Central Los Angeles Ends 2017 With Momentum

The Central Los Angeles market finished 2017 with momentum. Vacancy decreased by 180 basis points from the same period last year and absorption eclipsed 650,000 square feet for the year. There is currently 360,000 square feet of office product under construction along with 138,500 square feet of additional proposed product scheduled to break ground in 2018. This additional inventory will be attractive to both office tenants seeking new product in a high-image location and creative content producers looking for integrated office/production space in the creative center of Los Angeles. Absorption for the quarter totaled 150,600 square feet.

Central Los Angeles vacancy decreased by 120 basis points to 17.3% in the fourth quarter. Steady demand in the Mid-Wilshire submarket and robust absorption for new deliveries in Hollywood have combined to push vacancy to its lowest point since 2011. The average asking rental rate for the market rose $0.02 from the previous quarter.

Key Takeaways:

  • Delivery momentum stagnated in the fourth quarter as the construction glut of the last two years slowed, leaving 360,000 square feet of office product under construction and 138,500 square feet of proposed construction expected in the Hollywood submarket.

  • The average rent for Class A buildings in Central Los Angeles was $3.40 per square foot (PSF) full service gross (FSG), a 2.9% decrease year-over-year.

  • Vacancy slid 120 basis points from one quarter ago recording 17.3%.

  • Leasing activity increased from last quarter's 151,500-square-foot total to record 344,000 square feet.

  • Investment activity consisted of Vanbarton Group acquiring 7083 Hollywood Boulevard for $42.3 million ($515 PSF).

Outlook:

Strong leasing activity for the quarter will help keep demand steady into early 2018. Rents continued their ascent after a momentary slide last quarter, finishing at $2.76 PSF FSG. Overall rates were up 4.2% year-over-year. Central Los Angeles should stabilize in early 2018 because a lack of deliveries in 2018 will limit fluctuations in vacancy. With most of Hollywood's larger projects having been delivered, absorption in 2018 will be hard pressed to match the previous year. Rents currently stand 26.1% higher than their pre-recession peak. That, combined with fewer projects in the pipeline, could lead to limited room for rental growth going forward.

The Hollywood submarket will continue to see demand for space from entertainment, media and technology firms as pre-leased properties are delivered to the market, although the pipeline has dried up considerably from its height a year ago. With the surrounding submarkets mostly built-out and creative tenants passing on the burgeoning (but not fully realized) Downtown Los Angeles creative market, Hollywood has the opportunity to attract tenants desiring quality space at a lower price point than the Silicon Beach cluster. As the current development rush ends, the market will look to its proposed construction pipeline in 2018 and beyond to continue fulfilling demand for high quality creative and headquarter spaces.