Limited supply issues have struck the industrial and multifamily markets—causing what some investors are calling an affordability crisis—and the West L.A. office market could be next. The current development pipeline has less than 4 million square feet currently under construction in West L.A., and in a market with approximately 50 million square feet of office space and a 12% vacancy, that number is alarming. Office rents in the area have already surpassed prior peaks levels, and with little development on the horizon, they are poised to continue to rise through 2021, according to research by Rick Buckley and Owen Fileti of L.A. Realty Partners.

“It is shocking how little is in the pipeline to be delivered,” Buckley, a principal at L.A. Realty Partners, tells GlobeSt.com. “The rents have surpassed where we were at the last peak, so it does make sense for developers to develop. The challenge that developers are having is two fold. One: There is a lack of developable sites in the size and scale that it requires. It is hard to get scale in West L.A. And two: anti-developer sentiment in certain areas.”

Typically, when vacancy rates drop below 10%, landlords raise rents. While vacancy rates in the market are at 12%, the limited development pipeline could eat up that cushion soon. “Landlords start to increase rents when vacancy rates dip into the single digits,” explains Buckley. “We aren't there yet, but we are already at post-peak rents. The market has never seen the rents that we have seen today, and we are also postured for additional rent growth if we dip below 10% vacancy, which we are not far from now.”

This year, the office market has taken a pause in terms of leasing activity, so the market is stable; however, Buckley attributes the dip in leasing activity to the lack of lease renewals. “The tenant demand isn't as robust as it was, but I would look at the fact that ten years ago was our last correction,” he says. “So, ten years ago, you didn't have tenants signing ten-year leases getting signed, which is why I believe there isn't a lot of roll over this year and next year. I think we are poised to pick back up from an activity standpoint, and we are still near 10% vacancy with no product coming online. If that activity picks back up, we are headed into—I wouldn't say a crisis—but we are going to be dealing with a new normal of rents in West L.A.”

Buckley's research is focused on the West L.A. market, but also includes surrounding areas, like Hollywood, where there is a bulk of new development activity and strong tenant demand. Other office markets—namely Downtown Los Angeles—still have vacancy rates in the high double digits. This pressure from West L.A. could push tenants out of West L.A., which could mean growth in surrounding markets. “There will always be areas where tenants can go to save money, but in the prime areas, you are already starting to see a trend that is likely to get worse,” says Buckley, adding that the rental increases in the West L.A. markets aren't slowing down. “In five years, if we are only delivering 5 million square feet, that will be unheard of. If we are already above on a vacancy rate basis where we have seen historical inflection points for rental rates, then, barring a correction, rents will continue to increase.”

Instant Insights /

Is West L.A. Office Headed Toward an Affordability Crisis?

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