The overall office market in Los Angeles County showed continued strength during the first quarter of 2018 despite a quarter-over-quarter decline in the asking price of Class A office rent.

Countywide net absorption – the net change in occupied space over a period of time – turned positive at nearly 112,700 square feet as the vacancy rate fell to 14.2 percent from 15 percent during the fourth quarter of 2017. The net absorption rate rose despite nearly 2.2 million square feet of office space under construction in the county, with nearly half of it on the Westside – Culver City in particular (see L.A. Rising, page 25).

Total office inventory throughout L.A. County rose 0.7 percent, or 1.3 million square feet, to nearly 193 million square feet in the first quarter compared with the previous quarter.

Net absorption turned positive in downtown Los Angeles, the San Gabriel and Santa Clarita valleys and the Westside in the January-through-March period. Class A rents rose five cents on average countywide compared with a year earlier to $3.67 per square foot.

Planting flags

The emergence of Hollywood as a top office destination gave it the county’s most eye-popping numbers. The submarket’s vacancy rate tumbled to 9.4 percent, down more than five percentage points from the previous quarter. Meanwhile, Class A rents soared to $5.57 per square foot.

Jones Lang LaSalle Inc., which provided the first-quarter office market statistics, has begun to count inventory under construction in its rent calculations. The pending new space comes on the higher end and has pushed Hollywood’s average asking Class A rent up, according to David Eberling, a JLL spokesman.

Hollywood’s net absorption nearly tripled to 157,000-plus square feet, while there was nearly 426,000 square feet of office space under construction. The neighborhood has attracted companies such as Netflix Inc. and WeWork.

“This is an era of flag-planting tenants,” said Josh Wrobel, managing director at JLL. “Netflix has planted its flag in Hollywood.”

Other noteworthy flag planters during the first quarter include Apple Inc., which agreed to lease 128,000 square feet of space at Lincoln Property Co.’s 8777 Washington Blvd. in Culver City. Amazon.com Inc.’s entertainment wing, Amazon Studios, signed a 75,000-square-foot lease for office space at Hackman Capital Partners’ Culver Steps development, also in Culver City.

The changes in consumer shopping habits provided one of the biggest stories for the county’s commercial real estate in the first quarter.

Hudson Pacific Properties Inc. last month announced it plans to convert the Westside Pavilion to mostly office space by 2021. The mall has been struggling for years in the face of e-commerce as well as nearby competitors such as Santa Monica Place and Westfield Century City.

“It’s great real estate, but it was never merchandised well enough to survive as a retail operation,” said Andrew Turf, a senior vice president at CBRE Group Inc.

The Westside continued to be among L.A. County’s strongest performers as its office vacancy rate fell to 13 percent from 14.8 percent during the previous quarter. Century City boasted the Westside’s lowest vacancy rate at 7.6 percent, as its net absorption turned positive at more than 193,000 square feet.

Net absorption turned positive in several other Westside submarkets, including Beverly Hills, Century City and Culver City. Santa Monica’s net absorption slipped, but remained positive at roughly 67,500 square feet. More than 140,000 square feet of office space is under construction in that city.

Potential storm clouds on the horizon include rising interest rates as well as the possible impact of mergers and acquisitions on office real estate.

Walt Disney Co.’s proposed $52 billion acquisition of 21st Century Fox’s film and television studios may bring a “change in Fox’s occupancy in Century City,” said Josh Wrobel, managing director at JLL.

Downtown’s resurgence

Downtown’s vacancy rate ticked downward to 16.7 percent in the first quarter as net absorption turned positive at nearly 123,000 square feet. More than 176,000 square feet of office space is under construction in the downtown area.

The area has become more popular among tech companies such as Evite and Uber Technologies Inc., which have signed leases there, the former at 600 Wilshire Blvd. and the latter at the Times Mirror complex.

“The market has been extremely hot in the sector that caters to creative office tenants,” said Andrew Tashjian, a broker at Cushman & Wakefield.

Still, traditional office tenants such as law firms are looking to modernize their work places, Tashjian noted.

“So many firms are still getting rid of their law libraries and other inefficiencies and moving to more of a collaborative layout,” he said.

