LA office asking rents continue to rise despite increased vacancy

Co-working companies stayed busy, claiming four of the top 11 lease transactions

Jan.January 11, 2018 12:45 PM
Downtown Los Angeles (Credit: Wikipedia)

Los Angeles’ office leasing market slowed down at the end of last year, thanks to sky-high rents and yet another uptick in vacancy.

Average asking rents increased to $3.29 per square foot, up 9.3 percent from the same period last year and 3.5 percent from the third quarter, according to the new fourth-quarter report from Cushman and Wakefield. That’s the largest year-over-year increase since 2008, when the country was at the height of the Great Recession.

New inventory stemming from completed construction and renovations combined to over 3 million square feet for the year, driving vacancy up to 15.1 percent, up from 14 percent a year prior. And that number isn’t expected to get much better in coming years, considering over 4.8 million square feet of new office supply will be delivered in the next two years.

Vacancy, however, is also being driven by changing consumer preferences, Eric Kenas of Cushman said. His company, which is currently leasing at the luxe Wilshire Grand, has reduced its physical footprint despite having a greater number of employees.

“The design has shrunk the occupancy and that has definitely impacted vacancy rates,” Kenas said. “What would really drive the vacancy down, though, would be getting out-of-market or out-of-state tenants.”

Leasing slowed down significantly when compared to last year, despite some high-profile deals taking place. About 12 million square feet of new deals were signed in 2017 — a 15 percent decrease from the 14 million recorded at the tail end of last year.

Still, demand for the Westside remained the strongest. New leasing reached 4 million square feet on the coast, representing 33 percent of overall leasing in Los Angeles.

“The Westside office market is still dominating,” said Cushman’s Vincent Chang, who specializes on the Westside. “The Westside development pipeline is looking leaner now so we should see more occupancy growth by the end of 2018.”

Major deals in the area included Apple’s 85,000-square-foot deal at Hackman Capital Partners’ La Cienega project at 5500 W. Jefferson Boulevard and WeWork’s 60,000-square-foot snag at One Culver.

In fact, co-working companies dominated the list of major lease transactions in the quarter. Spaces, another co-working company quickly gaining traction in Southern California, took two of the top 11 spots with its 50,100-square-foot lease at Downtown’s Paul Hastings Tower and its 60,000-square-foot location in Hollywood.

Investment activity increased 17 percent year-over-year to 19.4 million square feet. Net absorption, on the other hand, increased slightly to 1.8 million square feet. That’s down nearly 30 percent from the fourth quarter in 2016, when net absorption clocked in at 2.5 million square feet.

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