and the San Fernando Valley and is logically coherent with the forecast of robust economic activity for the Valley that is presented in this publication. Dan Hamilton is director of economics of the Center for Economic Research and Forecasting at California Lutheran University.

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