Sun Shines on Southern California Offices

Southern California commercial real estate continues to benefit from falling area unemployment and increasing port traffic, reported Voit Real Estate Services, Orange County, Calif.

Los Angeles, Orange County and San Diego all saw healthy office demand in recent months, Voit’s Mid-Third Quarter Update said.

Voit Vice President of Market Research said Jerry Holdner called Los Angeles County’s office momentum “growing.” “Despite the weak first quarter, growth in demand is accelerating in L.A.,” he said, noting that net absorption doubled in 2014 compared to 2013, making last year the strongest year since 2006.

“West L.A. has been the star of the show, with the region’s tech and entertainment tenants absorbing a disproportionate share of the gains,” Holdner said. “[But] demand growth is finally sufficient to affect vacancies across the metro.”

Holdner said creative office leads the way in southern California. “Properties with buildouts that appeal to creative tenants have been able to push rents more aggressively,” he said. “While overall rent growth over the past year has been a healthy 5.7 percent, properties marketing themselves as creative have realized gains of nearly 9 percent.” He called rents for west-side Los Angeles creative offices “stratospheric” and said Santa Monica saw 11 percent rent growth relative to the most recent trough.

Investment volume retreated in recent quarters from the “frothy” figure seen in 2013 and 2014, when more than $9 billion per year changed hands, Holdner said. “To date, 2015 is on a more conservative pace, tracking at less than $3 billion through June.”

But prices indicate that L.A. remains as hot as ever among office investors. Average pricing exceeds $300 per square foot, considerably higher than the previous high-water mark of $250 per square foot established back in 2008.

In Orange County, underlying office demand drivers appear healthy, Holdner said. “With good demand, expect fundamentals to maintain a positive near-term trend, continuing the recovery,” he said.
Turning to San Diego, Voit Market Research Analyst Joshua Brant said construction has slowed and demand has returned. “With many tenants seeing expansion as a priority, lease rates are finally ticking up.We expect average rental rates to reach pre-recession highs in 2017,” he said. 

Brant said San Diego area sales prices vary widely by submarket. “Nicer buildings in top-tier submarkets have reached and in some cases exceeded pre-recession prices,” he said. “Investors are beginning to take on more leasing risk in those submarkets. However, outside of premier submarkets, assets could still be as much as 40 percent below peak pricing.”