Rents Continue Cooling Amidst New Construction

Hollywood/Wilshire Corridor vacancy increased by 130 basis points to 18.0% in the second quarter. Hollywood Class B properties saw the largest delta in vacancy, rising by 380 basis points from 10.0% last quarter to 13.8%.Vacancy in Mid-Wilshire rose after stable demand in the past few quarters, pushing up to 20.2%. Absorption for the quarter totaled negative 190,000 square feet. Among the move-ins that drove demand this quarter was WeWork occupying an expansion space of 16,300 square feet at 1601 Vine Street, where the co-working company had already occupied 64,800 square feet in 2017. Various space givebacks, both in Hollywood and Mid-Wilshire, contributed to lessened demand this quarter. Leasing activity totaled 153,300 square feet for the quarter. Create Advertising leased 42,300 square feet at 4201 Wilshire Boulevard joining media firms Concept Arts and Entertainment One, while political media company Crooked Media subleased 8,400 square feet at 6555 Barton Avenue in Hollywood.

The average asking rental rate for the market slid $0.01 from the previous quarter to $2.70 PSF FSG.Year-over-year growth, while lessened, had still been positive until now. However, mid-2017 now stands as the high point for Hollywood/Wilshire Corridor, as yearly growth was negative 1.8% for the quarter. The difference in rates between Mid-Wilshire and Hollywood continues to be stark as Mid-Wilshire remains a steady alternative for tenants averse to high rents. Hudson Pacific's 300,000-square-foot EPIC at Sunset Bronson is slated for an early 2020 delivery. The property is the developer's third project in the last three years. The other two, ICON and CUE, were fully leased and occupied at time of delivery by Netflix. Hollywood/Wilshire Corridor accounts for 10% of all properties under construction in Los Angeles County. Kilroy Realty broke ground on Hollywood's next large project, The Academy. The two-building campus, totaling 342,400 square feet, follows in the footsteps of the developer's other recent Hollywood development, Columbia Square, and will deliver in 2020.

1680 N. Vine Street traded from DLJ Real Estate Capital Partners to Ocean West Capital for $70 million ($555 PSF). DLJ bought the building in 2011 for $28 million and invested upwards of $16 million in capital improvements. Crown Street Associates sold 6725 W. Sunset Boulevard for $37.8 million ($511 PSF) to Vanbarton Group. This was the buyer's second acquisition in Hollywood after 7083 Hollywood Boulevard, which they bought in 2017 from CIM Group for $42.3 million.

Key Takeaways:

  • The average rent in Hollywood/Wilshire Corridor dropped to $2.70 per square foot (PSF) full service gross (FSG), a $0.01 difference from last quarter. The year-over-year difference was more precipitous, registering negative growth of 1.8%.

  • Vacancy rose 130 basis points from one quarter ago, recording 18.0%.

  • Leasing activity recorded 153,300 square feet, below the four year median of 184,500 square feet.

  • Investment activity for buildings over 25,000 square feet recorded two sales, totaling $107.8 million in transaction value.

  • Approximately 825,800 square feet of office product is under construction and 191,600 square feet of proposed construction is further expected in the Hollywood submarket.

Outlook:

The Hollywood/Wilshire Corridor 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. As evidenced by recent groundbreakings, developers still see room to run in the submarket. That optimism should be cautious as the market moves toward 2019. Positive rental rate growth, while it had been declining for the last few quarters, finally turned negative. While newer space may push rental rates back up upon delivery, it's also possible that those new developments may have to adjust to conditions cooler than at present.

Hollywood/Wilshire Corridor should stabilize in late 2018 because a lack of deliveries 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 23.2% higher than their pre-recession peak. That delta should decrease, at least until newer product is delivered to the market. Construction deliveries in 2018 mostly consist of smaller projects, while the next two large-scale projects, EPIC and The Academy, won't come to market until 2020. Investors remain bullish on the Hollywood/Wilshire Corridor market, targeting not only Class A trophy buildings, but also value-add and redevelopment opportunities.