Deliveries Raise Vacancy As Rents Stabilizet

The Los Angeles County office market recorded 230,600 square feet of net absorption and 555,300 square feet of deliveries as the total vacancy rate rose to 15.6%. Downtown Los Angeles and West Los Angeles led positive gains in the county, but construction deliveries in those submarkets and the South Bay negated substantial gains in vacancy. Nestle USA’s continued relocation from the Tri-Cities also tempered demand. Rental rate growth cooled as rates increased by $0.01 to $3.24 PSF FSG. Three of seven Los Angeles County submarkets saw rates decline or experience no change. Construction activity remains concentrated in Downtown and West Los Angeles, accounting for 82% of construction in the county.

The Central Los Angeles market began 2018 with mixed results. Vacancy decreased by 60 basis points from the previous quarter while absorption remained positive for the second consecutive quarter, posting 82,500 square feet. The Downtown Los Angeles office market recorded positive absorption of 228,100 square feet, marking three straight quarters of positive absorption.Vacancy in the West Los Angeles market rose by 10 basis points as the delivery of a few partially vacant buildings negated absorption gains in Marina Del Rey/Venice and Culver City. South Bay market rental rates continued to rebound with positive growth for the seventeenth time in eighteen quarters. Investment activity was concentrated in Pasadena, Burbank and Glendale. Glendale saw its fifteenth Class A property trade in the last three years. The Orange County office market saw negative movement during the first quarter due to Broadcom moving from the Airport Area into the newly constructed campus in South County. This is the largest tenant move the Orange County market has seen in quite some time.

Key Takeaways:

  • The Greater Los Angeles Basin office market posted minimal positive demand of 101,100 square feet.
  • Despite positive absorption, office market vacancy rose by 40 basis points from last quarter to 14.9% due to construction deliveries. Historically, vacancy rose by 20 basis points from 14.7% year-over-year.
  • Asking rental rate growth cooled compared to previous quarters, increasing at a trailing four-quarter average of 1.5% to end at 3.04 per square foot (PSF) full service gross (FSG). This is a 6.4% gain over last year.
  • New construction totaling 5.2 million square feet is underway in the Los Angeles Basin office market, three quarters of which will deliver in 2018.
  • The Los Angeles Basin unemployment rate rose after four consecutive quarters of decreases, ending at 4.2%. Job growth slowed to 1.9% as the economy stabilizes at virtually full employment.

Outlook:

There is currently 402,900 square feet of office product under construction in Central Los Angeles, along with 195,400 square feet of additional proposed product scheduled to break ground in 2018. In West Los Angeles, the market will add more than 1.65 million square feet over two years as construction and creative conversions deliver. With only one new project under construction on the horizon, the San Fernando Valley and Ventura County office market will remain supply-constrained and absorption is expected to remain flat to slightly positive. Given these conditions, market trends are expected to move at a slow rate for the submarket.

For investors, sizable discount to replacement cost and rents below peak levels in the Tri-Cities submarket are helping to fuel activity, along with a varied tenant base for the market. Market fundamentals in Orange County will remain strong as newly built inventory delivers to the market during 2018, giving tenants the opportunity to explore new space options. As tenants seek opportunities to right size and new construction delivers to the market, absorption gains are expected to be limited in coming quarters.