Have DTLA office rents hit the ceiling?

Rents will level out, one analyst said

TRD LOS ANGELES /
Oct.October 07, 2016 03:36 PM

How high can it go? That’s the question of the day in Downtown Los Angeles.

Rents have been on the rise in DTLA’s office market, but with a hefty vacancy rate relative to other submarkets, and new development rising, some analysts say rents won’t get higher.

“Rents will probably even out now,” Petra Durnin, CBRE’s director of research, told The Real Deal. “In Downtown Los Angeles, they’ve hit the ceiling.”

Rent

Asking rents increased by nearly 7 percent in DTLA, when compared with same quarter last year, to an average of $3.30 a square foot a month, according to third quarter data from CBRE.

It rose only 3 cents, however, when compared to last quarter’s average of $3.27, which some market experts see as a sign that things are slowing down.

Vacancy

Vacancy, meanwhile, remained relatively high Downtown, at 16.8 percent, compared with the Greater L.A. average of 14.3 percent. It barely dropped  from the 16.9 percent average last quarter, according to CBRE data.

Durnin said that DTLA’s vacancy rate has always been higher than most other submarkets, because of its size and the tenant downsizing that took place in the aftermath of the recession. The submarket’s equilibrium, she said, is about 16 percent vacancy.

The vacancy rate is even higher in Downtown’s Central Business District. When Bunker Hill and the Financial District are calculated separately from the rest of Downtown Los Angeles, as they were in Cushman & Wakefield’s third quarter report, they have the highest vacancy rate out of any submarket, at 19.2 percent.

Leasing

Sublease space in DTLA’s CBD has increased dramatically, according to the Cushman & Wakefield report, exceeding 135,000 square feet. That’s six times the amount that was up for sublease last year. This trend was not shared by other L.A. submarkets. Outside of DTLA’s CBD, sublease availability declined by 24.5 percent.

“Those subleasing tend to be tenants who have made other commitments to occupy new space and have term left on their existing lease,” Cushman’s market director Eric Kenas said in a statement.

Meanwhile, in Greater Los Angeles, leasing activity saw a 17 percent drop in the third quarter when compared to the average of the past 15 months — 2.79 million square feet, compared to 3.4 million square feet, according to the Cushman report.

“Leasing hasn’t been robust as it was in 2015, but it’s still been healthy. There’s very strong demand,” Durnin said.


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