Office Rent Growth Best in Suburban Markets

Los Angeles Suburban is ranked number 14 in the world for year-over-year office rent growth on CBRE’s annual Global Prime Office Occupancy Costs report. The report lists the top 20 global markets for rent growth, with Downtown Vancouver, Downtown Manhattan and Dallas making the list. This is the first time this cycle that the market has made the list for top rent growth. We sat down with Anthony DeLorenzo, SVP at CBRE, to talk about the rent growth in the market.

GlobeSt.com: What is driving rent growth in Los Angeles suburban markets?

Anthony DeLorenzo: Southern California is a suburban-type market. When you look at areas like Glendale, Pasadena, the Valley and Encino – these are really suburban hubs. You are seeing year-over-year rent growth in these markets because they are filling up. There is no new development in these areas today, but you are seeing good, strong absorption and demand. What is being built in suburban neighborhoods is housing, and that housing stock is bringing in a lot of people. As a result, these markets are seeing a resurgence. Southern California as a whole is just getting back past peak level rent pricing, but if you look at other tech hubs, they have been past the peak for years. That is another aspect—we still have a lot of runway compared to other markets on the West Coast.

GlobeSt.com: What is considered the Los Angeles suburban market?

DeLorenzo: It is really all over the place, and a better way to look at it is what is not suburban—or what is the core, urban markets. Core or dense urban markets include Century City, Downtown Los Angeles, El Segundo and Playa Vista and then little dense hubs with high-rise buildings. Everything else is really suburban in Los Angeles.

GlobeSt.com: Tech and creative companies are driving office activity generally in Los Angeles. Do you see these companies active in the suburban markets as well?

DeLorenzo: You certainly do. Millennials want a live-work-play environment. Tech is going to function well in the suburbs if you can provide that environment for the workforce. For instance, Glendale has seen a huge resurgence in the last few years, and a lot of the old vintage buildings have been adapted and reused. You are seeing this live-work-play environment in some of these buildings that has made this whole area hip and cool, and it has made tenants want to go there. That demand has tightened the vacancy and pushed rents up.

GlobeSt.com: You mentioned there has been limited new development. Are you seeing much redevelopment, especially for tech and creative users?

DeLorenzo: Absolutely, and they have done well. You have commodity, run-of-the-mill, non-descript real estate, and there is a lot of it. However, they are in places where people want to be. A lot of investors are taking these properties and taking the risk and creating something really new and interesting.

GlobeSt.com: The report notes that this is the first time Los Angeles suburban has made the top rent growth list this cycle. Why?

DeLorenzo: These markets have been growing steadily. I think that it is all about supply and demand. We are seeing an increase in the demand of this space, and there hasn’t been any new supply added—going back to no new construction. Vacancy rates are now at a level where landlords can really push rents, and that is why you are seeing such strong year-over-year rent growth. It is projected to be that way in the future, and that is why capital has a focus on assets in Southern California.

GlobeSt.com: As a result of the demand, do you expect to see more new construction?

DeLorenzo: The challenge is that, even though we are seeing great growth, rents are still too low to warrant new construction from a replacement cost standpoint. Development costs have gone up more than rents, and it puts a dislocation in the rents that you need for new development versus what is in the market. Because of that, you aren’t seeing a lot of new development in suburban markets.