Play Vista office rents are dropping. Rents in the premier Westside market—which has seen phenomenal activity in the last three years—fell nearly 5% this in the first quarter over last year, according to research from NAI Capital. Despite the drop, lease rates in Playa Vista remained at nearly $5.50 a foot, the highest average rate in the Silicon Beach market.

“There aren't any real large transactions that have transpired in the last six months in Playa Vista,” Michael Arnold, EVP at NAI Capital, tells GlobeSt.com. “People are taking small pieces, but there aren't any large deals. As a result, some landlords are being competitive and driving rates down to compete with Santa Monica. If the rates are the same as Santa Monica, most people won't drive an extra 20 minutes to Playa Vista.”

Overall, the Silicon Beach market continues to see significant rental growth. The total market had 5.3% rate growth for the first quarter, while Santa Monica rates were up 3.5% and Venice rates were up 9.5%. Culver City, however, led the market with a 25.5% increase over 1Q17. “You are having significant sticker shock. People are taking advantage of the market now before rates continue to go up,” says Arnold, adding that a lot the rental rate increase have been driven by increases in property values. “It has always been supply and demand, and right now, the market rent has been driven by the activity in the market. The driving factor of what is pushing rates is the pricing at which owners are buying assets. If you are buying assets at big numbers, you have underwrite that asset with certain numbers.”

In many of the Silicon Beach markets, however, Arnold says that it is the amenities and creative spaces that are driving leasing activity. “There is a bigger picture here of what is driving business in the Silicon Valley,” he says. “Tenants want to be in certain areas near public transportation, and they want open, collaborative spaces.” That is indicative of what happened with Amazon and Apple moving to Culver City. Culver City is a very unique area. It is filled with local restaurants, and it is a quaint, pro-business city. Everyone is looking in that area because of the amenity base and the culture that is there. Companies are willing to be in an amenity-rich area. It is conducive to keeping moral positive.”

Looking ahead, Arnold says that a growing stock of sublease space may deter more significant gains in rent growth this year. Specifically, he is looking at moves like Snap Chat putting all of its Venice office space on the sublease market. “I think you are finding a lot of moving pieces right now, and I don't know if the writing is on the wall to see where we are going to continue to see rents increase,” says Arnold. “The smaller tenants are going to move around and play musical chairs and the larger tenants are trying to figure out where they want to be. Companies are willing to pay to be in an amenity-rich area.”

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Why Playa Vista Office Rents Are Falling

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