Market stumbles into the new year
Los Angeles Office Market @ Q1 2013
Despite slow economic growth, and improvement in the unemployment rate, the Los Angeles office market suffered a setback in the first quarter. Demand for office space fell with overall occupancy declining by -456,800 square feet market-wide, and vacancy rate was up by 10 basis points to 17.5 percent. Even though demand was consistently positive in 2012, vacancy remains close to the peak reached in mid-2011 at 17.5 percent.
Growth in technology and new media industries has not been able to compensate for the lower demand of traditional office occupiers in finance, legal and professional services, which continue to consolidate. Last year, the Westside and Tri Cities submarkets benefited from their concentration of growth these industries; however the positive trend has not held so far in 2013. These two submarkets witnessed the greatest occupancy declines in Q1, with negative net absorption of -196,300 in Tri Cities, and -296,800 in the Westside.
The average asking rental rate rose during Q1 2013 to $30.51 per square foot, an increase of 5.0 percent year-over-year. This marks 12 months of consecutive rent growth since rents bottomed at $29.04 per square foot in Q1 2012. Both Class A and B property have experienced rising rental rates over the past year. The Class A average was $33.16, up 5.8 percent and Class B rents averaged $26.33, up 3.1 percent year-over-year.
Leasing activity picked up from a slow fourth quarter, with direct at 3.5 million square feet and sublease at 0.36 million square feet. Leasing activity is also running ahead of year ago levels which could bode well for absorption later this year. Except for technology, digital media and entertainment firms which have been actively absorbing space, leasing activity continued to be driven by renewals. Due to technological advancements and flexible work spaces, traditional office occupiers are finding they need less space per employee than ten or even five years ago.