The industrial market remained tight, though the vacancy rate in L.A. County tipped up to 1.4 percent in the first quarter. Countywide, industrial rents rose six cents from a year earlier to 82 cents per square foot. The South Bay was the most expensive at 92 cents a square foot, up 10 cents year over year.

Brokers said industrial tenants so far aren’t balking in significant numbers at landlords’ increased rent demands.

“Tenants have not at all had any change in their demand based on this price change,” said Zac Sakowski, an executive vice president at JLL. “It’s a pay-to-play mentality and they’re doing it.”

SUBMARKETS

Downtown

Downtown’s office vacancy rate tightened in the first quarter to 16.7 percent from the fourth quarter’s 17.2 percent. The vacancy rate rose 0.5 points from a year earlier. Class A rents were flat over the quarter, but slipped four cents year over year to $3.51 per square foot on average. Net absorption turned positive over the quarter to nearly 123,000 square feet.

Main Events

1. Cerberus Capital Management bought the 21-story, 476,000-square-foot Wedbush Center at 1000 Wilshire Blvd. for $196 million from Lincoln Property Co.
2. Bank of America Corp. expanded its lease at Bank of America Plaza at 333 S. Hope St. to 218,000 square feet. Brookfield Office Properties Inc. owns the 55-story, 1.4 million-square-foot property.
3. Seyfarth Shaw signed a long-term lease for 58,000 square feet at the Figueroa at Wilshire building at 601 S. Figueroa St. The 52-story, 1.1 million-square-foot office tower was built in 1990 and is owned by Brookfield Office Properties Inc.
4. MWest Holdings bought the Santa Fe Lofts, an 11-story, 132-unit apartment building at 121 E. 6th St., for $68.5 million from Capital Foresight.

Hollywood

Hollywood’s office vacancy rate tightened noticeably in the first quarter, dropping to 9.4 percent from 14.8 percent in the prior quarter and 17.3 percent in the year-earlier period. Class A rents soared $1.10 from the previous quarter to $5.57 per square foot, and rose $1.08 from the year-earlier period. Net absorption was 157,000 square feet. The area had nearly 426,000 square feet under construction.

Main Events

1. Entertainment marketing agency Trailer Park signed a lease for nearly 103,000 square feet at 6922 Hollywood Blvd. Hudson Pacific 2. Properties Inc. owns the 205,000-square-foot office property, which was built in 1966.
2. Valdoro Development bought La Brea Sunset Plaza at 1523-1543 N. La Brea Ave. for $10.3 million from investor Dee Dee Schneider. The two-story, 18,000-square-foot retail property was built in 1978.
3. F.O.M.M. Inc. sold 1612-1616 N. Cahuenga Blvd., a one-story, 7,200-square-foot retail space, for $6 million to investor Parviz Nadjat-Haeim.

Westside

Westside office vacancies fell to 13 percent in the first quarter, dropping from 15.7 percent in the year-earlier period. Culver City had the highest vacancy rate at 23.6 percent, pushed up by more than 545,000 square feet of office space under construction (see related L.A. Rising, page 25). Santa Monica saw its office vacancy rate rise to 12.9 percent in the first quarter compared to 12 percent in the previous quarter. The beach city was the most expensive Westside community on office space at $6.16 per square foot, up 17 cents from the fourth quarter of 2017.

Main Events

1. Maguire Investments and DivcoWest sold the 260,000-square-foot Water’s Edge campus at 5510-5570 Lincoln Blvd. in Playa Vista to a joint venture of Marshall Property Development and Rockwood Capital for $190 million.
2. CIM Group purchased the 93,000-square-foot Union Bank building at 9460 Wilshire Blvd in Beverly Hills for $132 million from Universal Properties Inc.
3. LVMH Moet Hennessy Louis Vuitton Inc. purchased a 6,200-square-foot retail building at

456 N. Rodeo Drive in Beverly Hills for $110 million from the Palm Beach, Fla.-based Sterling Organization, which had bought it the day before for $55 million.

Santa Clarita Valley

Santa Clarita Valley’s office vacancy rate rose to 11.6 percent in the first quarter from 11.4 percent in the previous quarter, but fell from 12 percent in the year-earlier period. Class A rents rose two cents from the previous quarter to $2.80 a square foot. Net absorption was 12,341 square feet.

