Office Vacancy Remains Flat in DTLA

The office vacancy rate in Downtown Los Angeles remained relatively flat in the second quarter, inching down only .6% to 16.8%, according to the latest quarterly report from the Downtown Central Business Improvement District. Warner Music signed a large lease deal in the Arts District last year that was expected to serve as a catalyst for the market, however, we have yet to see increased growth as a result of that transaction. Warner Music will take occupancy of its new office space in the fourth quarter.

While the growth spurt hasn't coming yet, Carol Schatz, president and CEO of the DCBID, says that it is coming. “There is no question that the Arts District has become the newest cool and hip places to work and live, and that is one of the factors that Warner Music was looking at,” she tells GlobeSt.com. “I think it is just a matter of time before other tech and creative companies see it the same way.”

Schatz likens the lease deal to AEG's initial investment Downtown, which served as a message to other investors and capital markets group that the L.A. neighborhood was worthy. “The Warner Music lease was a signal to other creative office tenants that wanted to make a move from wherever they were,” says Schatz. “I would compare the lease to AEG first began to invest in Downtown Los Angeles. That was a signal to other capital markets groups that a big player was betting on Downtown. That provides some impetus for others. It made people at least take a second look at Downtown. I believe the same will happen now.”

Despite the flat vacancy rate, office rents did continue to increase for the quarter, up 3.67% increase year over year to $3.39 per square foot, and there was a total of 1.2 million square feet of leasing activity. When asked if the rental rate increases were the result of buzz from the Warner Music lease or if it is simply market velocity—rates are up in office markets throughout L.A.—Schatz said both. “I think that the office market Downtown is moving in [the] direction [of higher rates] because we have seen other players coming into the Arts District, and I think that we will begin to see greater growth from new tenants as a result that Warner is going to be here,” she explains. “I think that it is a combination of Warner Music and general growth in the market.”

While Warner Music's lease in the Arts District should, eventually, spark growth in that neighborhood, Schatz expects office growth in all of the markets of DTLA. She uses Rising Realty Partners' PacMutual project as an example. “Rising created a stance that the creative tech market was a live in the financial core, not just in the Arts District,” adds Schatz. “That is why we say that all neighborhoods in Downtown are seeing this growth. The areas of continued growth will be the fashion district and north into Chinatown.”