Commercial Real Estate Investment: Los Angeles Is on the Rise

 Commercial real estate is a great investment. Or at least it can be. Admittedly, it’s possible to lose money on a commercial property. The causes vary from low market demand at the time of sale to poor economic conditions, short sale and more.

 However, some of these conditions present opportunities as well. It takes knowledge and experience to seize these opportunities and use them to your advantage.

Commercial property in Los Angeles is on the rise once again. Office, retail and industrial space are all showing low vacancy rates and rising rents. Many sectors of the Los Angeles commercial property suffered following the recession from 2007 – 2009. High unemployment and a suffering economy made it hard for landlords to demand rent increases.

However with the Los Angeles economy recovering, rents are once again rising. A large part of this rise can be attributed to improving job creation numbers. Job growth across Los Angeles County grew by 3% in past twelve months. Population in the Los Angeles is also strong with a 4% annual rise expected between 2013 and 2018. The average household income in Los Angeles now stands at $80,900.

The improving job market means that consumers are increasingly willing to open up their wallets. This has led to demand for retail space as shoppers return to the malls and local stores. It is also having an effect to the industrial sector as businesses are now looking for additional warehouse space.

Until relatively recently corporate clients had a strong negotiating position when looking to rent Class A real estate because landlords were desperate to find tenants. However,those times are well behind us. In Los Angeles the ability for tenants to find bargain priced Class A property is well and truly gone. Demand is now more than meeting available supply which is pushing rents upwards in the office market.

Below we will look at each area of the Los Angeles commercial property market in more detail. Highlighted are some of the reasons why certain sectors have been performing particularly well. We will also draw attention to the “hot” lower Westside market that has recently seen a significant amount of development and an influx of entertainment and technology based companies.

Highlights of the Los Angeles Commercial Property Market

  • Vacancy rates of 3.6% for Industrial property well below national averages
  • Demand for fulfillment space is driving demand for industrial property
  • Single tenant retail space have vacancy rate of only 3.4%
  • Lower Westside booms as technology and entertainment companies enter the area
  • Unemployment in Los Angeles dropped to 9.6% from 11.1% a year ago
  • Demand outstrips supply as planned construction fails to keep pace
  • 20 million sq. feet of industrial space expected to be demanded by businesses in the near future
  • Vacancy rates for strip centers drop by 40% basis points in the last quarter

Commercial Real Estate Investment Los Angeles Overview

The Los Angeles office market is made up of just over 300 million square feet of multi-tenant office space. This makes it the third largest market in the United States behind NYC and the greater Washington DC area. Unlike some other markets the Los Angeles office space market is relatively decentralized with only 11% of the office space located in down town Los Angeles. Most of the inventory available is relatively new with 55% of the office space currently used being built after 1985.

The retail market is made up of approximately 458 million square feet of shopping centers and single tenant properties. Because all income levels are represented in Los Angeles the area attracts a large array of retailers from the budget to very high end. Strong population growth and a multitude of affluent households make this a very attractive market for many retailers.

Los Angeles Economy and Jobs

Over the past 12 month Los Angeles has seen in a 1.1% increase in the number of available jobs. This equates to 44,100 new jobs being created. There has also been a rise in employment with unemployment dropping to 9.6% from 11.1% a year ago. While this brightened the employment picture in Los Angeles there are still some gray clouds in the sky. The entertainment sector saw heavy job cuts with more than 15,000 people losing their job. While many companies continue to lay off staff, particularly in the banking and legal industries this has not led to an over supply of office space . There have been no blocks of space over 15,000 feet to come onto the market in 2013.

Industrial Commercial Real Estate

Demand for warehouse space is likely to remain strong as Europe moves out of recession and growth in China stabilizes. Demand for industrial property has been particularly strong in Los Angeles and Orange County because of the large amount of exporting that occurs there.

The supply of industrial real estate is very tight with a vacancy rate of only 3.6% across Los Angeles County. The supply has grown even tighter over the last quarter with the availability of industrial space dropping by 20 basis points during the second quarter. Construction in the industrial is relatively robust with over 3 million square feet of industrial space currently under construction. The majority of this construction is for build-to-suits which means that it will not affect the current vacancy rates. It is expected that due to demand outweighing supply that the construction of industrial real estate will continue at its current rate.

The port system in Southern California is one of the busiest in the world and the largest in the United States. As cargo volumes increase it is a good indication that demand for industrial space will also rise. For 2012 container volumes were flat due in large part to an 8 day strike which closed the ports for this period. The expectation for 2013 is that container volumes will begin to increase in line with the improvement of the overall economy.

Ongoing tenant renewals are keeping the amount of available industrial space limited. To give an indication of how the supply of industrial space is shrinking in 2009 there were 30 blocks of industrial space of 100,000 square feet or more available. By the end of 2012 this figure had shrunk to eight blocks. This allows landlords to command above market rents and is also an indication that more development may ensue.

