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 1Q 2014 was $809 million which was up 61.1% from 1Q 2013 ($502 million), however, 1Q 2014 volume was down from 4Q 2013 volume of $1.1 billion. It is typical that there is a lot of activity in the fourth quarter followed by a decline in the first quarter.
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 in the number of properties (62 properties in 1Q 2013) with a corresponding increase in the total number of square feet (1.9 million square feet in 1Q 2013). The average deal size staid relatively the same at 30,337 for 1Q 2014 as it was in 1Q 2013 which was 30,645. The takeaway is the noticeable increase in the volume; up 43% in one year while the deal size is relatively the same.
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 $652 per square foot. The top quartile figure is heavily influenced by the sale of the Gucci Building in Beverly Hills which sold for over $8,000 per square foot!
PRICING – Cap Rate and Top Quartile Cap Rate
Cap rates continued their downward trend to 5.3%, which is down from 6.4% in 1Q 2013. The top quartile saw a decline from 5.% to 4.8% in the same time frame.
PRICING – Cap Rate and Yield Spread
As would be expected with a decline in cap rates and an increase in volume, the yield spread also continued to thin. With an average cap rate of 5.3% the spread over the 10 year treasury narrowed to 259 basis points in 1Q 2014, which is down from 1Q 2013 when the average cap rate was 6.4% with a spread of 455 points.
FUNDAMENTALS – Institutional Vacancy Rate and Institutional Vacancy Year Over Year Change
The institutional vacancy rate was a reported 4.9% which was down from 5.3% in 1Q 2013. 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 $30.60 per square foot per year which was up 2.9% from 1Q 2013 when it was $29.80. 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 at $22.80 in the 1Q 2014 from 4Q 2013, however, it still reflects an increase of 7.7% from 1Q 2013 when it was $21.10. This reflects a trend that has been occurring since the 4Q 2011 when Institutional NOI was only $17.70, a 29% increase in only 10 quarters.
The average institutional expense (Institutional Effective Rent – Institutional NOI) is about $7.80. Institutional NOI is climbing faster than the L.A. Metro annual inflation rate of 1.0% which is down 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.
Source: Real Capital Analytics