Los Angeles Top Office Sales Fell in 2018

Office transaction volumes and pricing declined last year. According to research from Yardi Commercial Café, Los Angeles office transactions totaled $948 million, a far cry from the $2.3 billion in office transactions in 2017. Slow job growth was one factor in the slow office investment activity. Los Angeles unemployment rate fell to 4.1% in the fourth quarter with total civilian job growth at 1.3%.

“The economy stabilized at virtually full employment,” Doug Ressler of Yardi Commercial Café, tells GlobeSt.com. “While there was a big drop-off in December, the market was consistently down over strong 2017 for number of sales. Total sales volume by dollar total, however, has stayed consistent, or even grown in some quarters.”

In addition to slow employment growth, office investors also reacted to macro economic trends. “Despite a plentiful supply of private capital, rising interest rates and stock market volatility affected investor confidence,” he explains. “The largest deal of the year was Hackman Capital’s $750 million acquisition of CBS Television City at 7800 Beverly Blvd announced in October,” says Ressler. “Hines sold Campus at Playa Vista for $335 million, or $1,031 per square foot to Chicago-based Heitman in November. In Pasadena, 18.4% of inventory traded in 2018, the highest percentage of the past six years. Overall, full year transaction volume dropped sharply compared with 2017.”

Office availability has also increased, albeit slightly, and that could mean a market shift. However, leading industries, like tech and media, continue to expand and emerging submarkets posted strong absorption at the end of the year. “Tech and media continue to be the major movers in the L.A. office market. However, rising interest rates will continue to pressure on the cost of debt and we see a general cooling in the market,” says Ressler. “Despite tenant rightsizing, a diversified tenant base pushed Downtown L.A.’s quarterly net absorption to its highest level since Q4 2015. On an annual basis, Downtown L.A.’s net absorption reached its highest level in more than a decade, reflecting the submarket’s revitalization as an office destination with affordable asking lease rates and aggressive concessions.”

This could be good news for office activity in 2019. Ressler expects a slower decline in transaction volume in 2019 as a result of industry growth, which will fuel stronger demand. This is especially true for new class-A product. “There is a higher demand in campus-style office properties and in newer “best-in-class” properties. Large blocks of high-quality space are in short supply in West L.A. and Hollywood where existing blocks are shrinking and new construction is pre-leased,” explains Ressler. “That may drive tenants to Burbank, El Segundo or the Arts District in search of Class A and creative office. Pre-leasing commitments for buildings under construction is +30% overall, which is the highest rate since 2015.”