More new buildings drive the Los Angeles office vacancy up higher in 2018

An increase in office supply and asking rents drove up vacancy in Los Angeles’ office market in the first quarter of 2018.

Meanwhile, investment sales in the office sector took a hit, reflecting a greater slowdown in commercial property trades as some foreign entities buckle down on capital outflow.

The overall vacancy rate rose to 15.4 percent, up from 14.4 percent from the same period last year and 15.1 percent in the fourth quarter, according to a new report. That’s due to 1 million square feet of new office development hitting the market, as well as over 1 million square feet of renovation completions.

Much of the new office construction is happening in Culver City, where average asking rents hit $4.31 per square foot, marking a 25% percent year-over-year increase. Hackman Capital Partners’ expansion of Culver Studios and Culver Steps, as well as Lincoln Property Co.’s 8777 Washington building are among some of the biggest projects underway in the area.

“There’s still development in the pipeline but much less that will be delivering in 2018.”

The bulk of the renovations are happening in pockets of Downtown, such as the Arts District, Historic District and South Park neighborhoods. “There’s really cool, old product that people are wanting to put the capital together to renovate and build. The Ford Factory, which is still awaiting Warner Music Group’s arrival, is one of the largest renovations Downtown.

On the whole, average asking rents in the Greater Los Angeles area rose slightly to $3.32 per square foot per month, up 6 percent from the year prior and less than 1 percent from the previous quarter. Rates in the Downtown Los Angeles submarket stayed largely flat, while rents in the Westside — Santa Monica and Pacific Palisades — grew 3 percent year over year to $4.74 per square foot.

While office leasing remained strong at 3.3 million square feet, investment activity decreased to 2.9 million square feet in volume. That’s a 40 percent decline from the 4.8 million-square-foot quarterly average recorded last year.

“There was a lot less product changing hands, so something is going on there,” Kenas said.

Still, there were four key transactions valued at over $100 million in the quarter. Lincoln Property Company’s $196 million sale of the Wedbush Center was the largest in the quarter, followed by the Connexion Burbank Campus portfolio trade at $123.5 million.

Net absorption for the quarter clocked in at 21,100 square feet, an increase from -23,000 a year ago. Roughly 2.1 million square feet are under construction, down from 2.4 million last year.

Los Angeles Office Market Has Best Quarter in Nearly a Decade

Original source: http://www.losangelesofficespace.net/los-angeles-office-market-continues-hot-streak/

The LA office market has been hot lately, posting its best quarter since the financial crisis. Two of the biggest drivers of this growth have been entertainment companies and tech firms, which continue to expand at an impressive rate.

Veteran developers who have been building in the area for decades find themselves working extensively on office projects, citing the growth and opportunity they are providing. Buoyed by large office leases from companies such as City National Bank, Warner Music Group, and Kite Pharma, 2.1 million square feet of office space was absorbed in Los Angeles and Ventura Counties during one quarter, the most in one quarter since 2000.

The 2.1 million square feet figure comes from the change in occupied office space between the amounts of space leased compared to vacated, and is a measure often used to determine how well the real estate market is doing in a particular area. This change has increased the development of office spaces, as developers see the potential for markets. For example, the developer of projects such as the Water Garden in Santa Monica is currently working on three separate projects which are worth $500 million altogether.

One interesting dynamic is that the increased demand could mean that landlords will wield more power when the time comes to negotiate leases with tenants who are in particularly popular areas and neighborhoods. All of this activity in Los Angeles comes in contrast to many major cities through the country which have seen office markets slow.

Because Los Angeles was a little slower to recover from the recession, a bevy of new local businesses or either being formed or expanded, causing this high level of demand and activity. This growth mode means many are preparing for a strong year both in leasing and sales.

The biggest driver of the office market boom in recent months has come from the entertainment sector, with web-based companies such as Netflix, Hulu, and Amazon entering the market to create new shows and productions. They are joined by other media companies like Youtube, Snapchat, and BuzzFeed who all seek to create news and entertainment for their users. These types of companies have been especially drawn to area in Hollywood, Playa Vista, Santa Monica, and Venice.

What has resulted is a mix of Los Angeles and Silicon Valley, with these tech companies seek to start and expand the media content of their businesses. Included in new tenants in the area are companies such as Broad Green Pictures and Formosa Group, both of which are in the entertainment sector.

Another area that has seen a big boom is in Santa Monica, which has traditionall been a major hub for tech in Los Angelees. It is one of the most expensive areas in the city with landlords asking for $5.61 per square foot per month, but still accounted for a quarter of all of the absorption in Los Angeles. This $5.61 figure is up from $5.43 last quarter, an 18 cent growth.

As a whole, the vacancy rate in Los Angeles dropped to 13.3%, nearly 2 percentage points lower than a year before. Meanwhile, average asking prices for rents increased by 5 cents over that time, up to an average of $2.94 a square foot per month. In Downtown Los Angeles, vacancy rates sit at 16.8%, which is down almost 1 percent from the year before, while asking price for rents increased by 3 cents per square foot.

The areas that experienced the great activity for both leases and increases in rent were in western Los Angeles County, with cities such as Playa Vista, El Segundo, and Culver City.

Many experts are projecting a strong 2017 but a relative lull in 2018 and 2019. This is due to it being a full decade since the financial crisis, which slowed the market down. It is common for large leases to last for ten years, which means that fewer leases than normal will be hitting the market during 2018 and 2019, because less leases were being signed a decade ago.

However, that hasn’t slowed developers down, as there is about 2.2 million square feet of office space under construction across Los Angeles. The biggest area of growth is in Hollywood, which is seeing almost 600,000 square feet of office space being built. Developers are eager to cash in on the strong demand and increased rents being charged across the city.

Beverly Hills Q1 2016 Office Market Update

The most expensive class A market for office space in Los Angeles County is Beverly Hills, according to a report by NGKF and confirmed by Beverly Hills Office Spaces own agents.. At the end of the first quarter 2016, the asking rate was $5.42 per square foot per month, slightly ahead of Santa Monica, which was asking $5.12/square foot.

In its peak in 2008, overall asking rent in Beverly Hills was $4.45 per square foot per month, meaning that the current rates are 12.4 percent higher than they were then. For comparison, the West Los Angeles market as a whole is just 0.2 percent above its 2008 peak.

In the first quarter, vacancy rates did climb from 6.5 percent up to 7.1 percent, a growth of 60 basis points. However, that 7.1 percent is still one of the lowest vacancy rates in Los Angeles, especially on the Western side of the county.

There was a net absorption of negative 14,804 square feet, which was the largest new occupancy loss in one quarter for Beverly Hills since 2012. This is not offset by any new construction that occurred in the first quarter of the year.

We also did not see any major leases being signed in the current market, with the biggest being the 5,898 square foot lease signed by United Talent Agency, for their space located at 9336 Civic Center Drive. The next largest was Cellar of Beverly Hills, which signed a lease on a 5,576 square foot space located at 9250 Wilshire Boulevard.

Photo credit: Flickr user Skinny Lawyer

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