Los Angeles office market ends 2017 with solid fundamentals
In the fourth quarter, the Los Angeles office market again reported strong occupancy gains, more development activity, and average rental rates ending the year at its highest level ever. Overall, the market remains healthy but the slowdown in leasing activity and net absorption compared to 2016 is a sign that the regional economy continues to operate at or near full employment. Combined with the industry trend of most companies continuing to right-size for greater space efficiency, the Los Angeles enters 2018 with more cautious optimism than at any time since the market began recovering back in 2011.
Direct weighted asking rental rate ends 2017 at highest level ever
The direct weighted average asking rental rate remained flat to end the year at $40.20 PSF per annum (up 5.5% year-overyear). Compared to year-end 2016 and 2015 when year-overyear average rental rate growth was 5.9% and 8.7%, respectively, rental-rate growth has slowed alongside softening leasing activity with some newly-delivered vacant office projects recently cutting their quoted asking rental rates by 5-7%. Assuming market conditions hold, expect 3-5% annualized rentalrate growth market-wide in 2018, as well as the fierce competition for deals to continue with hefty landlord concession packages being offered in order to lock-in larger tenants at the top of the market
Investment sales remain healthy but volume down from 2016
Over $2.3 billion in office buildings traded in the fourth quarter which brought total sale volume in 2017 up to $7.5 billion (down 26% from the $10.1 billion in sales volume reported in 2016). The largest sale transaction in the fourth quarter involved PCT in El Segundo which was acquired by Starwood Capital and Artisan Realty Advisors from Blackrock on behalf of the GM Pension Fund for $605.5 million ($382 PSF). While there has been very little cooling in pricing, especially for office properties in the best performing submarkets of Los Angeles, most investors have become much more cautious about overpaying at this point in the cycle. With the Federal Reserve recently stating that they will raise interest rates three more times in 2018, expect pricing to remain high but the cap rate compression seen over the past few years to come to an end.
