The Los Angeles office market continues to experience steady demand and accelerated rent growth as we enter 2017. The market is heading into its sixth consecutive year of expansion, after seeing a sharp contraction between 2008 and 2011. The Los Angeles office market has witnessed vacancy rates steadily decline from 16.3 percent to 13.7 percent since 2011, all the while absorbing more than 10.5 million square feet of occupied space. The market only added 4.5 million square feet of new construction during that same period, allowing vacancy to steadily decline back into the low teens, while average full-service gross asking rents have increased from $29.28 per square foot to $35.76 per square foot, up 22.1 percent. More importantly is the accelerated rent growth during this period. Rents increased 1.6 percent in 2012; 2.8 percent in 2013; 3.9 percent in 2014; 5.3 percent in 2015; and 6.8-percent to date in 2016.
Chad Jacobson, DAUM Commercial Real Estate Services
On the demand side, net absorption growth rates have been trending higher since 2012, averaging 0.8 percent during the past five years. They will finish above 1 percent for the second consecutive year. This remains below the growth rates experienced from 2003 to 2007, which averaged an annual growth of 1.75 percent during that period. Demand for creative office space continues to gain momentum as many non-creative office space users are now looking to adopt many of the creative office features. These include open space work areas, open/high-volume ceilings, polished concrete floors and other features to better attract and retain the growing Millennial workforce. This trend is occurring not only in the typical tech-heavy areas of the Westside, Burbank, Hollywood and portions of the South Bay, but is becoming increasingly popular in Downtown Los Angeles and many other traditional-type office submarkets.
This trend has also been a driver in the recent rise in rental rates as landlords are investing a significant amount of money in the renovation and tenant improvement costs to attract and accommodate the new creative office community. True to form, tenants have been willing to pay the higher rates.
Improving market fundamentals have also fueled growing investor demand for office buildings in Los Angeles as strong demand has pushed median sales prices to a record high in 2016, at $344 per square foot, up 26 percent from the previous 2008 peak. The total transaction volume for office investment sales reached $7.7 billion for the year, up more than 14 percent compared to 2006, which held the previous record at $6.7 billion. Median cap rates also dropped another 100 basis points in 2016, moving from 6 percent to 5 percent, as low interest rates and plenty of capital continue to drive investor demand.
We believe vacancy rates will continue to trend lower into the 12 percent range, while average rents will increase another 6 percent to 7 percent in 2017. With the U.S. presidential election behind us, we now have better clarity as to the general direction of the new administration. We feel the overall office market in Los Angeles will see continued growth and expansion in 2017.
— By Chad Jacobson, COO, DAUM Commercial Real Estate Services. This article first appeared in the January 2017 issue of Western Real Estate Business magazine.