Many Los Angeles distributors are willing to pay the premium for buildings with good clearance heights and high doors for trucks. There is also strong demand for building which feature yards large enough to house trailer parking. Given the lack of quality space on the market we can expect to see more construction to service logistics companies in this market.

Many brick and mortar stores are deciding to add fulfillment centers to supplement their existing warehouses for their stores. This should have a significant impact on the industrial property market in Los Angeles going forward. The 2013 Jones Lang LaSelle Industrial Property Outlook report suggests that by the end of 2013 there will be 20 million square feet required by industrial tenants. This is far greater than the current 9.6 million feet that is under construction. This should help to support rent rises in the industrial market.

The Picture for Retail

In retail location is critical. Rents for retail properties are rising fastest in areas of the Los Angeles where customers have been able to achieve wage increases and where home prices have been rising. This means that it is important to be strategic about where you invest and purchase retail property in Los Angeles.

All of the conceived projects that were built during the building boom up until 2007 are not performing as well. Much of the retail building took place in the later parts of the boom. This means that the retail sector has been harder hit than other parts of the commercial real estate market. In particular there were many poorly located strip malls constructed.

Strip renters have continued to be a soft spot in the Los Angeles retail market, with a vacancy rate of 8.5%. To give a comparison single tenant buildings currently show a vacancy rate of only 3.4%. While the picture for strip centers may not compare well to other parts of the market there are definite signs of an improvement in conditions. Vacancy rates drop by 40 base points.

Financing is another risk factor in the market. Retail development entrepreneurs financed construction with 10 year loans. Many of these will need to be rolled over in the next few years. If interest rates continue to rise on the back of an improving economy this could place owners under increased financial pressure. This also means that rents are likely to rise as tenants are required to absorb some of these costs.

For potential retail investors looking to enter the market this signals opportunity. With some strip center landlords likely to be under pressure and rents rising there may be chance for new investors to enter the market at attractive price points.

The outlook for retail centers is positive overall as consumers become increasingly confident in the strength of the resurgent economy. As employment continues to drop in Los Angeles consumers are increasingly able to spend their money on a variety of products and entertainment options. The rise in the residential property market is also helping retailers. As households see the value of equity in their home increase they are more likely to spend money. Retail chains in particular have been increasing rental rates for their tenants. Single tenant property landlords have been more hesitant to ask for higher rental fees as there are still concerns over the relatively recent recovery.

Lower Westside Booms

One area that has been performing particularly well is the area termed the “lower Westside. This is the area north of LAX and south-east of Marina Del Rey. There have been a number of well- known media and technology companies including YouTube, Microsoft and GameFly moving into the area.

Commercial properties in the area are transforming themselves to appeal to the influx of affluent and youthful new residents. Analysts suggest there exists room in the Westside for further entertainment complexes that will appeal to these young workers as well as tourists.

One of the largest projects under way in the area is the $260 million Runway. This is a commercial and entertainment area in the center of the Playa Vista planned community. This community is currently home to over 3000 residential units. Included in the Runway will be a whole foods grocery store, a ten screen movie theater and shops. The total size of the complex will measure approximately four square city blocks.

Howard Hughes headquarters is also getting revamped, as it is converted into industrial and office spaces for creative businesses moving into the area. Many companies are attracted to the lower Westside as it offers the ability to get into the Los Angeles Westside at a lower price point than Santa Monica.

Those who wants to invest and are interested in entering the Los Angeles’ commercial property market should consider taking action in future. Already there are indications of sharp rise in the number investors returning to the Los Angeles market. In 2012 the number of real estate transactions in LA increased by 40%. This trend has continued throughout 2013. With vacancy rates falling and rents rising we can expect to see growth in prices for Los Angeles commercial property over the next few years.

There are many investment opportunities presenting themselves in the Los Angeles  area. Vacancy rates for industrial property are very low at 3.6%. With an improving economy both locally and internationally, demand is almost certain to outstrip available supply. Businesses are showing an increasing willingness to pay premium prices for industrial properties which can meet their specific needs. Single tenant retail space is performing well and even strip centers which have underperformed over the past few years are showing lower vacancy rates.

If you want to invest in the Los Angeles commercial property market it is crucial that your work with an experienced commercial broker. While the outlook for commercial property in Los Angeles is certainly strong caution is still required. Certain areas of the Los Angeles market are set to outperform over the coming years while other areas will struggle. When looking for a broker you want to be sure that they have local knowledge to understand the difference. A recently relocated broker, even one with commercial experience, may not understand the nuances of the local market.

2013 is a great time to be investing in the growing Los Angeles commercial property market. Make sure to choose a commercial property broker who will enable you to take full advantage.

You need an agent who can guide you to the right properties when it’s the right time to buy them.

After all, timing is everything. Thank you for your consideration.

Elena Vlasyuk.