Office Will Be a Top Investment Asset in L.A. This Year

Office could be a top investment asset in Los Angeles this year. In fact, the 2020 forecast from Avison Young predicts that office investment activity will surpass industrial investment sales volumes this year. The report forecasts office investment will total $7 billion this year while industrial investment will total $6.5 billion in the market.

“L.A. has been a safe haven for the deployment of institutional capital in office product for over a decade, and we expect to see the same into the foreseeable future,” Christopher K. Cooper, principal and managing director of Southern California at Avison Young, tells GlobeSt.com. “Netflix, Apple, Google, and Amazon, among others, are growing as they curate content. To that end, investors are happy to develop more space for the proliferation of large tenant requirements. This in itself is not the only reason why the office class is doing so well, but it has had a large impact on the Westside and Silicon Beach.”

Office will surpass industrial sales, however, because of the limited investment opportunities for industrial deals. “There is simply less product going on the market. As a fairly new migration of young—and oftentimes venture-funded—companies opt for coworking and flexible offices, many landlords continue to hold onto industrial product to add value by converting into flex space,” says Cooper. “This, in conjunction with the fact that landlords can now demand higher rental rates for studio spaces—thereby generating higher rents for industrial property—has led to office outperforming industrial in total sales volume.”

While office sales will be strong this year, retail will continue to lag behind. The report forecasts $3.5 billion in sales volume. However, this is an increase over 2019 activity, meaning the asset class is gaining momentum. “With a population of more than 13 million people, and counting, in the L.A. metro area, the retail market is anticipated to increase in 2020 as long as there is a continuation of low unemployment and strong wage growth,” says Cooper. “This year, sales volume is expected to grow provided that retail fundamentals remain relatively positive, especially when looking at the projected growth of retail rental rates. Retail will continue to evolve by finding new ways of being utilized, and new concepts will come into play. Asking retail rents in Los Angeles have been forecasted to increase approximately 0.2% by 2021, making it a sound investment asset class for at least the next twelve months.”

Strong sales activity is the good news. There are challenges ahead for Los Angeles, and housing affordability is at the top of the list. A weak point continues to be housing affordability/inventory, which has an impact on the labor pool and overall quality of life for the employment base,” says Cooper.

On the other hand, a downturn is not on the list, at least not for this year. “For the past several years, there has a been a growing concern of an economic downturn. Despite that concern, the likelihood of a full blown recession within the next year is relatively low,” says Cooper. “After 11 years of economic expansion (since our last recession), we are expecting a soft landing, which could likely be occurring right now. That said, there are numerous major geo-political forces in the winds that could cause a material slowdown—but that seems to always be a risk in some form or fashion. At the moment, the economic fundamentals for Los Angeles look very strong.”