Employment Numbers Hinder Office Growth

Office leasing activity continued to slow in the first quarter of the year, according to a first quarter report from Newmark Knight Frank. Quarterly absorption was flat at 63,902 square feet, and the vacancy rate continued to remain at 14% as it has for the last 10 quarters. While there were gains in some markets—namely Downtown Lo Angeles—the leasing velocity overall has slowed. While the knee jerk response is to assume economic issues, David Kluth of Newmark Knight Frank, says that the real reason is the high level of employment.

“Our research shows that white-collar employment is nearing peak levels, and white-collar employment is decelerating,” Kluth, an executive managing director and office market expert at NKF, tells GlobeSt.com. “The gains in white-collar job jobs has been under 2% for the last year and a half, and that has really had an impact on the Los Angeles office market. Job growth decelerating is really the reason we have seen leasing activity slow compared to prior quarters.”

While employment is reaching peak levels, Kluth maintains that we are still in a healthy market with healthy employment activity. This is really a conversation of slowed growth, not a declining market. “The market is not unhealthy, and we haven’t reached unhealthy levels of negative employment,” he says. “The market growth is just decelerating as we reach near peak levels of employment compared to prior quarters.”

While the overall L.A. office market leasing activity is slowing, Downtown Los Angeles did post net gains for the quarter. However, with one of the highest vacancy rates in the city, at 18.7%, this market is poised to see an impact from the slow down in the market. In general, Kluth says that space sits on the market in DTLA longer than any other market. “Negotiations in Downtown Los Angeles tend to be more prolonged,” he says. “The average downtime in Downtown Los Angeles tends to be 18 months, whereas in other markets downtime is typically 10 to 12 months. In other market, space leases more quickly, and that has resulted in a game of patience for landlords.”

There is room for growth, however. While white-collar employment is decelerating, other industries are growing, namely tech and entertainment. Growth in those sectors could help fuel more leasing activity in the market this year. “The tech and entertainment tenants are a growing segment of the market, and the hope is that those tenants will fill some of the vacancy,” says Kluth. “As the workforce that we have continues to be enriched, the market should feed off of itself.”