Office leasing in Downtown Los Angeles is slowing down. The dearth of tech tenants or interest from tech tenants in the market has been a major reason for the anemic leasing activity, especially as traditional office users have rightsized their office square footage. The slowed leasing activity will almost certainly put downward pressure on rents, but for now, effective rents have continued to increase to $30 per square foot, according to research from Savills Studley. We sat down with Andy Lustgarten, senior managing director in Savills Studley Downtown Los Angeles office, and Jeff Cowan, senior managing director in Savills Studley's West Los Angeles office, to talk about office leasing in Downtown Los Angeles and how it will impact rents.
GlobeSt.com: Why has DTLA leasing activity been impaired because the market is a hub for professional services firms?
Andy Lustgarten: Overall, professional services firms are taking a conservative approach to office occupancy. Firms are not expanding their square footage and are choosing to either renew and occupy the same amount of space or relocate to a more efficient footprint and take, on average, 10% less space. As professional services firms comprise approximately 80% of the DTLA office market, leasing activity remains flat.
GlobeSt.com: In today's office market, is a presence from tech and creative firm's essential to a market's success?
Jeff Cowan: Tech and creative firms are dominant tenant sectors in specific submarkets such as Santa Monica, Playa Vista, Culver City and, to some degree, Hollywood. Although these areas are garnering significant leasing activity and some of the highest rents in the LA region, the submarkets existed prior to this sector's explosive growth and will continue to do so if and when activity flattens. There is also a dichotomy within each submarket, with the open-plan, creative-type buildings attracting considerable interest, while traditional high-rise offices are not benefitting to nearly the same level. Finally, there are very successful submarkets that do not rely on tech or media tenants at all. Beverly Hills is one such example.
GlobeSt.com: Despite anemic leasing activity, effective rents continue to increase. While they are below West L.A rents, do increase rents paired with ample availability of space serve to harm leasing activity even more?
Lustgarten: I wouldn't necessarily characterize DTLA's leasing activity as anemic, but rather as maintaining its same, historically moderate pace. Additionally, over the last 10 years, the Tenant Effective Rent has increased by approximately 15% or 1.5% year-over-year, below the cost of inflation. Landlords may have upped asking rents, but the increase in concessions necessary to attract tenants has more than compensated for that.
GlobeSt.com: Where is rent growth heading in DTLA, and why?
Lustgarten: Incremental growth will continue, but there won't be a spike anytime soon as the market is still significantly oversupplied. There are 125 full floors of space available for direct lease and nine for sublease across 28 institutional high-rise buildings. And, that does not include the smaller blocks of availability. This means there are a lot of choices for tenants. Until a significant transaction from outside the downtown market is signed in the downtown core, it is unlikely that there will be any meaningful increase in rents.
While more tech and media companies are considering DTLA than ever before, most of that activity is concentrated in the Arts District. If Spotify makes its deal to relocate to the Arts District and when Warner Music occupies the Ford Motor Factory project, that could bring 1,500-2,000 new employees to the Arts District and likely spur a cascading effect in terms of attracting ancillary businesses.
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Kelsi Maree Borland
