High Office Pricing Convinces Owners to Sell
With a dearth of quality boutique creative office available on the market, owner/users are paying nearly $1,000 per square foot.
In two separate, unrelated transactions, office owners made the decision to sell as a result of the high pricing and demand. In Culver City, a private investor sold a 4,025-square-foot office property for $956 per square foot, a record for the submarket, to an owner/user. In a similar transaction in Hollywood, another private investor sold a 4,320-square-foot property to an owner/user for $949 per square foot. “There is a lot of carryover and relation between the Culver City and the Hollywood submarkets for office building investment and creative owner user activity,” Nathan Pellow, an EVP at Colliers International who brokered both deals, tells GlobeSt.com. “Those submarkets have seen appreciation and increased pricing, and both markets are geared toward tech and entertainment-related buyers. So you have a similar tenant type and user type with limited supply of smaller owner/user office buildings and office rents are at a peak. That is really driving this activity.”
The owners of both assets originally sought to lease the properties, but decided to sell when they received offers well above expectations. “We had multiple offers both for sale or lease on both of these properties,” explains Pellow. “In both cases, and they were completely independent but happened at the same time, the owners were winding down their businesses in the property, and they both could have kept it as an investment and leased the property or done a 1031 exchange. In both cases, they were leaning toward leasing, but the sale market was so strong that we were able to exceed the pricing that we thought we could get on a sale.”
Culver City and Hollywood have both been considered emerging office markets, although Hollywood has evolved past that categorization. “Culver City is still emerging, and it is benefitting from pricing in Santa Monica and on the Westside,” says Pellow. Both markets do share a tight inventory of space in this size range, rising rents and strong user demand. These buildings were particularly popular, as well, because they had already been renovated. “It is a very tight inventory for user opportunities,” Pellow adds. “These buildings were already reconfigured and renovated.”
Pellow says that these two deals are not anomalies, but rather that office owners/users are recognizing the strong market conditions and are choosing to sell now. “There are a number of different ownerships and partnerships that have been in L.A. for 20 or 30 years, and we are seeing pricing hit a point that principals approaching retirement may never see again in their window to sell,” explains Pellow.
In terms of whether or not we will see more transactions like this, Pellow isn’t sure. He says that interest rates may put downward pressure on pricing, and these owners may choose to sell as a result, at least in these submarkets. In other areas of L.A., there is still plenty of room for appreciation. “Interest rates are a continued concern that may put downward pressure on pricing,” says Pellow. “I haven’t seen it yet. We may see some plateau on pricing, certainly in submarkets that are approaching $1,000 per square foot. However, there are other markets in L.A. that are priced lower and have quite a bit of appreciation still to see.”