Q4 2016 Commercial Real Estate Outlook - Westside / Los Angeles

CEO George Pino presents his outlook for the Los Angeles / Westside market for the fourth quarter (Q4) of 2016.

Transcript:

Hi , I'm George Pino. I'm the CEO of Commercial Brokers International, and today I'd like to talk about the market conditions for commercial real estate within the Los Angeles submarket, and what we can expect coming into the 4th quarter of 2016.

Office vacancy rates for the third quarter of this past year actually saw a little bit of an increase on the Westside. It went from 9.1% roughly to about 10.5%. I see this trend as actually... continuing within the fourth quarter, with a slight increase in vacancy rates, but really more of a stabilization -- especially coming into the holidays.

What's interesting on the vacancy rates -- also -- is that we've seen a little bit of an increase in subleases, not just an increase in subleases, we're also seeing a decrease in the sublease rate prices for rents.

Direct lease rents in the West Los Angeles submarket for offices -- we've actually seen a little bit of an increase in that as well, with an average of -- just slight increase -- going from $4.25 to $4.35 a square foot on the asking rate. I don't see this changing over the next quarter. In fact, I see it stabilizing a bit more so, especially with the subleases that are coming onboard -- there's been more competition from subleases that have come on the market. With that, also, we've seen a decrease in the sublease rental rate.

Los Angeles has always been a desirable market for investors. In fact, this first half of the year, the office investments -- we were actually 2nd leading the nation for the most sales above $25 million. I don't see this changing in the 2nd half of the year -- going into the 4th quarter as demand is still very strong and interest within the Los Angeles submarket for investments is increasing.

Creative office as a submarket of the general office has always been a strong demand market within the Los Angeles sector, especially West Los Angeles, where there's a lot of creative office space. What we have seen, however, is that earlier this year -- in the 1st half of the year -- we had about a 5% vacancy rate across the board for creative office space. Currently, going into the 4th quarter, we're almost at 8% rate. I think this is probably due to the fact that creative office space has really grown, as far as the price increases. We've seen some pretty large price increases across the board, from last year to this year over 10 %.

One submarket in the Los Angeles office space that is actually fairly weak compared to everything else is the LAX submarket, where the vacancy rates are extremely high. There has been a lot of talk recently about converting those into creative office space to try and attract the overflow from the Westchester, Playa Vista, Culver City, and Venice submarkets. We haven't seen much happen right now, in terms of development, but there is talk about that going on. I think that would... to repurpose those buildings is definitely something that is of interest and to keep an eye on for the future, and see how they actually do that. I think what they do need to take into consideration, however, is the traffic congestion along Century Boulevard, with the construction and airport, and how they're going to work around that.

Demand for retail properties as an investment is pretty high right now. I think this is due to the fact that vacancy rates are pretty low. We're actually at about 3.5 -- just under 3.5% across the board. What my concern is that we're seeing a lot of increases in the rental rates. I would actually start looking at other secondary markets perhaps, as far as retail investments, where there's some value opportunities to be added into it, as opposed to some of the prime neighborhoods where I think the rents are already at where they should be, or even higher than what could be sustainable.

Many of the shopping centers, and specifically the major malls within the Los Angeles submarket have either been renovated recently or currently have plans for renovations, or currently under renovation. I think this is a factor of trying to attract a different tenant base and client base into those areas. I do believe this will revitalize the shopping within those centers themselves however I don't necessarily think it's going to have a major impact within the immediate retail surrounding those malls. A lot of those are located in infill neighborhoods and areas, where it's very limited on what you can bring in, such as in Century City, there's no real retail supporting the mall itself. The others areas are infill already, and have a pretty good support for secondary retail.

One of the hottest markets for investment in the Los Angeles submarket is the multifamily sector. This is for good reason, we've seen average rent growth of almost 8% year over year, for the last year. My concern, however, is in certain submarkets where the rents have grown dramatically, whether or not it can be sustainable. So we're actually seeing investors looking at some secondary stronger markets, such as Koreatown, the South Bay, the Valley -- where people who are being displaced from the very high rents within the Santa Monica & Venice neighborhoods are moving to. What's also of interest is that, right now, construction is outpacing the demand for rental properties within the Downtown submarket. There's been a slew of new developments there. We're actually seeing a lot more concessions given to the new tenants -- such as rent drops. Those are things to keep an eye on when you're looking for an investment, so you can earmark the best property for you and your investment needs.