The Downtown Los Angeles market closed 2017 with a whimper. The market—which experienced a phenomenal year—saw vacancy rates increase in office and retail asset classes. Office vacancy rates increased 5.4% to 17.7%, and retail vacancy was up 9.8% to a rate of 4.5%, according to the fourth quarter report from the DCBID. Occupancy rates in hospitality market remained flat, while multifamily occupancy rates climbed 1% amid significant new development. While vacancy rates fell, absorption for both office and retail markets was positive, and office continued to see increases in rental rates.
Office has been a key asset class for the downtown market to capture, but the vacancy rate has remained high. It isn't unusual that vacancy rates bumped up in the fourth quarter considering that the whole of L.A. saw an office slowdown at the end of the year, including the Westside market, a typical driver for Los Angeles office. Overall, the office sector in the Downtown market performed well for 2017. “We feel the DTLA office market had a pretty good year in 2017,” Carol Schatz, president of the DCBID, tells GlobeSt.com. “Rates are up, vacancies are down, and leasing activity was up 10% over 2016. More importantly, all of this occurred while new creative office spaces opened throughout downtown. DTLA now boasts one of the most diverse office portfolio's in Southern California and stands to benefit from all of the exciting new projects still to deliver. If Warner Music Group's move to DTLA from Hollywood and Jerde Partnership's move from Santa Monica are any indication, the DTLA office market outlook is bright indeed.”
The drop in the retail market was more surprising. Retail has seen substantial demand in Downtown Los Angeles, and migration from international brands. “Much of the numbers in the retail market were basic market dynamics in action—
supply and demand,” explains Schatz. “DTLA continues to deliver new retail space along with older retail spaces being upgraded to serve modern retail uses. And with more space due to arrive this year, we'll likely see a year similar to last – which is not a bad thing. Last year, DTLA saw the addition of some great retailers—COS, 3.1 Phillip Lim—national brands, like Nordstrom Rack and SweetGreen, and iconic developments, including At Mateo and City Market South. During 2018, we expect to see more of the same.”
Multifamily, like in most markets continued to be the darling; however, hospitality has really shown stability in the market. Thanks to very popular entertainment venues, hotel product has shown that it can perform in Downtown Los Angeles, according to Schatz. “If there is one other sector to be really excited about in addition to residential, it is the hospitality market,” she says. “DTLA just delivered 1,400 rooms to the market, all the while increasing occupancy levels, room rates, and revenues. In addition to the InterContinental at Wilshire Grand Center and the trendy Indigo Hotel at Metropolis, DTLA also welcomed some of the most unique hotel properties in the country including the Freehand and now NoMad LA. From a consumer perspective, these properties are forming one of the most desirable hospitality markets in the country. Whether measured by the architecture, design, room quality, or food and beverage program, DTLA's offerings are second to none. And with coming arrivals of L.A. Proper, The Hoxton, and the redesigned Hotel Figueroa, it is only getting better.”
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Kelsi Maree Borland
