Have We Hit Peak Office Rents?
May 10, 2016

The Los Angeles market may have hit peak office rents. Landlord effective rent is now outpacing tenant effective rent, which is a sign that concessions are drying up. A recent study from Savills Effective Rent Index analyzes effective rents in the West Los Angeles and Downtown markets. In Downtown Los Angeles, total rents increased by 2.3% to $40.82, with tenant effective rent rising 2.2% to $29.09 and landlord effective rents rising 3.7% to $12.91. That is just above the 2008 peak of $12.77. In West Los Angeles, total rent grew 4.7% to $47.60, with tenant effective rent rising 6.7% to $37.59 and landlord effective rent rising 10.1% to $21.43. To find out what this trend says about rental trends in the office market and where rents are headed, we sat down with Keith DeCoster, director of US real estate analytics at Savills Studley, in an exclusive interview.

GlobeSt.com: Why is it important to track paid versus earned rental rates?

Keith DeCoster: The gap between the total taking rent, i.e. the base gross rent, and landlord effective rent, i.e. what the landlord ends up with after we deduct building expenses, commissions and concessions, provides detail on a couple of key costs—the cost of maintaining a property and what it costs a landlord to induce companies to sign a lease, like concessions and commissions. In both Downtown Los Angeles and West Los Angeles it’s clear that rising taxes and operating expenses are responsible for much of the gap between total rent and landlord effective rent. As a percentage of net rent, though, the value of concession packages in Downtown Los Angeles (28.7%) are still much higher than in West Los Angeles (21.0%). Landlords in higher-caliber class-A buildings in West Los Angeles consequently walked away with a landlord effective rent of $21.43 in 2015—the third highest nationally, behind only San Francisco and Midtown Manhattan. In contrast, Downtown Los Angeles registered a landlord effective rent of $12.91, falling short of the nationwide average of $16.39 during 2015.

GlobeSt.com: What does it say when tenant effective rent increases by a lower percentage than landlord effective rent, like it did in both markets?...

Have We Hit Peak Office Rents?

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2016 Savills Effective Rent Index
National Office Sector Report (Q1 2016)