Office Rents Inch Up as Vacancy Rates Tighten

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Los Angeles County is skipping into the new year with office vacancies sliding down and rents creeping up.

The fourth quarter of 2016 ended with vacancy at 14.6 percent, according to data from Jones Lang LaSalle, continuing a downward trend across the past several years.

“That’s a healthy vacancy rate,” said Devon Parry, a senior research analyst at JLL. “All the markets are performing well and we’re still seeing rent growth.”

Average monthly rents have now hit $3.47 a square foot countywide, the highest they’ve been in about a decade. They seem poised for a slow but steady climb.

“I would expect to continue to see a little bit of rent growth, especially in the Class A sector, as vacancy stays low. The delivery of new product will inflate the rents, too,” Parry added.

Hollywood saw the greatest plunge in vacancy, dipping to 21.6 percent from 27.6 percent the prior quarter. The new vacancy rate – which still tops all others in Los Angeles – is mostly a result of new construction that has yet to be snatched up.

But the decline in the fourth quarter is beginning to show the reality of high demand in a once lackluster office market.

“It’s a false number because Hollywood is doing quite well and that’s why we’re seeing new development come to market,” said Parry. “It’s being absorbed rather quickly when it’s delivered.”

Viacom Inc., for example, is now occupying 180,000 square feet at just-renovated Columbia Square, for which it signed an 11-year lease back in 2014. There now remain 760,779 square feet under construction in the submarket, including Hudson Pacific Properties’ Cue building, part of the Sunset Bronson Studios campus. Netflix Inc. signed a lease for the full building, nearly 92,000 square feet, this month.

Flying a bit under the radar – but holding strong – have been the Tri-Cities of Pasadena, Glendale, and Burbank. Vacancy is down to 11.6 percent, the lowest of any L.A. market.

Companies in these cities have grown organically and empty space has backfilled quickly. WeWork was one newcomer to the market in the fourth quarter, picking up 74,740 square feet at the Tower in Burbank.

Critical Content also moved in, taking 50,562 square feet at the Burbank Empire Center. The one hiccup in the trend happened in Pasadena, which put 55,212 square feet back on the market when Bank of America left its office at the Pasadena Financial Center.

The South Bay also experienced a dip in vacancy, declining to 16.9 percent from 17.9 percent in the prior quarter.

That drop mostly derived from El Segundo, the area’s largest submarket, with 10.2 million square feet. Average rents there budged a few cents higher in the fourth quarter to hit $3.06 – far above the South Bay average of $2.60.

Sitting on the border between the South Bay and Westside, El Segundo has drawn tenants looking to relocate or expand out of pricier submarkets such as Playa Vista or Santa Monica. It will likely retain that appeal, particularly as developers take on creative conversions of Class B offices. Lincoln Property Co. and Rockwood Capital did just that in November with their $120 million purchase of Gateway El Segundo, an office park with 355,000 square feet.

“We think long term that the market has a lot left to improve,” said Rob Kane, Lincoln’s senior vice president, at the time of the sale.

All told, the South Bay absorbed 282,438 square feet of office space.

Activity is likely to heat up in the next couple of quarters on the Westside, which has 1.3 million square feet of office space under construction. At Tishman Speyer’s Brickyard project in Playa Vista, Loyola Marymount University is considering taking a lease for 50,000 square feet at $5.50 a square foot, according to a source familiar with the property. That rate would be among the highest on the Westside, where the average monthly rent is $4.83 a square foot.

Tight industrial

L.A.’s industrial vacancy rate did not budge in the last quarter, staying at an extremely tight 0.9 percent. Without new supply to help companies move or expand, just 10.7 million square feet were sold or leased, compared with 15.5 million a year ago.

Monthly rents are getting pushed up as a result, hitting 75 cents a foot in north Los Angeles and as much as 77 cents in the South Bay.

“Landlords have complete leverage,” said a Newmark Grubb Knight Frank report, pointing out that asking rents are now higher than their prior high point in 2008.

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