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Thursday, Dec 1, 2022
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Real Estate Quarterly: Industrial Vacancy Low, Sublease Space High

The industrial market in the San Fernando Valley remains on the solid, pandemic-proof run it’s been on for many quarters.

Vacancy in the Valley’s industrial market during the third quarter rose slightly to 0.5% from 0.3% last quarter, according to Colliers data. This is down from 0.7% last year. 

Harding

“It’s still ultra-low,” said David Harding, an industrial broker at Colliers. “The margin overall is still exceedingly tight.”

The lack of new construction has kept in-demand industrial rates high. Weighted asking rent went up in the Valley from $1.54 per square foot in the second quarter to $1.64 per square foot in the third quarter.

“It’s been a very strong market,” Harding said. “Lease values on the tenant side have held. On the sales side, from users’ standpoint, they still have held.”

Year over year, there has been a roughly 37% reduction in gross absorption, but that’s not due to the lack of activity, but a lack of supply, Harding said.

The big driver during the quarter has been the entertainment industry, as 40% of transactions involved entertainment or related companies, Harding said.

Elsewhere, DrinkPak, which claimed 200,000 square feet in The Center at Needham Ranch in Santa Clarita, took another 200,000 square feet in Moorpark. Cosmetic company Skin Act took about 80,000 square feet in Chatsworth, where Manhattan Beach Studios also took 66,000 square feet.

The Simi Valley/Moorpark submarket’s vacancy jumped from 0.1% to 2.7% in the third quarter, reflecting the new 344,056 square-foot Tapo Canyon Commerce Center coming online in Simi Valley.  

There has been less investment sale activity, primarily due to the debt markets, which have lowered their pricing, Harding said.

“Capital markets, these investment buyers, they become much more selective in what they purchase,” he said.

That said, a notable third-quarter deal saw Westbrook Partners and Captiva Partners purchase Sherman Way Industrial Park in North Hollywood for $37 million.

Even if a recession comes to pass, it may do little to dent the market, experts agree.

“If there is a recession, the vacancy levels are so low, it will be difficult for lease values to decline,” Harding said.

Harding himself has been in the center of a few third-quarter transactions, including a 28,000-square-foot lease for aerospace company Fortner Engineering and leased a 34,000-square-foot space in North Hollywood to Take Two Productions.

“We’ve been busy, but we need more buildings,” Harding said.

Historic high

Netflix has 66,000 square feet of space for lease in Burbank.

Subleasing hit an all-time high in the greater Los Angeles office market’s third quarter, with companies including Netflix Inc. in Burbank giving back large amounts of space. The streaming giant is listing more than 66,000 square feet at 2350 W. Empire Ave., and more than 121,000 square feet at 2400 W. Empire Ave. 

The total 187,794-square-foot figure is staggering, overshadowing the 150,000 square feet at 2300 W. Empire Ave. that Netflix leased for its first-ever animation studio.

In Glendale, ServiceTitan listed 72,000 square feet in the third quarter.

According to Savills’ third-quarter office market report, available sublease space has reached a new historic high of 9.6 million square feet. That’s up from 9 million square feet last quarter and 8.2 million square feet this time last year.

“There are still a lot of firms who haven’t mandated a return to the office as yet,” said Dain Fedora, Newmark Group Inc.’s vice president of research for Southern California.

Mike Soto, director of research at Savills, noted that this third-quarter activity was preceded in the previous months by action from Farmers Insurance, which is subleasing its two-building headquarters in Woodland Hills, totaling a staggering 550,000 square feet. 

“We’ve never seen sublease space this high,” Soto said. “If the space isn’t leased or subleased, the lease term’s just going to expire and it’s going to become directly vacant to the landlord. This is why high sublease space worries landlords.”

According to Savills’ research, the overall average asking rental rate decreased yet again from the $3.87 per square foot per month reported last quarter to $3.86 per square foot this quarter in L.A. County. The Class A average asking rental rate also decreased this quarter, to $4.06 per square foot from $4.07 per square foot last quarter as tenant flight to quality has caused higher-priced trophy space to be leased, leaving more lower-priced commodity class A-/B space on the market.

“Those companies that are looking for space, a lot of them are looking for direct space in the best buildings in the best submarket,” Soto said. “Everything else is just sitting.”

Soto believes that technology companies are partially behind the third-quarter results.

“The tech sector has cooled,” Soto said. “So much of the leasing nationally has been tech companies taking tons of space left and right. You’ve seen a lot of headline news of Facebook slowing their hiring and about to have layoffs, Google, Microsoft. A lot of these companies have slowed their hiring.”

Some of these tech companies may have over-hired, especially during the pandemic.

“When that tech-sector leasing cools, it reverberates throughout the rest of the leasing market,” Soto said. 

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