This article originally appeared in the July 2019 issue of Western Real Estate Business.
LA’s Creative Office Craving Shows No Sign of Satiation
The Los Angeles office market ended the first quarter with the average asking rent steady over the prior quarter. However, at $3.20 per square foot, the average asking rent remains the highest level on record, up 4.2 percent over the first quarter of 2018 and 15 percent above the prior peak reached in 2008. While the vacancy rate this quarter increased 30 basis points over the prior quarter, it is down 10 basis points from Q1 2018 at 10.6 percent.
This is about where it was pre-recession in 2004. This rise in vacancy was the result of several large move-outs, including about 200,000 square feet in the South Bay and 50,000 square feet in the Central office markets. Leasing volume fell to 5.8 million square feet, down 19.6 percent from the prior quarter and 7.9 percent from Q1 2018.
The rate of job growth is having some impact on the office market. Los Angeles County remains near full employment with the unemployment rate at 4.6 percent, one of the lowest rates on record. The Los Angeles County Economic Development Corporation (LAEDC) notes the county added 59,000 jobs in 2018. The latest LAEDC jobs forecast points to a strong and steady economy, adding 61,000 new jobs to LA County in 2019. Most jobs will be in the professional and business services, as well as in the education and health sectors. Despite the tightening jobs market, more new jobs is a good sign for the office market.
New construction is at a level not seen since the early 1990s, with more than 6.1 million square feet under construction. One of the largest projects under construction or renovation is Broadway Trade Center at 801 S. Broadway in Downtown. The 1.1-million-square-foot historic structure, owned by Waterbridge Capital and Continental Equities, was built in 1912 and is scheduled for delivery in Q1 2020. Broadway Trade Center includes more than 585,000 square feet of creative office space, a 100,000-square-foot hotel and 345,000 square feet of retail, including a food hall with room for 50 vendors. Most significant office developments or redevelopments in today’s market follow a similar trend and include fantastic amenities and outdoor spaces that celebrate a building’s history or dynamic location.
Continental Development Corporation and Mar Ventures broke ground on a new office campus at the site of a former Teledyne facility in the Silicon Beach submarket of Del Rey, which housed 1960s-era industrial buildings. Del Rey Creative Office Campus is a 162,000-square-foot project scheduled to debut in 2020. Del Rey features spacious outdoor private patios with direct access to a common greenway. It includes a café housed in a classic Airstream trailer and an on-site bike-sharing program that will allow workers to cruise to the beach or explore the winding paths and trails of Ballona Wetlands. Enthusiasm by tenants for creative office space continues to be very encouraging for developers and building owners alike.
Tech and media companies are driving noteworthy leasing activity. Leasing volume in Silicon Beach increased 37.7 percent this quarter over Q1 2018, to more than 1.2 million square feet. The average asking rent in Silicon Beach did moderate in Q1 2019, however, after a record-setting 2018. It is down $0.05 from last quarter, the highest level on record, to $4.74 per square foot. Several companies leased large blocks of space during the quarter, including Google, which took all 584,000 square feet of the Westside Pavilion, with plans to convert the former mall into a creative office campus. HBO preleased 241,205 square feet at Ivy Station, a creative office building in Culver City that is scheduled to deliver this December. WeWork leased 112,000 square of creative office space at Lantana Campus in Santa Monica.
The outlook for amenity-rich office projects and markets like Silicon Beach and Downtown remains positive. Office building owners in today’s marketplace try to remain competitive by taking their cues from tenants demanding creative office space that goes beyond the traditional four walls. Many are willing to build it — and select tenants coming into these projects, so far, are willing to pay the lease rates.
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J.C. Casillas is Vice President of Research, Marketing & Communications at NAI Capital and has more than 20 years of experience in commercial real estate. His market insight and analysis has been featured by GlobeSt.com. Western Real Estate Business magazine and Los Angeles Business Journal Commercial Real Estate Quarterly.