So is it a Tenant’s Market or a Landlord’s Market? The buzz seems to be that the market is tightening and that rates are on the rise, and their is evidence of improvement in many submarkets. However, the average vacancy rate in Los Angeles County Office Buildings at the end of the 1st quarter is 12.1% (Class A is 15.5%), the same as the end of 2013. In Orange County the vacancy increased slightly to 12% (Class A is 15.5%). What does this mean? Well, until vacancy is under 10% I will be calling this a Tenant’s Market. There are simply to many choices for most tenants in most markets for landlords to have great pricing power. Landlords that are raising their rents in submarkets with vacancy over 10% will do so at their own peril. That being said, quoted rental rates remain virtually unchanged across the board, but certain submarkets like Newport Beach with heavy landlord concentration, and below 10% vacancy, are seeing higher asking rates.
So that’s how it is, but where is it going? Absorption is always very difficult to project, but it is definitely trending downward in Orange County, averaging under 200,000 SF during the last four quarters. LA absorption spiked in the 3rd quarter of last year at 1.75M SF after many brutal years, but has not kept that pace and dropped off to 540K SF during the first quarter. Add to the mix a planned and under construction delivery of over 3M SF in Los Angeles and 400K SF in Orange County that is yet to be leased, and I have to predict higher vacancy rates 12 months from now, unless absorption spikes again (I feel like Carnac the Magnificent). I think there will be good absorption in one or two quarters during the next year, but vacancy will remain above 10%.
During the first quarter of 2014 72 office buildings traded hands in LA and Orange Counties. The combined value of all sales was $3.6 Billion. Average cap rates continued to compress with LA averaging 6% and Orange County averaging 5%. Clearly the investment dollars are chasing yield on the assumption of rising rents and increased absorption. Will it play out for them? Or are we at the top of the cycle? Let’s see… 7 year real estate cycles are pretty typical… the bubble last burst in 2008…. Insurance companies starting to invest… Yeah, were getting close.