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 4Q2013 while the number of properties traded increased only 15%. The average square foot of deals increased.
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 4Q2014 was $2.4 billion which was up 120% from 4Q2013 ($1.1 billion).
VOLUME – Number of Properties and Total Square Feet
There were 109 properties traded with a total of 9.7 million square feet, which represents a Year Over Year (YOY) increase of 28% in the number of properties (85 properties in 4Q2013). The total square footage traded increased dramatically by 111%, from 4.6 million to 9.7 million square feet from 4Q 2013 to 4Q 2014. The average deal size increased in that period from 54,118 square feet in 4Q 2013 to 88,991 square feet for 4Q 2014. This has had a downward pressure on cap rates which have continued to decline since 2010.
PRICING – Price per Square Foot & Top Quartile Price per Square Foot
The average price per square foot was about $233, however, the top quartile was over $625 per square foot. The top quartile figure is heavily influenced by the sale of 54 properties that sold for over one thousand dollars per square foot during the quarter. The average price per square foot in 4Q2014 decreased from $247 in 4Q 2013.
PRICING – Cap Rate and Top Quartile Cap Rate
Cap rates decreased 20 basis points this last quarter to 5.7%. This continues the downward trend which started Q1 2010 when cap rates were about 7.7%. The top quartile also had a 30 point decline from 5.3% to 5.0% 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 354 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 continued its steady decline to 3.9%, breaking the 4.0% barrier for the first time since 2Q 2009 when it started a steady climb to its peak at 7.1% in 4Q 2011.
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 declined slightly in the past four quarters from $31.40 in 4Q 2013 to $30.90 in 4Q 2014.
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 decreased slightly in 4Q 2014 to $22.30 from $22.70 in 4Q 2013. This seems to be more of a leveling off after a steady rise from $17.70 in 4Q 2011.
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 0.7% which is up from 1.1% for December 2013. The low inflation rate is due primarily to the significant decrease in Motor Fuel, which declined 22.4% since December 2013. This decline helped to offset moderate rises in other categories.
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.