Overall Market Vacancy Rises to Begin 2017

The Los Angeles County office market recorded -473,900 SF of net absorption as the total vacancy rate increased 50 basis points to 15.5%. Move-outs and new speculative construction deliveries in West Los Angeles, Downtown and Tri-Cities drove demand.

Despite the negative movement for this quarter, there is still confidence in the market as rental rates increased by $0.06 to $3.05 PSF FSG. Rents rose in all Los Angeles County submarkets except for the San Gabriel Valley. Construction actively remains concentrated in Downtown Los Angeles, West Los Angeles and Central Los Angeles, accounting for 96% of construction in the country.

Los Angeles County non-farm unemployment in February 2017 declined to 4.8% from 4.9% last quarter, a 12.7% decrease years-over-year. Over the past 12 months, Los Angeles County gained 70,800 jobs for an increase of 1.6%.

Key Takeaways:

  • The Greater Los Angeles Basin office market recorded negative net absorption for the first time in 12 quarters at -175,100 square feet (SF).

  • Office market vacancy trends rose by 20 basis points from last quarter to 14.4%. A longer historical perspective shows that the vacancy rate a year ago stood at 15.1%

  • Asking rental rates continue to increase at a quarterly average of 1.4%, ending the year at $2.86 per square foot (PSF) full service gross (FSG), a 5.9% gain over last year.

  • There is currently 5.6 million SF of new construction in the Los Angeles Basin office market of which most is to be delivered in 2017.

  • The overall economy continued to see solid growth carry over from 2016. Los Angeles Basin unemployment rates have declined from 5.3% to 4.7% year-over-year.

Outlook:

Future construction in Downtown Los Angeles will provide an abundance of creative space on the fringe of the CBD, as Downtown Los Angeles accounts for 51% of all new construction in Los Angeles County. The West Los Angeles market is poised to add just over 1.5 million SF in the near future as construction and creative conversions deliver. However, only 10.1% of this space has been pre-leased thus far. Whether demand can catch up to new supply will go a long way in determining whether vacancy stabilizes in the market or continues to rise. As overall space options have become limited in Orange County with vacancy declining and new construction coming online, asking rental rates have increased by 9.1% from one year ago. The Orange County office market will continue to be a target area for professional service tenants who are looking for space alternatives outside of Los Angeles and San Diego counties.