Q2 2012 Los Angeles, California Office Market Trends

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Q2 2012 Los Angeles, California Office Market Trends

After a difficult first quarter marked by negative net absorption, the 196-million-square-foot Los Angeles general purpose, multi-tenant office market bounced back with positive demand. Rent gains have been modest in both the first and second quarters. Job growth has “helped quiet the bumpy ride the Los Angeles County office market has been on for the past few quarters,” according to Cushman & Wakefield.


Reis reports a second quarter 2012 vacancy rate of 15.1%, down 20 basis points from a quarter earlier but up 20 from one year earlier. The rate has been close to 15.0% since 2010. It has not exceeded 20.0% since the early 1990s. The Class A rate of 14.3% is down 40 basis points for the quarter but up 10 basis points over 12 months; the Class B/C rate of 16.0% is up 20 basis points from a year earlier and up 10 over the quarter

“Los Angeles County job gains will be insufficient to ignite a full-scale office recovery in 2012, but as some employers exploit discounts to expand, vacancy will fall for the second consecutive year,” Marcus & Millichap notes in its national outlook report “Following a 20-basis-point improvement last year, vacancy will fall an additional 50 basis points to 14.4% in 2012,” Marcus predicts. “While the Central Business District (CBD) submarket weakened, the rest of the Los Angeles office submarkets improved. Overall vacancy decreased across all submarkets, totaling a year-over-year 0.5-percentage-point (pp) drop to 18.6%. The last year-over-year decrease occurred in mid-year 2007 indicating the rough ride since the recession ended is moderating,” according to Cushman & Wakefield. GVA Daum reports that “the Los Angeles County office market witnessed vacancy levels remain unchanged during the quarter, remaining at 16.6%.” Reis forecasts vacancy to finish 2012 at the current rate, with gradual declines to follow.


The 606,000 square feet of negative net absorption recorded in the first quarter, weighted heavily towards the Class B/C sector, was only partially redeemed by the 306,000 square feet of positive demand noted in the second quarter. Again, demand was unbalanced; Reis reports 386,000 square feet of demand for Class A space, but B/C demand was negative 80,000. In fact, for a premier market, Los Angeles has struggled with negative absorption. For the decade of 2002 to 2011, the market totaled minus 3.9 million square feet of demand, while new construction added 11.5 million during that time span. However, market inventory fell by 5 million square feet as buildings were taken off the market or converted into residential use during the housing bubble. It should be noted that the absorption total for 2008 to 2010, during the recession, had been a damaging minus 13.2 million square feet.

GVA Daum reports for the second quarter that “net absorption finished with a gain of 13,000 square feet of occupied space during the quarter and has gained 633,000 square feet for the year.” “Occupancy gains showed the most improvement with a second consecutive quarter, following 14 quarters of loss, of overall positive absorption totaling 838,508 square feet for the year, compared with negative 1.1 million square feet a year ago,” according to Cushman & Wakefield. Marcus & Millichap notes “absorption trends for Class A space in premier hubs will surpass the market’s lower-tier counterpart.”

Construction data has changed little since the first quarter. Reis reports 1.4 million square feet of multi-tenant general use space under construction, of which 788,000 has a 2012 completion date. A slightly larger amount is forecast for 2013, after which completions should exceed 1 million square feet annually. Net absorption is set for a modest 399,000 square feet in 2012, after which much larger amounts, approaching 3 million square feet, are forecast.


Rents generally perform well in the Los Angeles office market. Both the average asking rent and the average effective rent increased 0.2% in the second quarter of 2012, to $32.19 psf and $26.11 psf, respectively. The asking and effective averages are up 0.8% and 1.0% from a year earlier. The Class A asking average is $37.43 psf, up 0.2% from a quarter earlier and 0.9% from a year earlier. The Class B/C asking average is up 0.2% over three months and 0.6% over twelve at $25.70 psf.

“Average rents increased 2.1% year-over-year,” according to GVA Daum, from $28.08 psf to $28.86 psf. According to Cushman & Wakefield, direct asking rents increased 2.8% year-over-year from $29.52 psf to $30.36 psf. “Direct Class A asking rental rents increased 2.9% over the past year,” to $33.72 psf, according to this source. “Asking rents will rise 1.2% this year to $32.47 psf as effective rents climb 1.9% to $26.49 psf,” Marcus & Millichap reports. For the Greater Los Angeles Basin market, Colliers reports a weighted average asking lease rate of $29.88 psf.

Reis predicts the asking and effective averages will increase 1.2% and 1.5% in 2012, following low gains of 0.4% and 0.9% in 2011. The recession took its toll of rents mostly in 2009 and 2010, after several years of strong gains. National and West region rents both increased 0.2% asking and 0.3% effective in the second quarter, so Los Angeles is performing more or less the same as its regional and national peers. The LA metro area had a period of over performance on the rental front that has since subsided. Following the modest 2012 increases rent gains are forecast to gradually ramp up to an increase of 4.0% asking and 4.9% effective in 2016. The effective average is expected to be at a new high by the end of 2015.