Market Fundamentals Rebound in Second Quarter

The Los Angeles County office market recorded positive 611,000 SF of net absorption as the total vacancy rate decreased 20 basis points to 15.6%. This is a result of substantial tightening in West Los Angeles and moderate positive demand in most markets.

The market displayed confidence as rental rates increased by $0.06 to $3.11 PSF FSG. Rents rose in all Los Angeles County submarkets except the San Gabriel Valley and the San Fernando Valley where rents held steady. Construction activity remains concentrated in Downtown Los Angeles and West Los Angeles, which accounts for 87% of construction in the county.

Los Angeles County non-farm unemployment in May 2017 declined to 4.4% from 4.8% last quarter, a 9.0% decrease year-over-year. Over the past 12 months, Los Angeles County gained 100,500 non-farm jobs for an increase of 1.4%.

Key Takeaways:

  • The Greater Los Angeles Basin office market rebounded from negative demand last quarter to post 703,400 square feet (SF) of positive absorption.

  • Office market vacancy dropped by 10 basis points from last quarter to 14.6%. A longer historical perspective shows that the vacancy rate a year ago stood at 14.9%.

  • Asking rental rates continue to increase at a quarterly average of 1.5%, recording $2.92 per square foot (PSF) full service gross (FSG), a 6.3% gain over last year.

  • There is currently 7.9 million SF of new construction in the Los Angeles Basin office market, most of which is to be delivered in 2017 and early 2018.

  • The over all economy continued to see solid growth carry over from 2016. Los Angeles Basin unemployment rates have declined from 4.7% to 4.2% year-over-year.

Outlook:

Demand from strong leasing activity in 2015 and 2016 has finally started to manifest. After a period of stagnation, rents rebounded, registering an average increase of 2.0% in the last 3 quarters. Future construction in Downtown Los Angeles will provide an abundance of high quality creative space to the market, as it accounts for 42% of all new construction in Los Angeles County. The West Los Angeles market is poised to add just under 2.1 million SF in the near future as construction and creative conversions deliver. However, only 8.9% of this space has been pre-leased. Leasing efforts for these projects will determine whether vacancy stabilizes in the West Los Angeles market.

Investment activity was widespread throughout Tri-Cities, with Glendale seeing its ninth and tenth Class A properties traded in the last 2 years. Moving into the second half of 2017, the Orange County market is expected to see signs of stabilization. Class A asking rental rates have plateaued as the Airport Area and South County markets have reached their historical rental rate peaks, while Central County, North County and West County remain below prior pricing peaks.