L.A. Office Development Sees Late-Cycle Spike

Los Angeles office construction is experiencing a late-cycle spike. According to a recent report from NAI Capital, the office construction pipeline hit a record of 7 million square feet at the end of the second quarter—a record level not seen since the 1990s. Declining vacancy rates and rising rents as well as local incentives is spurring the new development activity.

“It is late in the cycle, but capital doesn’t seem to be scared of that at all. Developers are opportunity driven,” Joe Faulkner, executive managing director at NAI Capital, tells GlobeSt.com. “The city put together a transit-oriented development model, and that is spurring a lot of new growth because developers are getting a lot of benefits, like reduced parking.”

The new development is targeted to Los Angeles’ most popular office markets, like the Westside, Culver City, Hollywood and the Tri-Cities markets. While Los Angeles has an overall office vacancy rate of 10.2%, it can be significantly lower in some of these popular office markets. “The markets that are seeing the construction boom are out of options. They are full,” says Faulkner. “El Segundo, for example, has become a creative hub overflow for West L.A.”

In addition to the rising demand in popular L.A. submarkets, the rapid expansion of co-working operators are also driving new construction activity. “Shared workspaces are also driving this trend. There are many operators now, and they are taking massive amount of space that is driving a lot of the demand and a lot of the absorption,” says Faulkner.

While office is seeing a late cycle construction boom, Faulkner doesn’t expect the pipeline to continue to grow—mostly because there is a dearth of developable land. “We are running out of places to build, so I don’t think that pipeline will continue to grow,” he says. “Hollywood has been the biggest boon in new construction doesn’t have any spaces left for development. El Segundo is the only bright spot in new office construction.”

Developers are also facing challenges of rising construction costs and potential trade disputes. “The biggest challenge is the cost of new construction and thus the cost of rent is really high. I am not sure that a lot of the tenants out there can actually pay the proforma rents of these new buildings,” says Faulkner. “Once you get past the top layer and you get past the big users, not a lot of people can afford the rents that need to be achieved to justify the new construction. There will be a squeeze.”