West L.A. Rent Growth Climbs into Second Half

   

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 Century City and Westwood. Rents continued their torrid ascent, rising by $0.11 to $4.74 PSF FSG, boosting year-over-year growth back over 6%. Leasing activity matched last quarter’s 1,417,400 square feet, recording 1,413,900 square feet of velocity. The West Los Angeles market is poised to add more than 1.34 million square feet in the next two years as construction and creative conversions deliver. Leasing efforts for these projects will go a long way in determining whether vacancy stabilizes in the West Los Angeles market or continues to rise.


The overall vacancy rate for West Los Angeles rose 10 basis points for the second consecutive quarter to 14.0%. Class A properties accounted for most of the movement in vacancy, with a 20-basis-point increase from 15.1% to 15.3%. Vacancy rose despite positive absorption due to the delivery of partially vacant buildings in Santa Monica, Culver City and Beverly Hills. Absorption recorded 294,000 square feet for the quarter. Leasing velocity nearly matched last quarter’s 1,417,400 square feet, posting 1,413,900 square feet. Marina Del Rey/Venice led the market in velocity as Pepperdine University renewed for 110,000 square feet at Howard Hughes Center, while Regus subsidiary Spaces signed for 67,700 square feet in Univision’s former headquarters at 5999 Center Drive. Talent agency Paradigm occupied its 82,900-square-foot space at 8942 Wilshire Boulevard in Beverly Hills, while Levine Leichtman Capital Partners occupied 24,200 square feet at 335 N. Maple Drive. In Santa Monica, Starz took possession of 60,200 square feet at the newly delivered Santa Monica Gateway campus.

After moderate growth the past few quarters, monthly asking rental rates surged to $4.74 PSF, an increase of $0.11 from the previous quarter. The current year-over-year growth of 6.4% led to the current rental rate being the high-water mark since Colliers started tracking rents in 2005. The influx of high-quality new space, as well as increasing rents in Class B inventory, have led to some markets seeing year-over-year growth exceeding 7%, and in some cases, more than 10%. Four properties came to market, highlighted by the delivery of Colorado Creative Studios’ Santa Monica Gateway. The 200,000-square-foot property delivered partially leased to Starz. The West Los Angeles construction pipeline remains active. A bevy of properties, including CIM Group’s 953 N. Sycamore Avenue in West Hollywood, are due to deliver in the third quarter of 2018. Two new projects broke ground in Culver City and West Hollywood, adding just under 125,000 square feet to the pipeline.

Investment activity for properties greater than 25,000 square feet decreased from the previous quarter’s total of $350.5 million, recording $249 million in investment sales volume. LaSalle Investment Management acquired the two-building Marina Park campus in Marina Del Rey from Alliance Bernstein for $83.8 million ($560 PSF). The property was 79% leased at the time of sale and sold after an extensive value-add renovation. Another notable sale took place in Beverly Hills. After divesting the Waters Edge campus to Rockwood Capital last quarter, DivcoWest purchased 331 N. Maple Drive for $82.2 million, or $917 PSF.

Key Takeaways:

  • The average asking monthly rent for West Los Angeles rose to $4.74 per square foot (PSF) full service gross (FSG), a $0.11 increase over the previous quarter.

  • Demand rose, recording 294,000 square feet of positive absorption. Gains in Century City and Westwood figured prominently for the quarter.

  • The under-construction pipeline held steady, adding two more planned properties, while five projects delivered - A total of 15 buildings remain in the pipeline.

  • Investment maintained momentum with four properties trading, highlighted by DivcoWest’s acquisition of 331 N. Maple Drive in Beverly Hills.

  • Leasing activity recorded 1,413,900 square feet, marking two consecutive quarters of velocity exceeding 1.4 million square feet.

Outlook:

The West Los Angeles market regained some momentum to finish the first half of 2018. Vacancy experienced a slight uptick due to the delivery of vacant space, but demand remained positive for the quarter. Rent fundamentals found their footing as year-over-year growth exceeded 6%. West Los Angeles continues to be one of the premier office markets for entertainment and tech tenants, and we expect this to remain so for the foreseeable future whether rent growth continues to slide or not. Developers seem to agree, as new projects break ground to replace deliveries to the market.

Heading into the second half of the year, vacancy should mirror 2018’s trend thus far of incremental tightening, though much of that will depend on the occupancy of current construction projects at delivery. West Los Angeles’ place as the premier submarket for a variety of industries will help buoy demand through the end of 2018. Demand in the entertainment and content generation industries will continue to put upward pressure on West Los Angeles rental rates. West Los Angeles constitutes 31% of new construction in Los Angeles County, and robust construction activity will persist through 2018. Robust demand from the entertainment and media industries will continue to keep West Los Angeles on the radar of institutional investors looking for either value-add and core opportunities.