DTLA's 10 Most Expensive Offices

Here is the central idea. The Downtown Los Angeles office leasing market has changed since the last time you negotiated your office lease. Below, are the 10 most expensive office buildings DTLA (meaning Financial District and Bunker Hill) based on asking rents, and two of the buildings were nowhere near the top just five years ago. Not. Even. Close. Pacmutual and CalEdison (previously One Bunker Hill) were merely average class B office buildings providing functional office space to traditional office tenants. Now they are THE most expensive office buildings in the DTLA! Pacmutual's asking rental rates have grown 57% in five years. Now, compare that to your organization's revenue growth over the same period. Then, imagine you are a tenant in the building who has not negotiated the office lease in the last five years, and who must now face the need to renegotiate with the new landlord. These two buildings are the extreme examples in the neighborhood, but are indicative of recent area trends. You may be asking yourself, "How much has changed at my building?"

Growth

For good measure, here is how growth in the DTLA office leasing market compares to the rest of the United States. A recent report from CoStar stated that year over year office rent growth in the City of Los Angeles, as of Q4 2017, was higher than any other city in the country. LA won this race with year over year rent growth of 11.1%. That's big. Now, let us think locally and let's talk about the last five years, since the average office lease in DTLA is roughly five years long. Office asking rents over the last five year period in DTLA have increased roughly 22%. Again, compare that to your organization's revenue growth over the same period and see how it measures up. It has become common for office tenants entering today's leasing market to experience some form of sticker shock upon opening negotiations because of such rent steep increases.

Your DTLA Office Building

Nearly 50% of the existing DTLA core office market has traded to new landlords in the last five years. This is real change! And, this change means new building owners are either changing the building's direction, or capitalizing on residual activity in the market. Here are three signs your office building may be surfing the wave of rent growth:

1.) The building has a new owner and there are new amenities, like a tenant lounge with a shuffleboard table. We call this re-positioning, and it means higher rents are coming your way; or at the very least, a substantial increase in real estate taxes will be passed through to tenants. The most extreme examples of this are re-positioned (reclassified) buildings, such as PacMutual, CalEdison, 600 Wilshire, 800 Wilshire, et al.

2.) The building has the same owner, but the ceilings tiles are disappearing in place of exposed ceilings and the offices are glass, everywhere. This is a symptom of your landlord riding the trend of creative office space brought on by the migration of tech and media tenants from the more expensive west side submarkets, as well as those office tenants who are now attracted to the idea of the urban core.

3.) A gaggle of new neighbors are moving in to your traditional office building, and commenting about how their “old building became too expensive, or ...". These tenants are usually searching for the remaining DTLA office buildings that maintain traditional office space environments with economic rents. These traditional office buildings have benefited greatly from the relocation of office tenants searching for value over amenities.

What will happen next?

Good question. But, the outlook is positive for office tenants. It is true that the high tide rises all ships, but some DTLA office buildings have experienced more moderate growth. In fact, rent growth in DTLA has leveled off recently. In late 2017 and early 2018, overall asking rents in the DTLA did not grow at all. Also, the scheduled delivery of new and converted office space in DTLA, as well as in the adjacent Arts District and Historic areas, will provide tenants with more vacant space nearby, and possibly cause the leasing market to soften. According to the Downtown LA Business Improvement District, 2.9 million square feet of office space is under construction in the greater DTLA office market, which will eventually be added to the existing vacancy of more than 5.3 million square feet. In the City of Los Angeles as a whole, roughly 7.4 million square feet of new office space is coming online during the same period. This is the equivalent of building an entire submarket nearly the size of Century City. Where will the new tenants come from to fill all this vacant space? That is my question too. This will be important insight for those DTLA office tenants whose leases expire over the next 12 to 24 months. You will have options.

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