Why DTLA’s Office Vacancy Is Climbing

By most accounts, the Downtown Los Angeles office market is booming. Major companies are moving into the market, like Arup and Spotify; rental rates are up nearly 7%, up to $3.62 per square foot for class-A space; and leasing activity is up 25% year-over-year. Yet, office vacancy is rising. According to the DCBID second quarter report, office vacancy was up 3% year-over-year to 17.3%. With all of the other strong fundamentals, it is hard to understand what is driving vacancy rates up, but it isn’t offsetting the strong fundamentals in the market.

“Over the past several years, the DTLA office market has steadily, if quietly, grown stronger and more robust,” Nick Griffin, SVP of economic development at the DCBID, tells GlobeSt.com. “As our second quarter market report highlights, office rents are increasing along with both absorption and leasing activity.  The primary reason for the increase in vacancy is the delivery of new space to the market, both new, like The Wilshire Grand and At Mateo, and all of the older historic buildings, like ROW DTLA, The Ford Building, Broadway Trade Center, that are being converted into modern creative office environments. Many of these older buildings were no longer a part of the office inventory having been designated obsolete and/or classified previously as industrial or manufacturing space.  As these spaces continue to be converted and fill with creative and tech tenants, the net effect to the market is roughly zero.  DTLA is filling space that previously didn’t exist.”

In addition to new space entering the market—or reentering the market post renovation—right sizing tenants are also contributing to the rise in the availability of space in Downtown Los Angeles. This is a national trend, but it is certainly impacting Downtown Los Angeles. “Even companies that are expanding often will renew their lease or move to another building that can accommodate more people, but utilize less space,” adds Griffin. “Combined, these anomalies have masked a strong and growing office market that is rapidly diversifying.”

The office tenant mix is also evolving, and there will likely be an ebb and flow as the market changes. The DCBID has been active in attracting more office diversity into the market—namely in attracting more creative and media tenants. Those efforts have been successful, and creative companies have proven integral in driving leasing activity in the second quarter. “While DTLA has always enjoyed significant interest from traditional office tenants in the financial, legal, insurance, and business services segments, it is now attracting a growing number of entrepreneurs, startups, creative and tech companies. DTLA’s growing residential population, the amenities, and cultural venues in the area are tremendous draws,” says Griffin. “All of this has created an innovation ecosystem in DTLA that is rapidly diversifying the tenant base. Companies want to be where their employees are. And the superior connectivity provided by the growing Metro system opens up DTLA businesses to a countywide employment base. With the rest of the city getting more congested by the day, DTLA continues to get more attractive.”

Lease rates in Downtown Los Angeles are competitive with some of the most popular submarkets in the Greater L.A. area, and the leasing activity and steady rise in rental rates proves that tenants are willing to pay to be in the right spaces in the market. “What we are witnessing are companies willing to pay a premium for the new work environments and the recently converted towers and creative campuses throughout DTLA,” adds Griffin. “You have Arup moving to Wilshire Grand, Warner Music to The Ford Factory, and Spotify to At Mateo. These are all premium properties that demand superior rates. Further, more and more traditional office towers are undergoing major transformations by adding outdoor spaces, services and amenities to better compete in this new market. And while the vacancy rate is up this quarter year over year, the DTLA office market has experienced a steady decline over the last several years.”