L.A. Office Activity Is Fragmented

Los Angeles office activity is fragmented, with some submarkets showing growth, like the Westside, and others trailing behind. In general, however, the bad is outweighing the good. According to the latest report from Savills Studley, office-leasing activity trended down in the second quarter with 3.3 million square feet of office space leased—below the long-term average of 3.7 million square feet per quarter. As a result, asking rents remained flat and investment sales volumes were down. We sat down with Marcus Arredondo, corporate managing director of Savills Studley, for an exclusive interview to find out more.

GlobeSt.com: Why is there such a dichotomy in office leasing patterns from submarket to submarket in Los Angeles?

Marcus Arredondo: Increasingly, companies’ labor pools are among the biggest drivers to identifying their office location. Younger technology, entertainment and media oriented firms continue to recruit talent who seek versatility and creativity within their work premises, walkable amenities and denser communities with access to public transportation.  As a result, we are witnessing a greater divide between markets suitable for firms more easily categorized as creative than traditional service oriented firms—financial, accounting and/or legal – which are often most drawn to CBDs and office campuses with parking availabilities, and whose employee pool may not be so proportionately influenced by the same demographic and whose priorities may be more firmly established within the culture.

GlobeSt.com: Which submarkets are leading the market and which are falling behind?

Arredondo: Playa Vista, Culver City, Venice, Hollywood and West Hollywood continue to be the recipient of rapidly growing companies, particularly in the technology and media sectors, seeking a synergistic environment and/or campus with greater accessibility to clientele, talent and production. We have also seen Warner Music and Spotify, among others, plant significant flags in the Arts District, but just how attractive the DTLA core and the Arts District overall is to other large creative users remains to be seen.

GlobeSt.com: Overall, why do you think leasing activity has trended down?

Arredondo: As we’ve seen rental rates being pushed upward in the more desirable markets by new media/content creation companies, more traditional companies have continued to take a measured approach to their space consumption.  In many respects, the high volume of leasing activity was perpetuated for a long time by the convergence of technology and media as the race for content production became increasingly competitive.  While Los Angeles served as the hub for this growth, at some point even the largest occupiers like Netflix, Amazon and YouTube, to name a few,  will reduce their growth rate if not become satiated outright.

GlobeSt.com: Why have office sales volumes dropped off?

Arredondo: With interest rates inching up, cap rates leveling off, costs of materials in flux and construction labor pools being absorbed by existing building projects, we’re witnessing many of the investors most active in the last 24-48 months reduce their acquisition volume.  Further, as leasing activity continues to slow, the rental rate growth landlords have become accustomed to will likely dissipate, and investor returns will become increasingly rife with uncertainty.

GlobeSt.com: What is your outlook for the remainder of the year?

Arredondo: It will be interesting to see how macro socioeconomics impact local activity. The data points suggest that as projects underway are completed, we will likely  see more aggressive competition among landlords for tenants, increased concessions and, potentially, a reduction in asking rental rates which  may  spawn a re-set in in investor return expectations.