Demand bounces back
Los Angeles Office Market @ Q3 2013
The Los Angeles office market bounced back in the third quarter as strong demand for office space resulted in positive net absorption totalling 920,000 square feet. Still, with 1.1 million square feet vacated in the first half, year-to-date net absorption remains in negative territory. The 60 basis point decline in vacancy is welcome, but at 17.5 percent it is still at the previous peak reached in mid-2011. Despite moderate economic growth and job creation in office-related employment sectors, the vacancy rate has not been able to break below 17 percent.
Construction activity picked up, with 800,000 square feet delivered in the last year, and 973,700 square feet currently in development. This is low compared to the historical average, and has not contributed to the persistently high vacancy rate-yet. Year-to-date leasing activity is running slightly ahead of 2012’s pace, which bodes well for occupancy gains in future quarters.
Following a pause last quarter, average rental rates resumed their slow ascent increasing by 2.3 percent during the third quarter. Much of the rent increase can be attributed to repositioning of Class B & C property into creative office space that is able command premium rents. In many cases, rents for creative space surpass traditional Class A rents, and developers have jumped on this trend. Indeed, 60 percent of the office construction tracked by DTZ in the Los Angeles market is classified as creative office.
A strong investment sales market has changed the dynamic between owners and occupiers in recent quarters. Some of the changes have been the result of capital markets resolving distress such as Brookfield’s acquisition of the MPG Office Trust portfolio. But, most of the transactions have been traditional sales, with trophy assets trading at record prices. Notable sales this quarter include CalPERS’s purchase of One Wilshire in Downtown for $673 per square foot, and Jamestown Property acquiring the Lantana Media Campus in Santa Monica for $678 per square foot. In addition, JP Morgan put its Century Plaza Towers/2000 Ave of the Stars portfolio on the market in August. The 3.2 million square foot portfolio is expected to sell for $2.0-2.5 billion, a record for this market.
