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.