New Office Supply Will Test the Strength of Demand

“The Los Angeles office area has emerging supply-side issues,” according to Doug Ressler of Yardi Commercial Café, but the market has a swelling construction pipeline that could oversupply the market. New research from Commercial Café on office construction shows that 2.9 million square feet of new office product will deliver this year, and 2.5 million square feet is scheduled to deliver in the second half of the year. With a construction pipeline of this size, Los Angeles ranks 11^th in the country and third on the West Coast for office construction. This new supply could prove to test demand instead of satisfy it.

“The new supply will test the strength of tenant demand,” Ressler, director of business intelligence at Yardi-Matrix tells GlobeSt.com. “This will be especially true in tech and co-working firms. Los Angeles midtown has typically been a low vacancy/high demand markets; however, there is pressure on this model as large leasing, defined as 50,000 square feet-plus, has slowed and renewal rates are softening.”

The new office construction is largely redevelopment projects, rather than ground up construction. Additionally, there is a growing number of public projects. “We see much of the office pipeline focused on repurpose of existing structures with new supply shrinking,” says Ressler. “Many of the major public-sector projects in Los Angeles County are focused on upgrading aging facilities or preparing the County to host the 2028 Olympics. There is a longer-term ten-year effort with multiple public agencies and institutions. As of June 2018, there are nearly 20 major public-sector/institutional projects or programs in the pipeline.”

El Segundo, in particular, has been a favorite spot for redevelopment projects, and other Westside markets that have emerged as a result of supply constraints in Santa Monica and Venice. “There is stronger demand in micro-districts within L.A. as businesses move to El Segundo, which has been dubbed the “lower west side,” adds Ressler. “Most of the companies that have moved to El Segundo are seeking alternatives to higher Santa Monica rents. Taxes incentives and creative tenant amenity packages in West Los Angeles continue to put pressure on the downtown hubs. We have seen some business downsizing in Westwood, which typically has been a strong H2 market in past years.”

While this is one of the largest office pipelines on in the nation, Ressler says that L.A. doesn’t stack up in other ways. “L.A. is a major gateway city that has relied on major Asia-Pacific rim investment in past years. However, entitlement, tax policy and local development administrative processes are negatively impacting investment. This has deterred foreign developers,” he explains. “Sophisticated Asia-Pacific developers with successful overseas developments have faced issues in navigating complex local regulations and procedures that have resulted in schedule or cost overruns and stalled projects.”

Still, Los Angeles will remain a major market for office construction. Ressler explains, “Los Angeles continues to remain an attractive destination for foreign capital, however we have seen developers to other global where the development process is less cumbersome.”