More completions drive LA office vacancy up higher in first quarter: report

Investor activity was down 40 percent from 2017’s quarterly average

Downtown Los Angeles skyline (Credit: Pixabay)
Downtown Los Angeles skyline (Credit: Pixabay)

An increase in deliveries and asking rents drove up vacancy in Los Angeles’ office market in the first quarter of 2018. Meanwhile, investment sales in the office sector took a hit, reflecting a greater slowdown in commercial property trades as some foreign entities buckle down on capital outflow.

The overall vacancy rate rose to 15.4 percent, up from 14.4 percent from the same period last year and 15.1 percent in the fourth quarter, according to a new report from Cushman & Wakefield. That’s due to 1 million square feet of new development hitting the market, as well as over 930,000 square feet of renovation completions.

Much of the new office construction is happening in Culver City, where average asking rents hit $4.31 per square foot, marking a 25.4 percent year-over-year increase, said Cushman’s Vincent Chang, who specializes in the Westside market. Hackman Capital Partners’ expansion of Culver Studios and Culver Steps, as well as Lincoln Property Co.’s 8777 Washington building are among some of the biggest projects underway in the area.

“There’s still development in the pipeline but much less that will be delivering in 2018,” Chang said of the Westside.

The bulk of the renovations are happening in pockets of Downtown, such as the Arts District, Historic District and South Park neighborhoods. “There’s really cool, old product that people are wanting to put the capital together [and renovate] because they are getting rates,” said Eric Kenas, Cushman’s market director and co-author of the report. The Ford Factory, which is still awaiting Warner Music Group’s arrival, is one of the largest renovations Downtown.

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On the whole, average asking rents in the Greater Los Angeles area rose slightly to $3.32 per square foot per month, up 6 percent from the year prior and less than 1 percent from the previous quarter. Rates in the Downtown Los Angeles submarket stayed largely flat, while rents in the Westside — Santa Monica and Pacific Palisades — grew 3 percent year over year to $4.74 per square foot.

While office leasing remained strong at 3.3 million square feet, investment activity decreased to 2.9 million square feet in volume. That’s a 40 percent decline from the 4.8 million-square-foot quarterly average recorded last year.

“There was a lot less product changing hands, so something is going on there,” Kenas said.

Still, there were four key transactions valued at over $100 million in the quarter. Lincoln Property Company’s $196 million sale of the Wedbush Center was the largest in the quarter, followed by the Connexion Burbank Campus portfolio trade at $123.5 million.

Net absorption for the quarter clocked in at 21,100 square feet, an increase from -23,000 a year ago. Roughly 2.1 million square feet are under construction, down from 2.4 million last year.