According to research from Newmark Grubb Knight Frank (NGKF), the commercial real estate market in Southern California mirrored the mixed signals seen in the broader economy in the second quarter of 2013, with some submarkets posting impressive occupancy gains and others continuing to struggle with high vacancy and stubbornly flat rental rates.
The data and analysis was shared by J.C. Casillas, regional vice president of research for NGKF, who previewed the company’s second quarter market trends reports for Los Angeles County, Inland Empire, Orange County and San Diego at a luncheon hosted by private investment company The TerraCotta Group on June 27.
Mr. Casillas said, “While we’ve seen some improvement overall, Southern California, like the rest of the country, continues to be plagued by a weak economy and uncertainty concerning the decisions of the Federal Reserve Bank. Office tenants are trying to trim office space as they adapt to doing more with less, which is holding back a robust recovery. Industrial has fared better due to an ongoing flight to quality and healthy investor demand.”
Orange County led the region in office occupancy gains for the quarter and has posted positive net absorption of 1.7 million square feet year to date. Los Angeles County continued to be affected by the highest unemployment rate in Southern California, which is reflected in the submarket’s 17.1% vacancy rate and a modest $0.03 bump in average asking rental rates, which are currently hovering around $2.63/sf per month.
In the industrial sector, all four markets posted positive net absorption in the second quarter, with asking rents up slightly across the board with the exception of San Diego, where they remained flat. Lease activity has come from a wide array of industries, including retail-wholesalers, freight forwarders and electronics manufacturers, and a shortage of product in Los Angeles and the Inland Empire has pushed vacancy rates to historic lows - 2.2% and 4.9%, respectively. In anticipation of higher rents, developers have begun to build once again and are focused on larger, more efficient buildings. This is especially true in the Inland Empire, where currently there is 9.6 million square feet of industrial product in the pipeline.
“Today, the average size of an industrial building under construction is 510,000 square feet, which is more than six times the size of an average industrial building built in this market 10 years ago,” Mr. Casillas said. “Of the 12 projects currently underway in the Inland Empire, only one is less than 200,000 square feet, which illustrates investor and tenant demand for increasingly larger properties.”
Mr. Casillas explained that the region has adapted quite nicely to some harsh headwinds, and that the outlook for Southern California’s commercial real estate market remains positive.
“In general, we expect continued slow improvement in both the office and industrial sectors,” he said. “Interestingly, the rough waters we’ve been sailing over the past several years have resulted in some new trends. Take, for example, an emerging micro-market like Silicon Beach. On the Westside, instead of signing leases for traditional office space, production studios, media companies and technology firms are moving into old industrial facilities or even mixed-use residential space that can be adapted to meet their needs, creating a true live/work/play environment.”
To learn more about NGKF’s outlook for the Southern California commercial real estate market or to request the full report for a particular market, please contact Mira Matic at email@example.com.
About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank (NGKF) is one of the world’s leading commercial real estate advisory firms. Together with its affiliates and London-based partner Knight Frank, NGKF employs more than 11,000 professionals, operating from more than 340 offices in established and emerging property markets on five continents.
With roots dating back to 1929, NGKF’s strong foundation makes it one of the most trusted names in commercial real estate. Its integrated services platform includes leasing advisory, global corporate services, investment sales and capital markets, consulting, program and project management, property and facilities management, and valuation services. A major force in the real estate marketplace, NGKF serves the local and global property requirements of tenants, landlords, investors and developers worldwide. For further information, visit www.ngkf.com.
NGKF is a part of BGC Partners, Inc. (NASDAQ: BGCP), a leading global brokerage company primarily servicing the wholesale financial and real estate markets. For further information, visit www.bgcpartners.com.