Limited Office Ownership Has Helped DTLA

The office market in Downtown Los Angeles in somewhat of a dichotomy. It has one of the highest vacancy rates in the Greater Los Angeles area, but rents that can rival West L.A. There are a few reasons for this. Among them are expensive pricing as a result of the redevelopment activity that creates higher proforma rents as well as the abundant confidence in the Downtown Los Angeles market. Another, however, could be the limited office ownership in the market. Much of the office stock is owned by a handful of large office owners, and they are able to keep rents up despite the vacancy longer than they might be able to if there were more competition.

“Downtown Los Angeles is dominated by a few really large landlords. Ordinarily, has the vacancy rate goes up, rents go down,” Joe Faulkner, executive managing director at NAI Capital, tells GlobeSt.com. “That is the way that it is. In New York, where you have a really robust market with lots of different owners, they are more elastic and they react to changes in vacancy quicker. Out here, we have big blocks of space that are owned by Brookfield, Kilroy and Douglas Emmett, they can kind of ignore those swings—and they do.”

While Downtown Los Angeles is attracting more attention—Warner Music and Spotify among them—overall office absorption has been anemic. For tenants moving within the market, negotiating can be difficult, but tenants moving from outside of the market have more leverage. “The amount of space being absorbed is slow,” says Faulkner. “There isn’t a whole lot of leases being signed from quarter to quarter. If you have a tenant moving to the market from outside of Downtown Los Angeles, you can get landlords to negotiate well.”

Technology is still the most sought-after tenant base for Downtown Los Angeles, because it has been such a major driver of leasing activity in other successful L.A. office markets. “Small tech companies are a terrific driver in the Westside markets, but they tend to bounce up and down with the real estate market,” explains Faulkner.

While there is tech interest in the market, some those opportunities are going to co-working spaces rather than direct leases, but Faulkner says that the activity isn’t enough to really impact the market. “In some ways, I think that the co-working market is getting overbuilt and over saturated,” he says. “In terms of them taking traditional office away, it doesn’t seem to be that way. Brookfield for example just bought Convene because they see it as a great incubator of people that then take space in the building.”