Strong office market fundamentals at mid-year 2018
At mid-year 2018, the Los Angeles office market saw net absorption swing positive due several large corporate expansions across the region. This caused total office vacancy to decrease to 15.2%. Led by strong office space demand from the entertainment, media, technology, and coworking sectors, expect a few large office leases to be signed in the second half of the year, especially as the rise of digital media has become the primary growth driver in Los Angeles this cycle.
Direct average asking rental rate up 3.9% year-over-year
The direct weighted average asking rental rate increased to $40.92 PSF market-wide (up 3.9% year-over-year). While Class A office rents increased to $44.16 PSF (up just 1.8% year-over-year), Class B office rents have increased faster recently and are now up to $34.80 PSF (up 6.1% year-over-year). Led by value-add investors renovating older properties, as well as occupiers being pushed into Class B properties due to the recent rise in Class A rents, it is no surprise that Class B rents have accelerated over the past year while Class A rent growth has slowed. As a result, expect continued 3-5% annualized rental-rate growth market-wide with double-digit year-over-year rent increases in several exceptionally tight submarkets in the second half of the year.
Office investment sales market remains healthy
Nearly $1.5 billion in office buildings traded in the second quarter which brought sales volume up to $2.8 billion in the first half of 2018 (down 21% from the $3.5 billion in office building sales reported in the first half of 2017). The largest sale of the quarter involved Coretrust Capital Partners acquiring the 4-building Corporate Center Pasadena from UBS Realty Investors for $254.0 million ($397 PSF). Many investors have become increasingly cautious in their acquisition underwriting amidst rising interest rates, rising average cap rates, and concerns over an economic expansion which is now the longest of the post-war period. However, with several trophy properties being brought out to market in the second half of 2018 and the cost of capital remaining low and widely available, expect sales volume and building valuations to continue to be strong moving forward.
