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.
Volume – Dollar volume increased by 59% from 3Q 2013 while the number of properties traded increased only 15%. The average square foot of deals declined.
Pricing – Subsequently, the average price per square foot increased with a slight increase in cap rates of 20 points. Yield spread is back to a more normal range.
Fundamentals – Institutional vacancy declined by 30 points after holding steady for two quarters, while effective rent has leveled off and NOI per square foot edged up slightly.
VOLUME – Dollar Volume & Year Over Year Change
The total volume for the Los Angeles Market for 3Q 2014 was $1.7 billion which was up 59.2% from 3Q 2013 ($1.1 billion).
VOLUME – Number of Properties and Total Square Feet
There were 101 properties traded with a total of 3.8 million square feet, which represents a Year Over Year (YOY) increase of 15% in the number of properties (88 properties in 3Q 2013) with a corresponding decrease in the total number of square feet (4.7 million square feet in 3Q 2013). The average deal size declined in that period from 53,409 square feet in 3Q 2013 to 37,624 square feet for 3Q 2014. The takeaway is the noticeable increase in the volume while the deal size is has declined.
PRICING – Price per Square Foot & Top Quartile Price per Square Foot
The average price per square foot was about $486, however, the top quartile was over $668 per square foot. The top quartile figure is heavily influenced by the sale of nine properties that sold for over one thousand dollars per square foot during the quarter. The average price per square foot in 3Q 2014 increased from $335 in 1Q 2014, and has increased dramatically from $267 in 3Q 2013.
PRICING – Cap Rate and Top Quartile Cap Rate
Cap rates increased 20 basis points this last quarter to 5.9% after a 60 point drop in 1Q 2014 from 4Q 2013. The top quartile also had a 30 point decline from 5.5% to 5.2% from 2Q 2014.
PRICING – Cap Rate and Yield Spread
The yield spread continued its climb back to normalcy as it increased this last quarter to 337 basis points from 266 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 3Q 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 edged back down slightly to 4.4% from 4.7% the previous two quarters. 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 has leveled off the last four quarters with an average rent of $31.10 per square foot per year which was up 1.3% from 3Q 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 edged up slightly after staying steady for three straight quarters, up twenty cents to $22.90. The Year Over Year change of 2.6% is higher than the rate of inflation.
The average institutional expense (Institutional Effective Rent – Institutional NOI) is about $8.20. Institutional NOI is climbing faster than the L.A. Metro annual inflation rate of 1.3% which is up from 0.4% for November 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.