L.A. Office Investment Rebounds in Q2

Office investment in Los Angeles rebounded in the second quarter 2018 with $1.9 million in office assets trading hands, according to a new office report from Yardi Commercial Cafe. The sales volume represents a 53% increase quarter-over-quarter, making Los Angeles the top office investment market in California for the quarter. San Francisco and the Bay Area took the number two and three positions with San Diego coming in fourth for office investment activity. The activity was driven by class-B office sales and core urban markets.

“Class-B office transactions doubled from Q1 2018 to Q2 2018, which has had a positive impact on the sales volume,” Doug Ressler, senior research officer at Yardi, tells GlobeSt.com. “Also, transactions in urban primary markets have doubled compared to Q4 2017. Large media and co-working operators added new locations while smaller newcomers are looking to gain assets in lieu of future rate hikes. Asset managers have been on track adding amenities in the dense urban core to incent transactions.”

The top transaction for the quarter was Boston Properties’ acquisition of Santa Monica Business Park for $619 million. The firm purchased the 47-acre office park in a joint venture with the Canada Pension Plan Investment Board from Equity Office. Additionally, Blackstone brought a total of $1 billion of assets in both Los Angeles and San Francisco to market, further driving transaction volume. “In addition to the doubling of sales in urban primary markets, the constant increase in sales activity recorded in the Santa Monica area has also significantly contributed to the overall second quarter activity,” says Ressler. “The five largest deals in West L.A. were in Santa Monica by large media companies and corporate tenants. They included a new lease by Tennis Channel along with renewals by Macerich and Cornerstone OnDemand.  Asking lease rates in Santa Monica hovered at $6.00 per sq. ft. per month, and the area’s vacancy rate increased to 11.1% compared with 9.7% in Q1 2018 due to other media tenant move outs.”

With the increase in activity, pricing also increased—up 10% for the quarter and 23% year-over-year to an average of $396 per square foot. “Price per square foot has increased 10% over Q1 2018 and is now at 93% of Q4 2017 sales,” says Ressler. “Volume also decreased from Q1 2018 when transactions totaled $1.43 billion. However, price per square foot increased 10% over Q1 2018 and is now at 93% of Q4 2017 sales.”

Don’t get too comfortable, however. Sales volumes are expected to decrease in the second half of the year, according to Ressler. “We expect a significant decrease in sales for H2 2018. Looking forward to the H2 2018, strong liquidity and abundant debt capital will be positive for the market outlook,” he says. “However, interest rates and looming trade barriers may have a dampening effect for large portfolio sales.”