Could a slowdown in the growth of venture capital funding pouring into Los Angeles tech companies have a negative impact on the region’s office market?
Close to $260 million in high-tech VC funding was invested in L.A. in the first quarter, including $101 million across six deals in Santa Monica, according to a report by real estate brokerage JLL. While that represents a nearly 7 percent increase compared to the first quarter of 2015, it’s less than half the level of funding that funneled into the market during the particularly active second quarter of last year.
Indeed, VC funding has decreased substantially over the last four quarters, JLL’s figures show.
“We’re totally a reflection of the IPO and public markets,” said Blake Searles of JLL, an agent who specializes in tenant representation. “Investors are being a lot more cautious right now in writing checks.”
While the L.A. office market has been tight in recent months — the overall vacancy rate for the region decreased by 10 basis points to 15.1 percent in the first quarter from 15.8 percent a year ago — the VC crunch may stoke fears of slowdown in tech leasing.
The L.A. tech sector has been a major boon to the local office market, with companies such as YouTube and Facebook taking major spaces in areas such as Playa Vista. Facebook will soon spread out in its largest Southern California office, a 35,000-square-foot space at the Playa Jefferson campus at 12777 West Jefferson Boulevard in Playa Vista, The Real Deal previously reported. The biggest VC raises in the first quarter included a $61.2 million Series C funding round by Ring, the home security start-up, and a $60 million equity raise by the Trade Desk, an advertising technology firm.
The correlation between VC funding and real estate is strong. In San Francisco, for instance, there’s been a recent rise in the level of available sublease space as tech companies such as Square, Twitter, Zenefits and Rocket Fuel look to shed space. That has led to some speculation that the tech bubble is about to burst.
L.A. hasn’t seen an increase in subleased space just yet — but that may well be on the horizon.
“We’re always cognizant of San Francisco as a bellwether for our market. On a macroeconomic scale there’s a lot of correlation,” Searles said.
Still, that might not be such a bad thing, he said.
“It might be a welcome slowdown,” Searles said. “If you look at how aggressive the funding had gotten, that’s not a sustainable level. A little bit of a pull back is not a bad thing. It allows us to reset.”