Los Angeles office market remains strong at mid-year 2019
At the end of June 2019, the current US economic expansion has now grown for 121 consecutive months which is officially the longest period of economic growth in US history. However, with 2.3% average annual growth, it is also the weakest expansion in modern times. For the Los Angeles office market, fundamentals remain strong at mid-year 2019 with steady leasing activity, healthy occupancy gains, and continued rental-rate growth. Looking into the second half of 2019, we expect this to continue as consumer and business confidence remain high despite the tight labor market and the increasing cost of doing business locally.
Direct weighted average asking rental rate up 3.3% year-over-year
The direct weighted average asking rental rate increased to $42.33 PSF (full service), up 3.3% year-over-year. Compared to a year ago, rental-rate growth has slowed as office-using employment growth in Los Angeles has also slowed. Class B office rents have grown faster market-wide over the past two years as existing owners upgrade their buildings and occupiers have increasingly looked for cheaper space after the frenzied flight to quality Class A buildings seen earlier in the cycle. While office rental-rate growth market-wide is no longer seeing the 6-8% annual increases from 2015-2017, growth remains steady with expected annualized rental rate growth of between 3-4% market-wide over the next 12 months.
Despite high pricing, office investment activity remains high
Over $1.9 billion in office buildings traded in the second quarter as institutional capital continues to focus on Los Angeles due to its large and diversified regional economy led by the resurgence of the region’s entertainment sector and growing technology ecosystem. It should be noted that although office building valuations remain historically high, especially as the Federal Reserve recently signaled possible interest rate cuts later this year, pricing could be cooling as an increasing number of investors begin thinking more defensively knowing that the market is now firmly later in the cycle. As a result, expect a higher emphasis on an increasing number of investors on stabilized properties with credit tenants and solid cash flow in the event of a possible economic downturn in the short-term.