DTLA Vacancy Decreases to End 2017

At the end of 2017, the Downtown Los Angeles office market recorded positive absorption of 104,100 square feet, making 2017’s total essentially flat, having given back -24,400 square feet. Likewise, vacancy decreased by 30 basis-points on the strength of move-ins within the Financial District and Greater Downtown/Arts District. Leasing volume recorded 512,000 square feet. Asking rents rose incrementally from last quarter but still grew by 4.4% year-over-year. With Class A rents slightly retreating in the CBD, growth was mainly attributed to Class B rents.

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 the continued wave of deliveries in the next year, will put pressure on the market as the amount of vacant space rises.

Key Takeaways:

  • Net absorption slid slightly from last quarter’s total of 125,900 square feet, recording 104,100 square feet of demand.

  • Vacancy corresponded with a 30-basis-point drop to 20%.

  • The overall asking rental rate rose by $0.02 to $40.19 per square foot (PSF) full service gross (FSG), marking a 4.4% increase since the end of 2016.

  • The Financial District and Greater Downtown/Arts District drove leasing volume for the quarter, accounting for 88% of all activity.

  • No new projects completed this quarter, though all but one of the properties in the current pipeline are scheduled to deliver in 2018.

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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 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 in the earlier part of the year, but there are signs that landlords have started to rein in the upper limits of those rates. Investment activity, while lower than 2016, will continue into early 2018 as a few properties remain on the market.

Vacancy is expected to increase as new construction deliveries in the Greater Downtown/Arts District submarket have the potential to outweigh demand from tenants. A focus on efficient workplace design and new construction deliveries could temper demand from future out-of-market relocations to Downtown. While newly constructed vacant space will keep rents high, rightsizing and fewer tenants in the market could cause rents to slide in the future. Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 35% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and pre-leasing activity. Capitalization rates are expected to continue compressing while sale prices rise as Los Angeles County remains a favorable investment environment for foreign and domestic capital.