Research - MAY 19, 2017

L.A. office sales decrease in Q1 2017

by Andrea Waitrovich

Office property sales in Los Angeles during the first quarter of 2017 were $1.9 billion, down from $3.6 billion during the fourth quarter 2016 and down from the $2.6 billion sold during the first quarter 2016, according to Savills Studley.

Strong demand for office properties has added to the rental rate pressure, compelling landlords to achieve very aggressive pro forma rent expectations. During 2016, investors bought $11.5 billion in office properties in Los Angeles — the second strongest year since 2007.

Savills Studley believes sales will be hard pressed to keep pace in 2017. Office property sales totaled under $2 billion during the first quarter 2016. No local market has been more popular with investors than Santa Monica. Beachfront office buildings are commanding even higher premiums. During the first quarter, Douglas Emmett and an existing joint venture that includes Qatar Investment Authority acquired 1299 Ocean Ave. and 429 Santa Monica Blvd. in downtown Santa Monica, Calif., for $285 million.

Demand for space has diverged from one area to the next — with the most intense competition in the Westside, and a growing interest in some emerging micro-markets such as El Segundo.

Leasing activity has fallen from a pace that was well above historical averages in 2015 and 2016. Activity in West Los Angeles, for example, was slow during the first quarter. The majority of the larger leases occurred in Downtown Los Angeles or suburban submarkets such as San Gabriel Valley.

This deceleration in leasing velocity could be a product of a slow start to the year, or it may be a sign of changing market dynamics, concluded JLL in a recent report.

Sublease space increased noticeably during the quarter. Although rising sublease inventory can be an indication of a potential economic slowdown, this is not the case in Los Angeles, according to JLL’s L.A. first quarter 2017 report. The increase was driven by consolidations, incentive-driven relocations and other business factors. Nestlé’s relocation to another state added 280,000 square feet of subleases to the market. Cooking school Cordon Bleu’s decision to exit the U.S. market has added 75,000 square feet of sublease space in the Tri-Cities, and Yahoo’s relocation of operations to Playa Vista resulted in 100,000 square feet of sublease space hitting the market in Burbank.

The Los Angeles office market maintains sufficient room to grow, says JLL. Unemployment remains very low, and leading tech and media sectors are on solid footing. The construction pipeline is exceptionally light compared to past cycles and this is viewed as a positive. Current demand is expected to remain brisk, which will push rents even higher.

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