LOS ANGELES-The commercial real estate market in Southern California is giving off the same mixed signals as the national economy, according to research from Newmark Grubb Knight Frank. But two executives from the firm say that areas of high office vacancy and stubbornly flat rental rates may represent more than the usual market fluctuations.
In fact, the two executives tell GlobeSt.com, sluggish office vacancy in some submarkets may represent a fundamental change in how much space is needed for collaborative work. It may reflect a new workplace that needs less employees, a more informal setting and non-traditional space adaptations, all of it potentially putting the brakes on any renaissance in traditional office growth.
“There's some significant changes going on,” says Chuck Hunt, the firm's regional managing director. He notes “there's a little bit of a battle going on” between traditional office space available and newer company needs. As a result, “a lot of the office landlords downtown are trying to be a little more creative in traditional office buildings.”
J.C. Casillas, regional VP of research for NGKF, agrees. “Part of what is happening is employment hasn't gone gangbusters.” Existing tenants, Casillas says, often have 20% more space than they really need. “So they may not be in financial trouble, but when they renew the lease, they may take down 20% less space.” Creative office space, Casillas adds, also generates fewer private offices, resulting in even less square footage needs.
Adding to the stagnation for traditional office space is the trend toward adapting non-traditional spaces for office use. “That's not being captured in traditional office statistics,” says Casillas. “The mixed-use is not being tracked. We've got tech companies that will take quasi-residential space on Abbot Kinney Blvd. (a street near the beach popular with technology, media and advertising companies). “But that fills their space needs and they're not even looking for traditional office space.”
The candid remarks came in response to the issue of the company's second quarter market trends reports for Los Angeles County, Inland Empire, Orange County and San Diego. “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,” says Casillas. “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.”
Los Angeles County continues 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 three-cent bump in average asking rental rates, which are currently hovering around $2.63 per square foot per month.
In the industrial sector, 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, the report states, 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,” Casillas says. “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.”
Casillas says 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 says. “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 West side, 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.
As previously reported by GlobeSt.com, a Jones Lang LaSalle executive says workplace changes toward more open offices and collaborative work spaces could be a dampener on rent volatility in the downtown L.A. office market.
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