Downtown LA Carries Momentum Into 2018

The Downtown Los Angeles office market recorded positive absorption of 228,100 square feet, marking three straight quarters of positive absorption for the market. Even with the delivery of 500 S. Santa Fe Avenue, vacancy fell by 40 basis points as the Financial District drove demand for the quarter. Leasing volume recorded 459,300 square feet. Asking rents fell incrementally from last quarter but still grew by 4.3% year-over-year.

Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market. On a positive note, much of the streamlining by these larger tenants has been completed. As such, much of the speculative space coming on line both in the CBD and the Arts District will be left to out-of-market interest to fill.

Key Takeaways:

  • Demand momentum carried over from last quarter into the new year, rising from 104,100 square feet to 228,100.

  • Vacancy corresponded with a 40-basis-point drop to 19.6%.

  • The overall asking rental rate declined by $0.01 to $40.18 per square foot (PSF) full service gross (FSG).

  • The Financial District accounted for the lion’s share of leasing volume for the quarter, recording 59% of all activity.

  • One new project completed this quarter. Going forward, all but two of the properties in the current pipeline are scheduled to deliver in 2018, keeping construction momentum strong in the near future.

Outlook:

While news for the past three quarters has been positive, this year’s wave of construction deliveries will see to some vacancy increases. New construction deliveries could temper demand from future out-of-market relocations to Downtown Los Angeles, but the emergence of the Arts District as a tenant destination could mitigate demand concerns. While newly constructed vacant space will keep rents high, 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 42% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and preleasing 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.

Downtown L.A. vacancy is expected to stay relatively flat despite positive demand due to new construction deliveries. However, if interest from out-of-market tenants persists, especially in the media and technology industries, Downtown Los Angeles may be able to claim itself as a competitor to markets such as Hollywood and Silicon Beach. It has already been competitive insofar as asking rent, and even as new deliveries come online, we expect space to still be available at a discount to other creative hubs.