Office Market Recovers in Healthy Second Quarter

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Office space in Los Angeles County turned a new leaf in the second quarter, when the vacancy rate fell and net absorption headed into positive territory after a first quarter that saw the industry’s worst performance in over a year.

The market absorbed 621,674 square feet of office space while the vacancy rate declined to 14.9 percent, according to data from Chicago-based Jones Lang LaSalle. That was a stark change from the 293,473 square feet put back on the market in the first quarter, when the vacancy rate was 15.2 percent.

“What’s interesting about this quarter’s activity is that it came from multiple markets,” said Tony Morales, executive managing director at JLL. “Sometimes when we see positive absorption, it tends to be biased in one market. Here, the absorption came from across the base.”

Hollywood, the South Bay and Westside all saw an uptick in office activity.

Real estate analysts said the second quarter’s results align with robust economic activity in the L.A. area and follows a pattern of recent years where a slow first quarter is followed by a busier second quarter.

Average monthly rent for Class A office space remained largely unmoved at $3.63 a square foot.

Eric Kenas, research market director at Chicago-based Cushman & Wakefield, said in an e-mail that asking rates “will maintain strong, with some markets showing greater increases.”

He said the central and southern county likely would jump more than other areas.

About 1.92 million square feet of office space were under construction in the county in the second quarter, up from the first quarter’s 1.68 million square feet.

Westside story

L.A.’s Westside market bounced back in the second quarter with 281,489 square feet taken off the market, alongside a 14.3 percent vacancy rate. Asking rents continued to be the highest in the county, rising to $4.96 a square foot from $4.87 in the previous period and $4.76 a year ago, driven largely by high demand in Silicon Beach.

That push was led by Marina Del Rey, which saw a one-year increase of 67 cents to $4.50 a square foot, and Playa Vista, which jumped 80 cents to $5.65 a square foot. Playa Vista’s asking rent was second only to Santa Monica’s, which at $5.78 a square foot was the highest in the county.

The increase didn’t offset the first quarter’s absorption deficit, however.

“Even though absorption is negative year to date, leasing still remains strong and above the average in the past few quarters,” said Vincent Chang, associate market director at Cushman.

The Westside had the highest volume under construction in the second quarter with 1.17 million square feet, surpassing other submarkets by more than a half-million square feet. Santa Monica Gateway and the Pen Factory were two of those construction projects, both set to be delivered by the end of the year.

In Santa Monica’s biggest acquisition deal in the period, Santa Monica-based Douglas Emmett Inc. and the Qatar Investment Authority jointly paid $353 million for office buildings at 1299 Ocean Ave. and 429 Santa Monica Blvd., containing a total of 293,000 square feet.

On the leasing front, Compton’s Henkel Corp. and London-based Dentsu Aegis Network were among others that contributed to the positive absorption on the Westside as each signed deals for 49,000 square feet at Culver City’s Culver Pointe business park.

Risky business

Experts warned, however, that the county office market can be volatile.

“There are a lot of inner movements within submarkets that tend to offset the stats as well,” Kenas said. “So we have seen some good leasing activity, but overall, one big move in or out can change this quarter over quarter.”

El Segundo took one of the biggest hits to absorption in the second quarter, giving back 110,402 square feet of space after absorbing 39,622 square feet in the first quarter. Yet rents were still on the upswing, rising 20 cents to $3.18 from a year earlier.

“El Segundo is really driving the South Bay, and the best projects and newly created adaptive reuse campuses are experiencing the most significant spikes in rents,” said Tina Arambulo, Cushman & Wakefield’s industrial research director for Los Angeles. “Even with the spike in rents, they are still significantly lower than the competing (Westside).”

Downtown L.A.’s negative absorption saw 100,674 square feet returned to the leasing pool while its vacancy rate was virtually unchanged from the previous quarter and year-earlier period at 16.3 percent.

Editor’s Note: This story has been updated to correct the name of the company and add the title of Tina Arambulo.

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