Where Have Office Investors Been This Year?

Office investment sales volumes have plummeted after strong activity in the end of 2017. Los Angeles office investment activity fell 20% in the first quarter of 2018 with 21 closings in the first three months of the year totaling $1.3 billion, according to research from Yardi’s Commercial Café. While investment volumes were down, there were still some significant transactions, with the largest as the sale of the Wedbush Center in February for $196 million.

“Metro Los Angeles has been very dependent on the tech and entertainment industries,” Doug Ressler, a senior researcher at Commercial Café, tells GlobeSt.com. “When development or leasing diminishes in these two industries there is a dampening effect for the market in general. We believe it is more dependent on the submarkets specifically. For example, areas in Hollywood that have previously shown significant leasing activity are down. We anticipate that in those submarkets, which have been hardest hit owners will be more aggressive in concession packages and positive results will be seen in H2 2018.”

The slowdown in investment activity the first quarter of the year may be driven by the slowed leasing activity at the end of 2017. Office investors are reacting now to the decline in leasing demand, and this may be the beginning of an anemic office market in 2018. “Leasing volume in 2017 for Los Angeles ended short of 2016. Leasing exceeded a quarterly 4.5 million square feet versus 3.5 million square feet in 2017,” says Ressler. “Q1 2018 came in at 2.9 million square feet, with significant impact being made by the co-working industry.”

Despite the slow down in investment sales, Los Angeles was still the most active market in California for both sales volume and number of deals. San Francisco came in second with 13 closings totaling $807 million. “The growth of shared workspace is impacting all submarkets in Metro Los Angeles,” says Ressler. “For instance, Connecticut-based Working Well Win is anticipated to take the top two floors at the former Barnes & Noble on Third Street in Santa Monica. New York-based Serendipity Labs established its first Los Angeles location, signing for 36,000 square feet in Hollywood. Metro gateway cities specifically in Los Angeles are well-known markets for foreign investments. U.S. CRE investment in major known gateway cities produces higher returns and less risks that alternative sites.”

Ressler says that there are more changes to come with the anticipation of media consolidations. “We anticipate that the consolidation of large media and entertainment players in the Los Angeles will create significant long-term impacts for the Los Angeles market,” he says. “Significant impacts will be seen first in the Westside, Tri-Cities and Hollywood markets.”