2018 Q3 Central Office Knowledge Report

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Rents Continue Cooling Amidst New Construction

The Hollywood/Wilshire Corridor market saw mixed results to start out the second half of 2018. Vacancy fell 70 basis points from the previous quarter, while absorption posted positive demand, recording negative 104,300 square feet. There is currently 954,500 square  eet of office product under construction, along with 191,600 square feet of additional proposed product scheduled to break ground in 2018. The majority of deliveries will take place in 2020 with the arrival of Hudson Pacific's EPIC and Harlow properties and Kilroy's Academy project.

However, rents dropped again this quarter, sliding by $0.04. A historical perspective hows some cooling. Growth, which had been slowing but remained positive, contracted by 2.7%  year-over-year, after recording at -1.8% last quarter. Hollywood/Wilshire Corridor vacancy decreased by 70 basis points to 17.3% in the third quarter. Hollywood Class A properties saw the largest delta in vacancy, dropping by 500 basis points from 14.1% last quarter to 9.1%. Vacancy in Mid-Wilshire rose for the second consecutive quarter, pushing up to 20.5%.

Absorption for the quarter totaled 104,300 square feet. Among the move-ins that drove demand this quarter was Spaces occupying 60,700 square feet at 1800 N. Vine Street, where the co-working company hopes to plant a foothold in the Hollywood submarket. Marketing agency Workshop Creative moved into 21,200 square feet at 4525 Wilshire Boulevard, while Tornado Productions took 9,400 square feet at the former Cat & the Fiddle building at 6526 W. Sunset Boulevard. Leasing activity totaled 138,100 square feet for the quarter. NewTV leased 49,500 square feet at 6555 Barton Ave joining Serendipity Labs, Formosa Group and Crooked Media.

The average asking rental rate for the market slid $0.04 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 for the second consecutive quarter. Part of the slide in rents can be attributed to more space givebacks in Wilshire Corridor figuring prominently in asking rents, coupled with positive absorption in Hollywood.

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 and it would be unsurprising if they were in the conversation to lease the entirety of EPIC. Hollywood/Wilshire Corridor accounts for 24% of all properties under construction in Los Angeles County. Hudson Pacific also broke ground on Hollywood's next large project, The Harlow, at 1001 N. Seward Street. Slated for the Sunset Las Palmas Studios, the project is  expected to add 128,700 square feet in 2020. There was no investment activity for buildings over 25,000 square feet, as no sales recorded this quarter.

Key Takeaways:

  • The average rent in Hollywood/Wilshire Corridor dropped to $2.66 per square foot (PSF) full service gross (FSG), a $0.04 difference from last quarter. The year-over-year difference was more precipitous, registering negative growth of 2.7%.

  • Vacancy dropped 70 basis points from one quarter ago, recording 17.3%.

  • Leasing activity recorded 138,100 square feet, below the four year median of 184,500 square feet.

  • Investment activity was quiet for buildings over 25,000 square feet, as no sales recorded this quarter.

  • Approximately 954,500 square feet of office product is under construction and 191,600 square feet of proposed construction is further expected in the Hollywood submarket.

Outlook:

Hollywood/Wilshire Corridor should stabilize in late 2018 as a lack of deliveries will limit fluctuations in vacancy. With most of Hollywood's larger projects having been delivered, absorption in 2019 will be hard pressed to match the previous year. However, 2020 looks to be more promising, as several large tenants have expressed interest in that year's pipeline deliveries. Rents currently stand 21.4% 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 three large-scale projects, EPIC, The Academy and The Harlow, 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.

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 set for delivery in 2020, 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, recorded negative for the 
second consecutive quarter. While newer space may push rental rates back up upon delivery, it's also possible that those new developments, if not pre-leased, may have to adjust to conditions cooler than at present.

 

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Q3 2018 Greater Los Angeles Central Office Market Report

2018 Q3 Central Office Knowledge Report

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