This review covers the Los Angeles Market, which includes the Los Angeles, San Bernardino, and Ventura Counties as defined by Real Capital Analytics. The review includes three main topics; Volume, Pricing, and Fundamentals. The data includes deals over $2.5 million.
As the saying goes, a picture is worth a thousand words, so I’ve kept the write up short for easy review!
VOLUME – Dollar Volume & Year Over Year Change
The total volume for the Los Angeles Market for 2Q 2014 was $971.3 million which was down 0.5% from 2Q 2013 ($976.4 million), however, 2Q 2014 volume was up 18.1% from 1Q 2014 volume of $822.6 million.
VOLUME – Number of Properties and Total Square Feet
There were 89 properties traded with a total of 2.7 million square feet, which represents a Year Over Year (YOY) increase of 51% in the number of properties (59 properties in 2Q 2013) with a corresponding increase in the total number of square feet (3.1 million square feet in 2Q 2013). The average deal size declined in that period from 41,071 square feet in 2Q 2013 to 34,831 square feet for 2Q 2014. The takeaway is the noticeable increase in the volume while the deal size is has declined by 15%.
PRICING – Price per Square Foot & Top Quartile Price per Square Foot
The average price per square foot was about $328, however, the top quartile was over $726 per square foot. The top quartile figure is heavily influenced by the sale of 12 properties that sold for over one thousand dollars per square foot during the second quarter. The average price per square foot in 2Q 2014 declined slightly from $338 in 1Q 2014, but has decreased from $423 in 2Q 2013.
PRICING – Cap Rate and Top Quartile Cap Rate
Cap rates increased 50 basis points this last quarter to 5.9% after a 70 point drop in 1Q 2013 from 4Q 2013. The top quartile also had a 50 point rise from 5.0% to 5.5% in the same time frame.
PRICING – Cap Rate and Yield Spread
The yield spread increased this last quarter to 334 basis points from 268 points in the 1Q 2014. Part of this could be due to the fact the 10 year treasury has also decreased a similar amount. The spread peaked 2Q 2012 at 496 points, the highest spread since 3Q 2002 when it was 488 points.
FUNDAMENTALS – Institutional Vacancy Rate and Institutional Vacancy Year Over Year Change
The institutional vacancy rate ticked up slightly to 4.8% from 4.7% the previous quarter. However, Institutional Vacancy has been steadily declining since its peak in 4Q 2011 when it was 7.1%.
Institutional Vacancy Rate is defined as the percentage of the property’s net rentable square footage that is not under lease obligation, and may vary from physical vacancy.
FUNDAMENTALS – Institutional Effective Rent and Institutional Effective Rent Year Over Year Change
Effective rent also saw strengthening with an average rent of $31.50 per square foot per year which was up 4.5% from 2Q 2013 when it was $30.70. Institutional Effective Rent includes all collected rental income from the property. More specifically it includes: Base Rent incorporating free rent and escalations, Contingent Income, Expense Reimbursement, Other Operating Income.
FUNDAMENTALS – Institutional NOI per square foot and Institutional NOI Year Over Year Change
Institutional NOI per square foot stayed steady for the third quarter in a row at $22.90. however, it still reflects an increase of 5.8% from 2Q 2013 when it was $21.70. This reflects a trend that has been occurring since the 4Q 2011 when Institutional NOI was only $17.70, a 29% increase in only 11 quarters.
The average institutional expense (Institutional Effective Rent – Institutional NOI) is about $8.60. Institutional NOI is climbing faster than the L.A. Metro annual inflation rate of 2.0% which is up from 1.3% for March 2013. Institutional NOI is defined as Institutional Effective Rent Revenue minus Operating Expense. Operating expense includes the following: Ground Rent, General Administrative, Management Fee, Marketing, Other Operating Expense, Payroll And Benefit, Professional Fees, Property Insurance, Real Estate Tax, Repairs And Maintenance, and Utility Expense.