Los Angeles Metro Area, Second Half 2016
Silicon Beach, Downtown Revitalization Underpin Capital Flows
Labor market set to fuel expansionary office environment. Accelerating job growth, coupled with moderate supply increases, will generate improvement in the Los Angeles County office market this year. Following a year of lackluster net absorption, demand for premier office spaces is set to re-accelerate as strength in the labor market translates into broader office space demand. Tightening vacancy has emboldened developers, who have expanded the project pipeline to its highest point of the current cycle. However, construction has remained concentrated in the strongest submarkets, including the Mid-Wilshire area in Downtown Los Angeles and the cluster of submarkets making up the Westside Cities and South Bay, where technology tenants have emerged as the primary demand driver for new spaces. Farther north in the San Fernando Valley, pre-leased floor plates make up the biggest supply additions, with smaller floor plates rounding out expected completions. Underlying demand for office space has begun to translate into broader improvement in average asking rents over the past few years as well. The pace of growth will remain robust over the coming months, allowing the metro to record a mid-single-digit rise in rents in 2016.
Capital flows rising even as buyer and seller gap emerges in some markets. Re-accelerating net absorption and low interest rates are driving investors of all sizes to allocate capital to the metro, particularly in the urban core where revitalization efforts are underway. Deal flow accelerated in all markets over the past year. Investor allocations surged in the Silicon Beach area of the South Bay and Downtown Los Angeles, boosted by the revitalization of older industrial buildings into new mixed-use projects. While cap rates have drifted somewhat lower to the low-5 percent range, dollar volume soared over the last year, underscoring the immense desire to purchase assets with material upside in average asking rents and vacancy improvement. Although a gap has emerged between buyers and sellers over the past few months, little has resulted from it beyond a lengthening of closing times. As interest rates remain low, investors will remain motivated to deploy capital at higher rates of return, providing tailwinds for the market into the last half of the year.
2016 Annual Office Forecast
Employment: Los Angeles organizations will hire 75,000 new workers this year, expanding total employment by 1.7 percent. In the previous four quarters, 114,100 jobs were created, a 2.7 percent rise year over year.
Construction: Builders will complete 2.5 million square feet of office space this year, the highest annual amount since 2009, with the vast majority of new product targeting the Downtown Los Angeles market. In the previous year, 1.6 million square feet was delivered.
Vacancy: The metro vacancy rate will decline 50 basis points to 14.8 percent this year as nearly 4 million square feet of office space is absorbed. During the previous four quarters, vacancy rose 20 basis points as net absorption lagged supply growth.
Rents: Rising net absorption will trigger a 5.5 percent advancement in the average asking rent to $34.90 per square foot. This matches the prior year’s growth.