South Bay Rents Accelerate Amidst Vacancy Gains
South Bay market rental rates continued to rebound with positive growth for the seventeenth time in eighteen quarters. Due to Molina Healthcare’s give-back in Downtown Long Beach and the delivery of 555 S. Aviation Boulevard in El Segundo, vacancy rose from 15.2% to 16.2%. Still, 135,200 square feet of product remains under construction and is expected to deliver by the end of the year. Leasing activity dropped from last quarter but still recorded a relatively healthy 446,800 square feet. Investment activity fell from last quarter’s total volume of $1.1 billion to $77.9 million. Future demand, high-quality traditional and creative space, and moderately increasing rental rates will continue to attract a variety of media, technology and consumer product tenants.
The overall vacancy rate for the South Bay market increased by 100 basis points from the prior quarter to 16.2%. El Segundo/Beach Cities and Downtown Long Beach drove vacancies up due to new property deliveries and anchor tenant give-backs. Absorption for the South Bay recorded at negative 135,000 square feet. Among the major move-ins for the quarter were coworking company Cross Campus setting up shop in 61,600 square feet at 840 Apollo Street in El Segundo, as well as the State Land and Coastal Commission occupying their space in Long Beach soon after they signed their lease. The big demand driver was Molina Healthcare vacating 128,300 square feet at 1 World Trade Center in Long Beach. As part of their restructuring, the company relocated the location’s employees to other offices throughout the city. Every submarket in the South Bay saw rents increase for the quarter. The delivery of 555 S. Aviation Boulevard (259,100 square feet) was the largest introduction of inventory since 2011. Investment activity for properties over 25,000 square feet logged $77.9 million in volume across three transactions.
- Leasing activity fell year-over-year by 13.6%, the fifth consecutive quarter of negative momentum after 11 straight quarters of growth.
- Average asking rents for the overall market rose to start the year, climbing to $2.48 per square foot (PSF) full service gross (FSG) from $2.44 last quarter.
- Class A vacancy bore the brunt of negative demand, rising 320 basis points, while Class B increased more modestly by 10 basis points.
- Tishman Speyer’s 555 S. Aviation Boulevard project delivered to the market. Its delivery leaves the South Bay market with 135,200 square feet of inventory under construction, all of which is slated to deliver in 2018.
- After posting activity exceeding $1.1 billion last quarter, sales activity came back to normal levels, posting $77.9 million in value. The trade of Pacific Concourse in El Segundo from LBA Realty to Beacon Capital was the highlight for the quarter.
Sliding velocity and new construction deliveries through early 2018 will temper major vacancy gains in the South Bay market. With leasing velocity tailing off at the end of 2017, look for demand to lessen accordingly throughout 2018. After a period of measured rental growth in late 2016 and early 2017, South Bay rents have exceeded 5% growth in the last few quarters. This is expected to continue throughout 2018. Construction will lag behind the boom the market saw in the past few years. However, all current projects, which account for 3% of all construction activity in the county, are due to deliver within the year. The disposition of converted industrial and obsolescent office inventory and the associated returns the market is currently seeing will sustain interest in value-add projects going forward.
The outlook for the South Bay market remains positive. Vacancy should decrease into mid-2018, although movement will be incremental due to lessened leasing activity in 2017 and projected deliveries of new inventory. Likewise, rental growth will increase at a more measured pace than in previous years. In addition to core investment properties, value-add and creative conversion projects will remain part of the investment environment as sellers divest completed projects and buyers seek opportunities to enter the market.