Vacancy Continues to Decline While Rents Rise

 

In third quarter 2016, the Downtown Los Angeles office market continued to see positive momentum. While the overall market recorded positive absorption, the Financial District submarket contributed the majority of negative demand due to Millbank Tweed, LLP’s relocation to Century City. However, leasing velocity recorded 548,100 SF, as a number of out-of-market tenants agreed to relocate to downtown, which bodes well for future demand. Asking rents continued to climb, recording growth of 1.9% year-over-year.

 

Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. As new construction deliveries in the Greater Downtown/Arts District are forthcoming shortly, the possibility of a large creative/tech/media tenant landing in one of those new properties will help solidify that submarket’s validity as a tenant destination.

Key Takeaways:

  • Vacancy continued its gradual descent for the sixth straight quarter, recording at 18.2%, down 10 basis points from the previous quarter.

  • Net absorption fell from last quarter’s total of 108,500 square feet (SF) but remained positive at 45,000 SF.

  • The overall asking rental rate slightly increased by $0.02 to $38.43 per square foot (PSF) Full Service Gross (FSG), marking a 1.9% increase since the third quarter of 2015.

  • Midsize leases once again dominated velocity in both Class A and B product type. Leasing activity totaled 548,100 SF for the quarter.

  • Several properties traded hands in third quarter, highlighted by the LA Times building located at 202 W. 1st St. selling for $140 PSF from Tribune Media Company to Canadian investor/developer Onni Group.

Outlook:

The Downtown Los Angeles market activity is expected to remain on a steady path as vacancy is projected to remain relatively flat through the end of 2016. While tenant demand has been steady in the past, continued rightsizing from existing tenants and the influx of potentially vacant creative properties on the CBD fringe could temper any major vacancy gains. Asking rental rates will remain stable as landlords aim to hold high occupancy rates by offering large concession packages.