Vacancy Rises For Third Consecutive Quarter

In the third quarter of 2017, the Downtown Los Angeles office market recorded positive absorption of 125,900 SF, a reprieve from three consecutive quarters of negative demand. The delivery of two partially vacant office buildings contributed to the 40 basis-point uptick in vacancy. Leasing volume recorded 601,300 SF. Asking rents continued to climb, recording growth of 4.5% year-over-year. Class A and B rents increased by 1.6% and 7.7% from the same time last year, pushed by the high entry cost of new speculative space. 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 the amount of vacant space rises.

Key Takeaways:

  • Net absorption improved from last quarter’s total of -97,300 square feet (SF), recording 125,900 SF of demand.

  • New construction deliveries drove the overall vacancy rate to 20.3% from 19.9%, despite positive demand.

  • The overall asking rental rate climbed by $1.26 to $40.17 per square foot (PSF) full service gross (FSG), marking a 4.5% increase since the third quarter of 2016.

  • The Financial District and Greater Downtown/Arts District drove leasing volume for the quarter, accounting for 71% of all transaction activity.

  • Korean Air’s Wilshire Grand project completed construction, delivering Downtown Los Angeles’ first Class A new construction since 1992.

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Outlook:

Downtown LA market vacancy is expected to rise despite positive demand. 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. The introduction of new inventory to the market pushed asking rental rates, but existing stock held steady for the most part. Investment activity will gain momentum through the end of 2017 and into early 2018 as a few properties remain on the market.