What to Expect From LA’s Office Market

NKF's Jennifer Frisk touches on the changes in Los Angeles’ office landscape, undersupplied areas and the role of hospitality in the future of the sector.
Jennifer Frisk, Senior Managing Director, Newmark Knight Frank

A diverse economy and new jobs in the financial, information and business sectors drive demand for office space in Los Angeles. According to Yardi Matrix, more than 7.5 million square feet are under construction in the Californian metro, as of February. Commercial Property Executive reached out to Jennifer Frisk, senior managing director at Newmark Knight Frank, for insights on where the Los Angeles office market is heading and which sectors will continue to be the lifeblood of the business. Frisk also hints at what the L.A. office market lacks in terms of supply.

What are the Los Angeles office market’s biggest strengths and weaknesses?

Frisk: Los Angeles office market’s strengths are venture funding, talent, L.A. lifestyle, continued development and conversion to creative product. Its weaknesses are historically high rents and overall real estate costs, traffic/ability to centralize an office for all employees and lack of creative space inventory.

What kind of assets are investors looking for in 2019?

Frisk: Investors continue to look for quality real estate across all asset classes, with a continued focus on multifamily and office product. Investors will also continue to seek normalized returns and acquisitions that are not susceptible to a future slowing of rent growth.

The latest Yardi Matrix office report revealed that growth in L.A. is driven mostly by tech, but biotech and life sciences companies have been impacting the market as well. How do you see this trend going forward?

Frisk: All technology influenced industries will continue to drive growth in Los Angeles. Biotech and life sciences, which are the convergence of health and tech, will continue to grow just as health care has also been a strong growth segment in Los Angeles. Biotech historically centers around education and this will continue in L.A. as the talent pool continues to grow.

Tell us about L.A.’s most sought after and emerging submarkets for office product.

Frisk: Currently Culver City and Hollywood are two of the most sought-after submarkets for office space. Both have become incredibly popular due to increased investment, development and an expanded amenity base. Both also serve a workforce that is interested in living on the east side of the city, as opposed to driving all the way to Santa Monica and other western submarkets. Additionally, the area around the new stadium in Inglewood, as well as east of Culver City, along the Expo line, will become popular, as emerging areas, as development continues.

What challenges will the L.A. office market face this year and how will these impact the investment landscape?

Frisk: Leasing velocity is forecasted to slow down, which will also cause the continued rent growth to level off. From an investment standpoint, a softening in rent growth will create a reduction in values, especially compared to some of the record-setting sale prices we have seen over the last 18 months.

What can you tell us about the L.A. office market in terms of supply and demand?

Frisk: The L.A. office market currently suffers from an oversupply of traditional commodity office space and an undersupply of built out, creative space. The term creative space is used broadly, but it is really just current, forward-thinking space, that reflects the new workplace trends, which are very different from offices built out over five years ago. The demand for creative office space has increased across every industry type and landlords have struggled to keep up with a good supply.

What trends will define the office market in 2019?

 Frisk: We will see an increase in the lifestyle office space or office space that has a hospitality overlay. As consistent with years prior, tenants will seek out well-located space from an amenity standpoint, with flexible, yet functional workspace. Companies will continue to try and understand their cultures and how that plays into or is reflected in their office space, to a more customized space rather than just looking to follow general market trends.

Image courtesy of Newmark Knight Frank