DTLA Office Rents Climb as Occupancy Falls

The Downtown Los Angeles office market is an enigma, and the fourth quarter report from the DCBID is a perfect example of the market dynamic. In the fourth quarter, the vacancy rate increased 9.6%, while the class-A lease rate also increased 5.4%. Leasing activity clocked in at 3.8 million square feet, while net absorption was negative 4,305 square feet.

“The movement of the vacancy rate in this quarter was attributable to several factors. We added a couple hundred thousand square feet of office space with the Trust Building , 7^th and Olive and a few buildings on Broadway,” Nick Griffin, executive direction at the DCBID, tells GlobeSt.com. “So, we have added inventory. There were a few departures that had been announced a while back but took effect this quarter, including Thomson Reuters, which is pulling out of Southern California in general, and City National. So, I think the vacancy rate has more to do with moving around and new inventory than broader demand.”

Griffin says that the strong rent growth is actually a better indicator of the demand rather than vacancy rate. “The rent per square foot is a stronger indicator of the demand in the market because landlords are able to get a higher rent for the space that they are losing,” says Griffin. “Overall, there is plenty of leasing activity, meaning they are able to fill those spaces. Overall, the important trend is the desirability of downtown as a place for companies and growth industries, and that is indicated in the increasing rent per square foot.”

The current dip in leasing activity is due to move-outs, not rightsizing, That trend has subsided, according to Griffin. “A few years ago, we were able to take up a certain amount of slack in the office market because of right sizing,” says Griffin. “Law firms and accounting firms were using a lot less space that they used to. That process had really run its course by 2018, and now we are dealing with a solid base. Now, downtown is becoming desirable for a significantly broader range of industries, like tech, media, fashion, design and architecture. That is where the new activity and the demand is coming from.”

The vacancy rate should start to trend down this year. “We are going to start seeing the market trending mostly down in terms of the vacancy rate,” says Griffin. “The market is strong enough now that starting this year the vacancy rate is going to start trending down. We are one or two years away from a major shift in the market, and we are going to see one or two deals this year that will have a major impact on the vacancy rate.”