Office Leasing Activity Rebounds in First Half of Year
Tech companies have accounted for the majority of the leasing activity this year, but office investors still have some concerns about supply-demand imbalance.
Office leasing has rebounded in the first half of 2018 after a slow end of 2017. Tech companies have made up the majority of the leasing activity this year, especially in the pre-leasing market for new construction. While leasing activity has rebounded, the Greater Los Angeles area still has a double-digit office vacancy rate and office conversions and redevelopment may impact the supply-demand dynamics. We sat down with Tim Lee, VP of corporate development and legal affairs at Olive Hill Group, to talk about the leasing activity in the market this year.
GlobeSt.com: At the end of 2017, office leasing activity had slowed. Have you seen that change in the first half of 2018?
Tim Lee: At the end of the year, things are always a little slow. In the beginning of this year, we have noticed that office leasing has picked up and there have been a number of moves in the media and tech space. We are seeing continued growth with tech tenants expanding space. There is more inventory on the market today than there was at the same time last year, so it feels like there is a bit more vacancy than last year. However, if you look at how much is being absorbed and the deals getting down, there is an uptick from last year. The vacancy rate is only making feel slower than it actually is.
GlobeSt.com: Which companies are continuing to drive leasing activity?
Lee: Typically, the larger tech and media that is driving the demand. When you have a tenant that is willing to commit to preleasing it is because they have a lot more demand for space than they can fill, and typically, that has been with tech and media companies. We haven’t seen that kind of growth and demand from any other industry outside of tech and media.
GlobeSt.com: Is there any concern that the office market is becoming over reliant on the tech market?
Lee: I think that there are always going to be cycles and waves in the market, and we do see that happening in the tech world. There are timelines for start-ups to merge or go public and we are starting to see that from some of the investments made in the 2010 to 2014 year timeframe. Some of those investments are hitting the five-year and six-year mark, and they are starting to get sold to larger companies. We think this is part of the cycle, and because the overall macro view of the economy is so strong with low unemployment and high consumer confidence, it will trickle down to space getting absorbed.
GlobeSt.com: Where have you seen the majority of the leasing activity this year?
Lee: We have seen Westside rents continued to grow, and that is really where the growth trajectory has been. In Downtown Los Angeles, we have seen rents growth at a slower pace, and part of that is because there is a 20% vacancy rate in that market and there haven’t been any major moves into that market. We aren’t seeing the outside organic growth coming into downtown.
GlobeSt.com: What are you biggest concerns?
Lee: We are concerned about the growth of conversions and the amount of space that is coming online. We believe that supply may be outpacing demand in some areas, like El Segundo, where there is a tremendous amount of investor focus. So, there are certain pockets of the L.A. area where supply is outpacing demand, and that could create issues within those submarkets, but overall, we believe the L.A. submarket is still very strong. It has all of the factors for continued growth in the future.