West L.A. Absorption Positive As Rents Ascend

   

Vacancy in the West Los Angeles market rose by 10 basis points, as absorption gains in Marina Del Rey/Venice and West Hollywood helped buoy the market against partially vacant spec deliveries. Rents continued their ascent at a more measured pace than the market had seen in past quarters, rising by $0.01 to $4.75 PSF FSG, a growth of 4.4% year-over-year. Leasing activity came up short of last quarter’s 1,413,900 square feet, recording 1,312,100 square feet of velocity. The West Los Angeles market is poised to add more than 1.1 million square feet in the next two years as construction and creative conversions deliver. Concentrated mainly in technology tenant-dense submarkets, leasing efforts for these projects will go a long way in determining whether vacancy ebbs of flows in the coming quarters.

Vacancy rose for the fourth straight quarter with the overall vacancy rate for West Los Angeles rising by 10 basis points to 14.1%. West Hollywood properties accounted for most of the movement in vacancy, with a 330-basis-point decrease from 17.4% to 14.3%. Vacancy in Class B properties rose despite positive absorption due to the delivery of a partially vacant buildings in Culver City. Absorption recorded 405,800 square feet for the quarter. Leasing velocity fell short of last quarter’s 1,413,900 square feet, posting 1,132,100 square feet. Santa Monica led the market in velocity as the Tennis Channel took 69,000 square feet at Lantana Center, while Bird Scooters (58,400 square feet) and lifestyle brand Goop (57,000 square feet) at Colorado Center and Santa Monica Gateway, respectively. Google started its long-awaited move in to the Spruce Goose Hangar right before the end of the quarter, bringing the 310,000 square foot building to full occupancy. Elsewhere in the Marina Del Rey/Venice submarket, Kaiser moved into 36,000 square feet at 5300 McConnell Avenue.

Monthly asking rental rates rose to $4.75 PSF, an increase of $0.01 from the previous quarter. After posting year-over-year growth of 6.4% last quarter, rental growth retreated to a still-healthy 4.4% in the penultimate quarter of 2018. 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 Aso Group’s creative conversion of the former Spruce Goose Hangar. The 310,000-square-foot property delivered fully leased to Google. The West Los Angeles construction pipeline remains active. A bevy of properties, including Culver City’s Ivy Station mixed-use development, are due to deliver in 2019. CIM Group’s project at 953 N. Sycamore Avenue delivered to the West Hollywood submarket with SiriusXM occupying 20,000 square feet as its first tenant. Investment activity for properties greater than 25,000 square feet increased from the previous quarter’s total of $249 million, recording $1.1 billion in investment sales volume. A joint venture of Boston Properties, Inc. and Canada Pension Plan Investment Board acquired the 21-building Santa Monica Business Park campus in Santa Monica from Blackstone for $627.5 million ($528 PSF). A majority of the property was subject to an 80-year ground lease and was 94% leased at the time of sale. Another notable sale took place in Beverly Hills. With the intent of renovating the property to push rents to market levels, Starpoint Capital purchased 433 N. Camden Drive from Camden Properties for $193 million, or $930 PSF. 

 

Key Takeaways:

  • The average asking monthly rent for West Los Angeles rose to $4.75 per square foot (PSF) full service gross (FSG), a $0.01 increase over the previous quarter. 

  • Demand rose, recording 405,800 square feet of positive absorption. Gains in Marina Del Rey/Venice figured prominently for the quarter.

  • Four projects delivered from the under-construction pipeline - A total of 12 buildings remain in the pipeline. 

  • Investment maintained momentum with six properties trading, highlighted by Boston Properties’ acquisition of Santa Monica Business Park.

  • Leasing activity recorded 1,132,100 square feet, marking three consecutive quarters of velocity exceeding 1.1 million square feet.

Outlook:

The West Los Angeles market continued to move with purpose into the second half of 2018. Demand remained positive for the quarter, but vacancy rose as new vacant space outweighed move-ins. Rent fundamentals continued to push higher with year-over-year growth of more than 4%. 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 loom on the horizon to fill demand in the major creative markets of Santa Monica, Culver City and Marina Del Rey/Venice.

Heading into the final quarter of the year and beyond, vacancy should mirror 2018’s trend thus far of incremental softening, 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 and into 2019. Demand in the entertainment and content generation industries will continue to put upward pressure on West Los Angeles rental rates. West Los Angeles constitutes 26% of new construction in Los Angeles County, and robust  construction activity will persist through 2019. 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.