The Los Angeles Basin commercial real estate markets are the healthiest they have been in at least a decade. Demand is very strong, vacancy rates are low and falling, rental rates are on the increase, and construction remains generally restrained. While this is positive news for the real estate investor and developer, it does mean that the user is finding it increasingly difficult to meet requirements.

The Office Market

Demand is strong, driven by a robust economy, particularly among office-using sectors (business services, computer programming, engineering, management consulting, etc.). In the past 12 months, net absorption has totaled 11.2 million square feet, for the strongest performance since the late 1980s. There has been particularly strong activity in South Orange County and West Los Angeles, and Central Los Angeles is finally seeing a significant growth in demand.

Vacancy rates have dropped by more than two percentage points in the past 12 months, and now average a healthy 11.3% (direct vacancy). If sublet space is included in this calculation, the vacancy rate is still healthy, at 12.9%. Vacancy rates are particularly low in West Los Angeles (just 4.0%), the Tri-Cities of Burbank, Glendale and Pasadena (6.8%) and South Orange County (7.8%). However, they remain high in Central Los Angeles (17.9%). In the past 12 months, rental rates have climbed approximately 5% to 10% in West Los Angeles, the San Fernando Valley and the Tri-City area, but have been relative flat in Central Los Angeles and much of Orange County. Construction activity is picking up, and currently there is approximately 8.6 million square feet under construction. Approximately half of this space is in Orange County, where market conditions will likely soften, particu-larly for older Class B and C space, as this space comes on-line. However, conditions will tighten in the South Bay and Central L.A. in coming months, and remain tight in West L.A. and the Tri-City area.

The Industrial Market

Net absorption of industrial space in the Los Angeles Basin totaled 47 million square feet in the past 12 months, setting a new record. More than a third (42%) of the net absorption took place in the Inland Empire, the only area remaining in the Basin with large tracts of vacant industrial land. This is exceptional growth in demand, driven by the booming Los Angeles economy. An additional 3.2 million square feet of research and development/ flex space was absorbed (net). Most (76%) of the net growth in demand for R & D; space took place in Orange County. Vacancy rates for industrial space have fallen to just 3.6%, down from 5.7% 12 months ago. They are now about as low as they can possibly go in most of Los Angeles and Orange Counties. In the Inland Empire, they are a healthy 6.9% despite a major construction boom. For R & D; space, rates have fallen to 6.8%, down from 8.3% 12 months ago. Rental rates and sale prices have climbed by approximately 10% per year over the past two years in most submarkets. Rental rates for a 75,000 square foot requirement now range from $0.44 to $0.56 in the basin, with the highest rates in the South Bay, and the lowest rates in the Inland Empire. Approximately 20 million square feet of industrial space is currently under-construction & #173; a large amount, but less than growth in demand. This indicates that market conditions will remain tight into the foreseeable future. Almost half of the construction activity is in the Inland Empire. In addition, 2.4 million square feet of R & D; space is under-construction, with the vast majority of the activity in South Orange County. Market conditions there may temporarily soften as this space comes on-line. However, conditions in the South Bay, the Westside and the western San Fernando Valley will continue to tighten. Storage-cost sensitive firms looking for large distribution facilities are increasingly finding that they cannot find space that meets their needs in Los Angeles or Orange Counties, or if they can find space, it is prohibitively expensive. A growing number are moving their distribution operations to Western San Bernardino County (Ontario, Rancho Cucamonga and Mira Loma) and Western Riverside County (Corona, Norco and the City of Riverside). However, within three to four years, Western San Bernardino and Riverside Counties will begin to "fill up," and new areas will have to be found for affordable distribution facilities. By acting now, investors and developers can lock in land in these areas while prices are still low.

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