Rents continue marching upward in greater Los Angeles.
Landlords have high expectations of what tenants should pay and are asking record rental rates. They are doing so partially because building sales prices have become so elevated that the new landlords are forced to charge higher rents to achieve their aggressive pro formas.
Surging prices have also resulted in increased property taxes, which cut into profitability for landlords and raise occupancy costs for tenants as landlords pass a portion of the increase onto tenants.
Potential real estate strategies for tenants in the current environment are to opt for short-term leases or subleases that offer flexibility or below-market rents, consider markets that offer lower rental rates or create more efficient space usage to offset higher rents.
High asking rental rates coupled with new concerns about the economy are the catalyst for waning tenant demand. The uncertain economy also has led buyers and investors to become more cautious.
Contrary to prevailing market conditions, law firms throughout the Los Angeles region are growing steadily and the interactive media industry remains strong. But the mortgage and residential real estate industries continue to erode and to downsize. Moreover, there are inherent obstacles for business growth in Los Angeles,high cost of living, extreme traffic congestion and Proposition U, which prohibits additional building in West Los Angeles.
Rents Post Solid Gains
Overall asking rents increased by 5.7% in the third quarter, rising from $2.55 a month at midyear to $2.69, while class A rents jumped by 5.3% to $2.87.
The Westside continues to be the trendsetter for rents. Class A rents rose by 30.2% year-over-year, ending the third quarter at $4.08, fueled by a 41% jump to $4.17 in Westwood/West L.A. Class B and C rents throughout Los Angeles have also ballooned compared to a year ago, rising by 15.3% to $2.11, led by a 36.1% increase to $2.46 in the San Fernando Valley.
Leasing Slower
Overall leasing totaled 3.1 million square feet in the third quarter, inching down by 0.3% from the second quarter and falling by 16.1% from the 3.7 million square feet leased in third quarter 2006. The leasing activity for the past four quarters reached 12.2 million square feet, down by 25.2% from a year ago.
Lower leasing numbers in 2007 reflect a national trend as employment growth and the economy both cool.
Nearly every area in Los Angeles registered lower leasing. For example, on the Westside, overall leasing volume (3 million square feet) dropped by 40.7% from a year earlier. Class A activity (2.7 million square feet) fell by 41.8%.
The Wilshire District posted more modest drops of 15.2% overall and 14.7% in the class A sector. The Tri-Cities submarket bucked the trend. There, overall activity during the past four quarters totaled 1.9 million square feet, up 33.3%, and class A volume reached 1.6 million square feet, up 21.3%.
Vacancy Up
As leasing slows, construction is finally starting to outpace demand. The overall availability rate increased for the second straight quarter, rising from 12.1% to 12.5%. The increase is tied to new class A space; the class A rate jumped from 12.6% to 13.2%.
Although class A availability on the Westside remains very tight with a 10.9% vacancy rate, the rate increased by 1.7% year-over-year. Availability rose more substantially in the San Fernando Valley, increasing by 6.2% over the past four quarters to 17% (21.1% in West San Fernando). Availability in class B and C properties now is well below class A availability at 10.8% and has fallen by 0.5% in the past year. The decline has occurred in numerous areas such as Century City (down 3.1% to 12.6%) and the West San Fernando Valley (off 3.5% to 8.6%).
Submarket Focus
Several projects are in various stages of development in L.A.’s “Lower Westside” area. These projects are being developed by such companies as Maguire Properties Inc., Tishman Speyer Properties, Lincoln Properties, Symantec Corp. and,potentially,Howard Hughes.
In addition, the former post office on Jefferson is being converted into office space. Symantec’s Corporate Pointe in Culver City is expected to deliver in October. One of the two class A buildings will be completely occupied by the Symantec; the other 240,000-square-foot building is available.
Tishman Speyer’s Playa Vista project is a proposed 64-acre office campus with more than 2 million square feet of office. Phase one of the project is expected to deliver in 2009.
Lincoln Properties is progressing on its Horizon at Playa Vista development. Phase one of the project consists of two class A office buildings totaling 460,000 square feet and has an estimated completion date of fourth quarter 2008.The Playa Vista area will likely offer space priced at $3.25 to $5 per square foot annually, providing an economic alternative to the $5 to $8 per square foot per year rents being asked in other West Los Angeles areas.
The Water’s Edge complex at 5510 and 5570 Lincoln Drive, occupied solely by Electronic Arts Inc., was recently placed on the market. The complex includes two class A buildings totaling 261,870 square feet and could sell for more than $160 million.
Looking Forward
Historical trends tell us that markets ebb and flow. The Los Angeles market is due for a correction and rents will stabilize and decrease. Not much change may occur in the next 12 to 24 months, because landlords who can afford to wait while their buildings stand vacant will do so. Landlords without deep pockets, or those who have owned their buildings for a long time, will tend to be more competitive.
Analysis provided by Studley Inc.
