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Insights for Industrial, Office Markets

Los Angeles Industrial

The loss of major corporate tenants like Toyota has experts like The Klabin Co/CORFAC International president David Prior concerned about California's competitiveness. Speaking at last week's California Commercial Real Estate Trends Conference in Downtown LA, David noted that one of the firm's clients lost a 150k SF tenant that is leaving for Texas to support Toyota, and another is losing a large tenant in Cypress. The news isn't all dire, though. The South Bay's 3% industrial vacancy rate is one of the lowest in the US, and the submarket is achieving $35/SF for land sales and $100/SF to $150/SF for building sales. Rents for 20k to 40k SF tenants are still 20% below market peak "but coming up very fast." With the scarcity of product and high demand, investors are no longer just focused on buying portfolios—they're looking to acquire good-quality, free-standing buildings as well.

Speaking on an office panel, one of David's CORFAC colleagues in the Bay Area, TRI Commercial's Barry Bram says the primary threat to San Francisco's hot office market is Prop M. The measure, passed by voters in 1986, limits construction of office space to 875k SF per year for projects of 50k SF or larger. This volume will hardly do when developers have filed applications for more than 2M SF of office projects, with another 9M SF in the pre-application stages. Marcus & Millichap's West LA regional manager Tony Solomon points up an issue that has a big impact on the market, but doesn't get nearly the attention it should: water supply.

Keynote speaker Christopher Thornberg of Beacon Economics presented one of the most telling slides on office market trends—absorption vs. employment change—which underscores how office users are taking less space while upping employee densities. (But we already knew that from counting the hairs in our co-workers' ears.) LA employers have added more than 10,000 new office jobs since the beginning of the economic recovery in 2009, yet office absorption through the middle of this year has been negative 4M SF. Another surprising factoid is that, between 2007 and August '14, Bakersfield racked up the state's third-largest job growth numbers: 6.4% or 257,400 new jobs. (Perhaps not so surprising when you consider the energy boom.)