Vacancy Rises With New Deliveries

In first quarter 2017, the Downtown Los Angeles office market recorded negative absorption for the second straight quarter. The delivery of 2 vacant office buildings contributed to the uptick in vacancy. Leasing volume recorded 641,300 SF. Asking rents continued to climb, recording growth of 0.2% year-over-year. While positive, growth was flatter than the previous 3 quarters, which saw growth rates of 1.5%, 1.9% and 1.4% respectively.

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. This, combined with a wave of deliveries in the next year, will put pressure on the market as more space becomes vacant.

Key Takeaways:

  • After seven consecutive quarters of declining or unchanged vacancy, the overall vacancy rate rose in first quarter of 2017, recording at 19.8% for the quarter.

  • Net absorption fell from last quarter’s total of -16,000 square feet (SF), ending at -157,200 SF.

  • The overall asking rental rate climbed by $0.02 to $38.51 per square foot (PSF) Full Service Gross (FSG), marking a 0.2% increase since the first quarter of 2016.

  • Mid-sized to small leases dominated velocity in both the Financial District and South Park submarkets. Leasing activity totaled 641,300 SF for the quarter.

  • No properties traded hands in first quarter, but investment activity in 2017 will not be muted with several buildings either under contract or on the market.

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Outlook:

Downtown Los Angeles market vacancy is expected to rise. Continued rightsizing and the delivery of speculative office space both in and on the fringe of the CBD will potentially outweigh interest from out of market tenants. Despite this, asking rental rates will remain stable as landlords and investors exercise cautious optimism about the local economy and real estate fundamentals for the time being. Investment activity will gain momentum through 2017 as properties under escrow close and few remain on the market.