Lease rates — and vacancy — rise in LA as new construction delivers

As new, high-end office buildings hit the market in the third quarter, lease rates in Los Angeles County rose to $3.32 per square foot per month, up from $3.19 in the second quarter and $3.08 in the same period last year.

The new inventory drove overall vacancy rates to 14.4 percent, up 3.5 percent from last quarter, according to a new third quarter report by commercial brokerage giant CBRE.

The quarter saw 1.7 million square feet of new construction enter the market overall. The completion of the Wilshire Grand in Downtown Los Angeles, as well as multiple projects in the Hollywood/Wilshire Corridor and West Los Angeles contributed to the new deliveries.

West L.A., which continually leads the market with the highest asking rents, delivered nearly 800,000 square feet of new construction. As a result, vacancy for the region rose 18.3 percent. In the third quarter of 2016, vacancy was at 10.9 percent. In the same period this year, it rose to 12.9 percent. Asking rents in the region were the highest of the county at $4.91 per square foot per month.

However, it can be hard to get a handle on vacancy because the rate in the reports reflect move ins and move outs, rather than reflecting leases that are signed. If a lease was signed in the third quarter, it will count as leasing activity but will still register in the report as vacant space, said CBRE’s Petra Durnin.

“Los Angeles is still in growth mode and that continued demand will drive landlord confidence and rent growth,” said Durnin, who is the director of research and analysis at CBRE and the co-author of the repor. “The continuously evolving tech and entertainment sectors will also contribute to rent growth across L.A.”

Investment continued to decrease, posting the lowest numbers year to date. Office investment decreased $1.6 billion from the first half of 2016 to the first half of 2017. While the volume of transactions has been on the come-down, total investment was bolstered by a few very pricey deals. Commercial giant Blackstone, for example, acquired a majority stake in Burbank Media Center, while also raking in $337 million from the sale of 9665 Wilshire and Arboretum Courtyard.

“Last year was a peak year and difficult to replicate but the absolute volume this year is still tremendous,” Durnin said. The lack of “big-ticket” opportunities has also contributed to investors moving into secondary markets, such as data storage and student housing, she added.

Net absorption for the quarter clocked in at a positive 140,239 square feet. Countywide unemployment was 5.4 percent.

Experts anticipate office employment will continue to expand slowly and remain positive through 2018. Vacancy rates will decline nearly 130 basis points with rents projected to increase 1.8 percent by the third quarter of 2018, according to CBRE estimates.

“Though the recession ended officially in 2010, Southern California didn’t begin to recover until almost the end of 2013 so this cycle has a bit more road ahead,” Durnin said.