Office rents in Downtown Los Angeles have been on the uptick, but they are expected to moderate this year to meet the reality of the market.
Rents increased by 6.4 percent in 2015, according to JLL’s latest Skyline report, which tracks trophy properties in the skylines of various cities. Rates are now at a record $3.46 a square foot a month, but are not expected to climb very high in the near future. Rent growth in 2016 is expected to increase at less than half as fast a clip.
“Three percent is a more realistic figure,” said Henry Gjestrum, JLL’s Los Angeles research analyst.
The three ownership groups that control more than half of Downtown’s vacant office space pushed rents aggressively, Gjestrum said. Now, they are taking a look at the market and reassessing those figures.
There are several factors likely to make landlords slow their role on rent increases. One, Gjestrum said, is that tenant demand is expected to remain steady, and not increase. Another is that a significant amount of Downtown space could come to the market in the next two years as leases expire.
Then there’s vacancy, which is well below the 12 percent rate that is considered healthy for a Central Business District market. Downtown’s vacancy rate is currently 16 percent, according to JLL.
“Every market has a different equilibrium level,” Gjestrum said. “[Nationally], a healthy rate for a CBD is usually 12 percent, for Downtown Los Angeles it might be 2 or 3 percent higher. There is 16 percent vacancy now Downtown, and it would be healthier closer to 14.”
However, different brokerages have reported different figures when it comes to Downtown L.A.’s vacancy, based on what properties and areas are included. A new report by Transwestern paints a bleaker picture than the skyline report, which focuses only on the trophy skyscrapers. According to the Transwestern report, which includes all properties in the Downtown and Greater Downtown submarkets, including the Arts District, DTLA saw negative absorption of 136,337 square feet in the second quarter, and vacancy of 17.1 percent.
What is clear to all is that Downtown landlords are making efforts to retain their tenants. Nearly $150 million of current and future lobby renovations are under way in Downtown’s trophy assets, according to the JLL report.
“I think for downtown particularly, the ownership groups are very astute and focused on tenants so we’re seeing a lot of investment on the part of landlords [going toward] amenities and services,” Gjestrum said. “They are renovating lobbies and looking to improve the overall tenant experience.”