Diversification Drives Next Wave of DTLA Office Growth

The office market in Downtown Los Angeles is playing the slow game—but experts maintain that the market is thriving. According to the first quarter report from the DCBID, the vacancy rate in Downtown Los Angeles grew 4.8% during the quarter to 17.3%, but leasing activity grew 58% year-over-year and rents are up 6.2% year-over-year. While this dichotomy has become a staple of the DTLA office market, the tenant mix is undeniably changing. The market is now home to law offices and legal services firms, tech and media companies, engineering firms and fashion companies. The tenant diversity is key to the market’s future growth, according to Carol Schatz, president and CEO of the DCBID. We sat down with Schatz to talk about the office market, the changing tenant base and the future.

GlobeSt.com: How did the office market perform in the first quarter?

Carol Schatz: The DTLA office market has been steadily growing, if not robustly. According to CoStar, the DTLA office market has absorbed almost 2 million square feet since 2015, representing 5% of the total inventory of class-A space. According to our quarterly market report, the overall vacancy rate as dropped 16%, from 20.6% in Q1 2014 to 17.3% in Q1 2018—all the while the market added 2 million square feet of new space in the form of new construction, like Wilshire Grand and AT MATEO; historic renovations, like The Desmond; and industrial conversations, like Ford Factory and ROW DTLA.

GlobeSt.com: What does this activity mean for the market?

Schatz: What those numbers tell us is that DTLA’s office market is experiencing an adjustment from a diversification and expansion of the market. Where it once was dominated exclusively by glass and steel high rises hosting traditional industries, DTLA has been restoring and upgrading old historic buildings and converting warehouses to creative and tech campuses, and filling them with creative, entertainment and tech tenants, such as Warner Music Group, Spotify, and more. When you add the delivery of a high rise the size of The Wilshire Grand, which is the first new commercial tower to be built in the last several decades, you have a temporary oversupply of space. As more companies continue to migrate to downtown, you’ll see that activity accelerate in the traditional towers – such as the recent news of engineering firm Arup relocating from Playa Vista to the Wilshire Grand.

GlobeSt.com: How is the tenant mix changing in the market, and how is this impacting activity?

Schatz: The DTLA office market, with tech and creative companies like TubeScience and H&M Innovation Group, is gaining momentum, creating and dynamic ecosystem and laying the groundwork for what we expect to be significant expansion over he next few years.

DTLA is unique and being driven by broader, longer term factors, like the growth of the residential population – aka the “talent pool” – and the related growth of restaurants and entertainment—also known as urban lifestyle—along with the increasing accessibility of our market via our expanding transit system versus the increasingly crushing commute times of other more car-dependent areas – are the critical elements that are attracting new office tenants. And speaking just for the markets in DTLA, activity has increased since last year, and in some cases significantly. DTLA has such great momentum that we are confident that 2018 and beyond will be strong.

GlobeSt.com:

GlobeSt.com: Office vacancy rates have wavered in the market, but rents have steadily increased. Tell me about this dichotomy in the market.

Schatz: Sounds impossible, but it’s true. That’s just how unique DTLA has become. Office rates are continuing to increase due to the quality and type of space that is being leased. Companies are willing to pay more for the architecturally distinct warehouses that have been converted into highly amenitized creative campuses. Further, deals in the office towers are getting more expensive as landlords reinvest in their buildings by bringing in new amenities and services to attract and retain tenants. As the creative market gets tighter and more expensive, larger firms will begin to fill the remaining office tower space driven by their need to be in market. It will be the same here as what has been happening in San Francisco.

Another factor to keep in mind is that a lot of our vacancy comes from companies right sizing their space usage, in which they are simply being more efficient with the space they have so leasing less even if their headcount remains the same or even expands, and that not only does reduce the rent per SF it can even put it at a premium because they are getting more value out of that space.