Is the DTLA Office Vacancy Heading Up?

The office market in Downtown Los Angeles had a stellar first quarter, following the Westside in absorption activity with new leases from Spaces and Jerde Partnership, according to the first quarter report from Newmark Knight Frank. The new activity, however, may be short lived. With 1 million square feet of redevelopment supply coming to market this year, it is likely the already high office vacancy rate in Downtown Los Angeles is heading up.

“In the short-run, you are going to see vacancy increasing. There is a million square feet of space that is under renovation,” David Kluth, executive managing director at NKF, tells GlobeSt.com. “There will likely be an increase in vacancy as that product comes online. As you add to the inventory, you are going to end up with an increase in vacancy.”

The oversupply in the market is the main challenge for Downtown Los Angeles, but it isn’t the only one. Kluth says that market particulars like expensive parking rates and the fact that most executives live outside of Downtown is hurting leasing activity in the market. Above all, he says tenants need to change their mentality to really impact office leasing. “Media tenants are historically located on the Westside, and they need shift their thought process. That doesn’t happen overnight,” he says. “For so many years, Downtown was off the radar for those companies. Additionally, if you are moving from a different market, you have to consider the potential loss of employees. West L.A. has already established a cluster of tech and media companies, and if a company moves downtown, they have to consider the potential impacts on employees to relocate.”

The shift is happening, though. Kluth says that more and more frequently, tenants are choosing Downtown Los Angeles, and in some cases the ample supply is seen as a benefit. “You are seeing less resistance, and there is more confidence in the market. Part of the attractiveness of the market is there are large blocks of space, and those options don’t exist in other markets,” says Kluth. “The rates are relatively competitive compared to West L.A. As the amenity base evolves and the residential base grows, then it will feed off of itself. The hope is that the market will continue to appeal to tech and entertainment tenants.”

Warner Music, which signed a 257,000-square-foot lease in the Arts District, has been lauded as a catalyst for tech and media tenants in the market, and Spotify is also now looking for 100,000 square feet in the Arts District—so the change is happening. Kluth says that although there is likely to be an oversupply issue this year, those leases act as an endorsement for the market. “It validates Downtown Los Angeles as an option for media companies,” he says. “It also is a big shot in the arm for the Arts District as a microcosm of Downtown L.A. It is such a unique area, and it really validates what is happening down there and clears the deck for more to come.”