Effective Office Rents Drop in Major Cities, But Not in California

Fueled by extensive new construction underway and large quantities of older space flooding the office market, U.S. landlords in major cities like New York and Washington, DC are continuing to sweeten deals by offering tenants free rent, remodeling allowances and state-of-the-art amenities, effectively reducing office rents. At the same time, a different trend is emerging in tech-centric cities, where competition for talent and amenity-rich space is fierce, according to Savills Studley’s 2018 Effective Rent Index.

Highlights of several major California markets include:

DTLA Summary: Dependency on the legal, banking and professional/business services sectors kept leasing in Downtown Los Angeles from gaining much momentum during 2017. Tenant effective rent pushed above $30/sf in 2017, but is still well below rent in West Los Angeles. The greater Los Angeles economy seems to be losing some momentum, and may have already pushed past its peak. Moderating demand should curb rent growth during 2018.

West LA Summary: Tenant effective rent posted its third consecutive year-on-year increase, rising at roughly the same amount as in 2016, but concessions jumped by more than 10%. Tenants displayed additional price resistance during 2017. Some found space in alternative areas such as El Segundo and Playa Vista. Consolidation in the media and entertainment sector could temper leasing activity and rent increases in 2018.

Orange County Summary: Orange County posted a third straight year of above-average leasing volume, even as rent pushed further into record territory. A diverse array of firms were once again willing to pay top dollar at Irvine Spectrum Center and Fashion Island. Emboldened by sustained demand, a few owners are proceeding with speculative office development. It will take several quarters for much of the new product to deliver. In the meantime, companies seeking quality space will face increased rent.

San Diego Summary: Leasing volume in Downtown San Diego was sustained, totaling one million square feet during 2017. The relocation of a few tenants from suburban locations and increased interest from the tech sector boosted activity. In the wake of a couple of years of sustained activity, the pool of quality Class A space Downtown has been depleted. Tenants will face increased rent during 2018, as landlords take advantage of a limited set of quality blocks and negligible construction.

San Jose Summary: Negligible space options and spiking rent in Mountain View, Sunnyvale and Menlo Park prompted more tenants to consider Downtown San Jose. Plans for major developments surrounding Diridon Station have given companies an even bigger push. In turn, landlords achieved the sharpest increase in effective rent during this cycle. Tenants will encounter additional decreases in concession packages in 2018, as occupancy levels remain at their highest level in years.

Sunnyvale/Santa Clara Summary: Tenants continue to face extremely-challenging conditions in Sunnyvale and Cupertino. Much of the rental rate growth occurred in 2016, but frenetic demand from both top tech firms and rapidly expanding startups has kept competition for space very heated. Landlords pulled back slightly on free rent and extended generous tenant improvements only for larger, creditworthy firms. Companies will face added rent hikes in 2018.

For comments, questions or concerns, please contact Dennis Kaiser