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December 11, 2019
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Metropolitan LA Office Rent Growth Hits Eight-Year High

4/20/16

Here’s a first quarter 2016 look at the Los Angeles office market, provided to us by PM Realty Group:

The Los Angeles metropolitan area’s economy continued to expand with a net 107,300 jobs added during the 12 months ending February, representing a 2.5% annual increase, which exceeds its 2.0% average growth rate experienced in the prior four years. The metro area has created an impressive 454,700 jobs since its trough in 2010, bringing total non-farm employment to a record high.

The education & healthcare services and leisure & hospitality sectors remained the job growth leaders. With a combined 1.27 million workers, the two industries account for slightly more than 29% of the metro area’s employment base but accounted for 52.7% of the annual employment gains through February 2016. As a result of the steady job growth, LA’s unemployment rate has dropped by 190 basis points to 5.5% during the same period to reach its lowest point since the end of 2007.

The Los Angeles office market experienced a quarterly net absorption gain of 783.8k sf, after recording an impressive 1.3 msf in the previous quarter. The office market has posted nearly 3.3 msf of direct net absorption over the prior 12-months, causing the overall direct vacancy rate to slide 70 basis points to 13.9%. During the first quarter, the Class A sector recorded a net absorption gain of 198,762 sq. ft. of direct space, but new supply slightly outpaced demand causing its vacancy rate to climb 10 basis points to 14.5%. Meanwhile, Class B properties accounted for the bulk of the quarterly gains with 585k sf, causing the sector’s vacancy rate to slide by 60 basis points to 12.8%.

Job growth in the technology and entertainment industry has led to strong demand for creative space, which has helped bring vacancy levels to their lowest point in six years and placed upward pressure on rents. Class A asking rents continued to trend higher, which have increased 6.4% to $2.97 per sq. ft. over the last 12 months. Class B monthly rents have also appreciated by 9.8% to $2.50 per sq. ft. during the same period, which have largely contributed to overall annual rent growth reaching their highest level in eight years.

Los Angeles saw several significant office leases signed during the start of 2016, which included Netflix inking a 123.2k sf deal at Icon – Sunset Bronson Studios, with plans to take the space upon delivery in early 2017. International Creative Management committed to 108.3k sf of space at Constellation Place and will move in during the third quarter.

As business confidence improves with the growing economy, tenant demand is expected to remain strong with a growing number of companies seeking larger and better quality office space options. The recent surge in construction will offer some relief to the limited high quality blocks of office space available and will continue to push average rental rates to record levels.


ANNUAL JOB GROWTH

Los Angeles created 107,300 jobs in the 12 months ending February 2016. The Education & Health Services and Leisure & Hospitality sectors accounted for 52.7% of the annual growth with 37,000 and 19,500 jobs created, respectively.


12-MONTH DIRECT NET ABSORPTION

South Bay and the Westside accounted for a combined 1.68 msf of direct net absorption over the prior 12 months, accounting for over half of the trailing 12-month absorption. Class A product absorbed 2.14 msf, while Class B properties absorbed 1.13k sf of direct space.


DIRECT VACANCY RATE

Office direct vacancy declined 70 basis points to 13.9% over the past 12 months and has dropped by 190 basis points since its post-recession peak in 2013 to its lowest level since the end of 2009.


OVERALL RENTS

Overall asking rents have edged up 7.2% over the year to $2.79/sf/mo, which is its highest annual rent growth in over eight years. Class B properties have largely contributed to the annual rent growth as asking rents have reached an all-time high.


UNDER CONSTRUCTION

LA currently has over 4.3 msf under construction or renovation, with approximately 3.2 msf expected to deliver in 2016. Mid-Wilshire, Westside and Downtown will receive the vast majority of the new supply this year, geared toward creative tenants.





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