Cautious optimism going into 2020 as local unemployment now at 4.4%
At year-end 2019, the massive $1-trillion Los Angeles regional economy continued to see solid employment growth and unemployment levels which remain historically low. Led by a resurgence in the region’s entertainment and media industry, as well as the emergence of Los Angeles as a major technology startup market, the office real estate market remains strong.
With vacancy rates in key submarkets hitting historic lows, average rental rates at an all-time high, and continued high interest from office investors from all over the world attracted by the region’s well-diversified economy, absent a geopolitical shock, expect current office market conditions to remain the same going into 2020.
Average rent ends year with 3.2% year-over-year growth
The direct weighted average asking rent increased to $43.05 PSF market-wide (up 3.2% year-over-year). Compared to 12 months ago when year-over-year rent growth was 3.7%, overall rental-rate growth has slowed although certain submarkets such as Century City, Beverly Hills, and El Segundo have seen double-digit rental-rate growth this year.
While rental-rate growth in the Los Angeles office market is no longer seeing the 6-8% annual increases from 2015-2017 when year-over-year employment growth averaged nearly 3%, office rental-rate growth remains steady with expected annualized rental rate growth of between 3-5% market-wide over the next 12 months.
Office investment sales volume ends 2019 at nearly $5.4 billion
Total office sales volume in Los Angeles to accounted for $5.4 billion (down 7% from 2018). Institutional capital remains focused on Los Angeles due to its large and diversified economy, the resurgence of its entertainment/media sector, growing tech startup scene, and increasingly high barriers-to-entry. However, high going-in pricing, more cautious rental-rate growth projections, and slower forecasted local employment growth has caused many buyers running around with value-add and opportunistic capital to push back on pricing while some sellers have decided to pull listings and hold. Office building valuations remain historically high and with the Federal Reserve already cutting interest rates this year and signaling no rate increases in 2020, investment sales volume will remain healthy and pricing will continue to be high as capital aggressively seeks out yield while debt remains widely available.
