Vacancy Rises For Second Consecutive Quarter

In second quarter 2017, the Downtown Los Angeles office market recorded negative absorption for the third straight quarter. The delivery of one vacant office building contributed to the uptick in vacancy. Leasing volume recorded 850,600 SF. Asking rents continued to climb, recording growth of 0.7% year-over-year. Class A rents slid by 0.3% from last year, as landlords cope with rightsizing and fewer tenants in the market.

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:

  • The overall vacancy rate rose for the second consecutive quarter, recording at 20.4%, up from 19.8%.

  • Net absorption improved from last quarter’s total of -157,200 square feet (SF), but still ended negative at -97,300 SF.

  • The overall asking rental rate climbed by $0.19 to $38.70 per square foot (PSF) Full Service Gross (FSG), marking a 0.7% increase since the second quarter of 2016.

  • The Financial District and Bunker Hill drove leasing velocity for the quarter, accounting for 90% of all transaction activity.

  • Investors were active for the quarter. 300 S. Grand Ave. traded to a JV of Rising Realty Partners and Colony Northstar for approximately $465.0 million ($448 PSF).

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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 Class A rents retreating this quarter, asking rental rates will remain stable as landlords and investors exercise cautious optimism about the local economy and real estate fundamentals. Investment activity will gain momentum through the end of 2017 as a few properties remain on the market.