SPACE LA’s office market explodes, will continue to stay on top
By Christina S. Porter
The Los Angeles Basin office market is huge — the fourth largest market in the United States, with approximately 314 million square feet of multi-tenant space.
It is highly decentralized, with only 17 percent of the space in downtown Los Angeles and 83 percent dispersed throughout the region, and with most of the space in low or mid-rise buildings. It also is a relatively young market, with 63 percent of the square feet built since 1980. The market softened considerably in 2001 and 2002 due to the completion of a large amount of new space (12.2 million square feet, which expanded the base by 3.9 percent), as well as significant negative net absorption (a total of 3.6 million square feet, for shrinkage in occupied space of 1.3 percent) due to a weak economy. Vacancy rates climbed to 17 percent, which includes sublet space and effective rental rates dropped by 5 percent to 10 percent on average, and by more than that in high-rent areas, particularly West Los Angeles and South Orange County. However, the market reached bottom in mid-2003, and is now starting to recover. Net absorption in 2003 totaled 3.1 million square feet, up from negative 1.2 million square feet in 2002. Square feet completed totaled 2.6 million square feet, down from 3.6 million square feet in 2002. The vacancy rate dropped from 17 percent at year-end 2002 to 16.7 percent at year-end 2003, which includes space available for sublease, with the entire decline taking place in the last half of the year. Asking rental rates continued to drop during the first half of 2003, but by a relatively small amount — 1 percent to 2 percent. They stabilized in most areas in the second half of the year. Vacancy rates today are highest in high-rise buildings (18 percent), followed by mid-rise buildings (17.8 percent) and low-rise (15.2 percent).
They also are highest in Class A buildings (18.6 percent), followed by Class B buildings (14.8 percent) and Class C (7 percent). This pattern is due to: ■ Most of the new construction in recent years has been in high-rise Class A buildings, and this space has not yet filled up. ■ Tenants shifted requirements toward lower-cost space during the recent economic downturn. Only 1.8 million square feet is currently under construction, which, when complete, will expand the base by 0.6 percent — a level that can be readily absorbed if the economy remains strong. Market conditions are projected to continue to tighten in 2004. From a tenant’s perspective, these are opportune times to expand or to lock in long-term rates. They also are excellent times for firms to take advantage of very low mortgage rates to purchase office buildings that meet their needs. Within the Los Angeles Basin, demand has been strongest in Orange County, the San Fernando Valley and the tri-city area (Glendale/ Pasadena/ Burbank). It has been weakest in the South Bay and Central Los Angeles. Vacancy rates are lowest in Ventura County (12.1 percent) and the San Fernando Valley (12.3 percent), and highest in the South Bay (21.7 percent).
THE MEDICAL OFFICE NICHE One segment that is generally healthy is the medical office niche. Demand for this space has been strong and, in Los Angeles County, vacancy rates are low — 8 percent. In Orange County, vacancy rates in medical office buildings are somewhat higher — 10.7 percent due to a high level of construction in recent years, rental rates are climbing.
West Los Angeles commands the highest rental rates in the Los Angeles Basin. It has a concentration of high profile firms — including those in entertainment, computer programming and finance — and is in the midst of some of the most exclusive residential neighborhoods in the nation. It has a large office base, with 47.8 million square feet. It is a relatively young market, with 57 percent of its space built since 1980. It also is moderately dense, with 62 percent of its space in mid-or high rise buildings. Net absorption turned positive in West Los Angeles in 2003 (+350,800 square feet), following very significant negative numbers in 2001 (-1.9 million square feet) and in 2002 (-1.2 million square feet). The implosion of the dot.com and entertainment sectors is finally over, and the market is starting to recover. A large amount of new space came on line in 2003 (1.0 million square feet), including the 775,000-square-foot MGM.
The Tower in Century City caused the vacancy rate to continue to climb, despite the positive net absorption. The vacancy rate peaked in the summer 2003, at 18.6 percent, up from 17.4 percent at year-end 2002 and up very sharply from 8.9 percent three years ago. By year-end, however, it had dropped slightly to 18.4 percent. Asking rental rates finally stabilized following a freefall in 2001 and 2002, and actually increased slightly in the second half of the year. The amount of construction activity currently underway is relatively small, just 386,200 square feet. This will enable market conditions to tighten in 2004 and 2005. (The above is an excerpt from NAI Capital’s “Year End-2003 Market Report.” The market report is published quarterly and covers all different types of real estate in the Los Angeles Basin, Ventura County and Orange County, with the exception of single family residential. Call (310) 806–6104 if you would like a copy. Christina S. Porter specializes in the leasing and selling of office and industrial buildings on Los Angeles’ westside and beyond. E-mail at)
Originally published in the Santa Monica Daily Press print edition on March 3, 2004. Read the original PDF.