Nearly Half of DTLA’s 2018 Office Leases Are From New Industries

The office market in Downtown Los Angeles is changing, and for the better. According to the most recent report from the Downtown Center Business Improvement District, 42% of office tenants in the market are from “new industries,” or a mix of largely creative users, including architecture firms, technology creative industries and co-working. This is a notable milestone, considering that Downtown Los Angeles has historically been a market for more traditional users, which now make up only 57% of the market.

“We are seeing the diversification of the base of office tenants,” Nick Griffin, executive director at the DCBID, tells GlobeSt.com. “For many years, it was traditional finance and law tenants, and now the market has diversified into tech, engineering, design, marketing and other fields. That has greatly broadened the companies that look at Downtown L.A. It has also dovetailed nicely with the growing population down here, which tend to be a more creative, well-educated class of people that work in those industries.”

The growing population in Downtown Los Angeles—largely made up of young professionals—has also created an attractive talent pool that has helped to lure creative companies to the market. “One of the biggest challenges for creative firms is finding access to talent. That is a competitive factor,” adds Griffin. “When they look at Downtown Los Angeles, they see a broad base of talent.”

This activity has had a major impact on the office market. According to the fourth quarter DCBID report, office vacancy dropped 6.6% year-over-year to 16.6%, and class-A lease rates increased 4.8% to $3.68 per square foot. This brings the market closer to the Greater L.A. vacancy rate of about 14%, while the lease rate is competitive with L.A.’s most coveted office markets. Griffin says that the vacancy rate will continue to fall. “I absolutely see that number continuing to come down, and I see that number coming down in 2019,” he says. “Downtown and Bunker Hill was overbuilt in the first place, and it never caught up. We are finally starting to see that happen. The vacancy rate has been trending down despite the fact that companies have been using less space per person and using space more efficiently. That shows the amount of growth that we are seeing.”

More importantly, these new users are absorbing space in submarkets throughout Downtown Los Angeles, not only in the Arts District. “There has been a lot of activity in the Arts District, which is conventionally where a creative company would go,” says Griffin. “However, one of the things that we have seen and that we are supporting is the movement of creative types of companies into the office towers as well. That is critically important because that is where the largest base of space is.”

The absorption of space also verifies the capital investments many office owners have made to modernize towers. Those investments have paid off both at the asset level as well as for the market. “There had been a preconceived notion that tech and creative firms wouldn’t go into those buildings, and I think that has been steadily disproved; however, not accidently,” says Griffin. “Those towers have actively and intentionally repositioned themselves to attract those tenants. That is starting to really pay off.”