Second quarter reports are in for the L.A. office market, and many outlets are reporting increasing vacancy rates in some submarkets—particularly in Downtown Los Angeles—and an increase in sublease space. Popular markets like West L.A. and Hollywood continued to show a healthy performance. Overall, however, the L.A. market performed very well. Commercial Café looked at the performance of the overall market, and found that L.A. had its second best quarter since 2013, with a 39% increase in dollar volume and a 16% price hike since the last quarter. The quarter also saw a total of 93 office transactions, including JMB Realty's acquisition of a 66% stake in 1999 Avenue of the Stars in Century City for $573 million. To find out more about the performance in the market, we sat down with Commercial Café's Doug Ressler for an exclusive interview.
GlobeSt.com: What is driving this strength in the California office market?
Doug Ressler: Los Angeles remains one of the most sought after investment markets for both domestic and international capital. Total transaction volume in the metro reached $6.7 billion in the 12 months ending in April. The office pipeline consists of more than 27 million square feet under various phases of development across the metro. Properties that were under construction as of March account for about a third of the pipeline, on par with planned and prospective projects. Los Angeles Market is in good shape but growth is slowing.
GlobeSt.com: There have been some mixed reviews about the second quarter in the Los Angeles office market, with increases in vacancy in some areas. What data are you using to determine that this is the “second best quarter” since 2013?
Ressler: Leasing activity and lease rate growth are strong, especially in the entertainment-centric submarkets of Beverly Hills, Century City and West Hollywood. Santa Monica boasts high lease rates, while 25% of all available space lies in the central business district. A reinvigorated CBD as well as adaptive reuse projects in the north and east submarkets are driving development activity in many different areas of Los Angeles. New properties came online at a steady pace over the past four years, bolstered by solid growth in the office using employment sector. Since 2014, the market has added between 1 million and 2 million square feet per year. We estimate a significant boost in deliveries by the end of 2017, however, as roughly 3.1 million square feet of space is expected to come online.
GlobeSt.com: How did JMB Realty's acquisition of 1999 Avenue of the Stars affect the Los Angeles office market in the second quarter?
Ressler: The largest office sales of the quarter involved the re-capitalization of 1999 Avenue of the Stars in Century City where JMB Realty re-acquired its 2/3 stake from Blackstone in a deal valuing the building at $860 million, or $1,042 per square foot, followed by Douglas Emmett and Qatar Investment. QIA, the sovereign wealth fund of Qatar, was DEI's joint venture partner on a $1.34 billion acquisition of a Westside office portfolio from Blackstone last year. The acquisitions increases DEI's share of the Downtown Santa Monica Class A office market to 71 percent from 55 percent, according to the release. The building at 1299 Ocean is 79% leased and 429 Santa Monica is 70% leased.
GlobeSt.com: How does Los Angeles compare to other California office markets?
Ressler: Absorption measures or the change in occupied space when offices are leased or vacated is considered a key measure of the real estate industry. The LA market compared to other CA markets shows net absorption positive for the Q2 but still negative year to date. The office markets in other big cities are slowing down, but Los Angeles was slower to recover from the recession and is still on the upswing as local businesses expand or are formed.
Second quarter reports are in for the L.A. office market, and many outlets are reporting increasing vacancy rates in some submarkets—particularly in Downtown Los Angeles—and an increase in sublease space. Popular markets like West L.A. and Hollywood continued to show a healthy performance. Overall, however, the L.A. market performed very well. Commercial Café looked at the performance of the overall market, and found that L.A. had its second best quarter since 2013, with a 39% increase in dollar volume and a 16% price hike since the last quarter. The quarter also saw a total of 93 office transactions, including JMB Realty's acquisition of a 66% stake in 1999 Avenue of the Stars in Century City for $573 million. To find out more about the performance in the market, we sat down with Commercial Café's Doug Ressler for an exclusive interview.
GlobeSt.com: What is driving this strength in the California office market?
Doug Ressler: Los Angeles remains one of the most sought after investment markets for both domestic and international capital. Total transaction volume in the metro reached $6.7 billion in the 12 months ending in April. The office pipeline consists of more than 27 million square feet under various phases of development across the metro. Properties that were under construction as of March account for about a third of the pipeline, on par with planned and prospective projects. Los Angeles Market is in good shape but growth is slowing.
GlobeSt.com: There have been some mixed reviews about the second quarter in the Los Angeles office market, with increases in vacancy in some areas. What data are you using to determine that this is the “second best quarter” since 2013?
Ressler: Leasing activity and lease rate growth are strong, especially in the entertainment-centric submarkets of Beverly Hills, Century City and West Hollywood. Santa Monica boasts high lease rates, while 25% of all available space lies in the central business district. A reinvigorated CBD as well as adaptive reuse projects in the north and east submarkets are driving development activity in many different areas of Los Angeles. New properties came online at a steady pace over the past four years, bolstered by solid growth in the office using employment sector. Since 2014, the market has added between 1 million and 2 million square feet per year. We estimate a significant boost in deliveries by the end of 2017, however, as roughly 3.1 million square feet of space is expected to come online.
GlobeSt.com: How did JMB Realty's acquisition of 1999 Avenue of the Stars affect the Los Angeles office market in the second quarter?
Ressler: The largest office sales of the quarter involved the re-capitalization of 1999 Avenue of the Stars in Century City where JMB Realty re-acquired its 2/3 stake from Blackstone in a deal valuing the building at $860 million, or $1,042 per square foot, followed by Douglas Emmett and Qatar Investment. QIA, the sovereign wealth fund of Qatar, was DEI's joint venture partner on a $1.34 billion acquisition of a Westside office portfolio from Blackstone last year. The acquisitions increases DEI's share of the Downtown Santa Monica Class A office market to 71 percent from 55 percent, according to the release. The building at 1299 Ocean is 79% leased and 429 Santa Monica is 70% leased.
GlobeSt.com: How does Los Angeles compare to other California office markets?
Ressler: Absorption measures or the change in occupied space when offices are leased or vacated is considered a key measure of the real estate industry. The LA market compared to other CA markets shows net absorption positive for the Q2 but still negative year to date. The office markets in other big cities are slowing down, but Los Angeles was slower to recover from the recession and is still on the upswing as local businesses expand or are formed.
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