Main Events

1. Massachusetts Mutual Life Insurance Co.sold The Commons at Valencia Gateway, a two-building, 154,000-square-foot office complex at 25124 and 25152 Springfield Court in Valencia, for $33 million to Harbor Associates.
2. Dedeaux Properties sold a 45,000-square-foot retail property at 23300-23314 Valencia Blvd. in Valencia to Ramin and Kathrine Partovy of Beverly Hills for $9.8 million.
3. Linden Apartments purchased the Valencia Entertainment Center, a 32,000-square-foot retail space at 23460 Cinema Drive in Santa Clarita, for $9.2 million from BRAD Management.

San Fernando Valley

The San Fernando Valley’s office vacancy rate rose to 11.9 percent in the first quarter from 11.7 percent in the previous quarter, but fell from 13 percent in the year-earlier period. Class A rents dropped a penny to $2.78 a square foot from the previous quarter. There was 218,267 square feet under construction.

Main Events

1. Blackstone Group purchased IMT Sherman Circle, a 354-unit apartment building at 14500 Sherman Circle in Van Nuys, for $115 million from IMT Capital.
2. Sandstone Properties purchased Warner Atrium, 128,000 square feet of office space at 6400 Canoga Ave. in Woodland Hills, for $27.8 million from Unilev Capital Corp.
3. SPI Holdings bought the Warner Villa Apartments, a three-story, 324-unit multifamily complex at 5807 Topanga Canyon Blvd in Woodland Hills, for $96.5 million from Universal Properties Inc.
4. Mary Aharonian sold the 33,000-square-foot Facey Medical Center at 11155-11165 Sepulveda Blvd in Mission Hills to Nathan Rubinfeld for $13.7 million.

Tri-Cities

Office vacancies continued to climb in the Tri-Cities submarket of Burbank, Glendale and Pasadena to 14.8 percent in the first quarter compared to 13.6 percent in the previous quarter and 12.6 percent from the year-earlier period. Class A rents fell three cents from the fourth quarter of 2017 to $3.10 a square foot. Net absorption remained negative across the submarket at 353,616 square feet, with nearly three-quarters of it coming from Glendale.

Main Events

1. JPMorgan Chase sold a 235,000-square-foot office building at 888 E. Walnut St. in Pasadena to ACCO Engineered Systems Inc. for $112 million.
2. Lincoln Property Co. of Dallas sold three Burbank office properties at 303 N. Glenoaks Blvd., 333 N. Glenoaks Blvd. and 300 E. Magnolia Blvd. to Intercontinental Real Estate Corp. for $123.5 million.
3. Rexford Industrial Realty Inc. sold the Rexford Creative Campus, a 25,000-square-foot office space at 700 Allen Ave. in Glendale, for $10.9 million to investor Razmik Hovsepian.

Wilshire Corridor

The Wilshire Corridor’s office vacancy rate rose to 17.8 percent in the first quarter from 17 percent in the previous quarter and 17.3 percent in the year-earlier period. Class A rents rose to $3.10 a square foot, up five cents from the fourth quarter of 2017 but fell 40 cents from a year ago. Net absorption turned negative at 78,212 square feet.

Main Events

1. The Buchwald talent agency signed a 10-year lease for nearly 15,000 square feet at 5900 Wilshire Blvd. Ratkovich Co. is the landlord of the 30-story, 493,000-square-foot office building.
2. Jade Enterprises purchased the 20-story, 207,000-square-foot office tower at 6420 Wilshire Blvd. on the Miracle Mile for $96 million from TA Realty.
3. Entertainment content studio Stun signed a lease for 22,000 square feet at 6420 Wilshire Blvd. as well as a 5,000-square-foot soundstage in Culver City.

South Bay

The South Bay’s historically tight industrial market saw more relief in the first quarter with vacancies increasing to 1.5 percent from 1.2 percent in the prior quarter. Nearly 256,000 square feet is under construction in the submarket, while 1.8 million square feet was either sold or leased, about half the deal volume from the prior quarter. Rents jumped 10 cents year over year to 92 cents a square foot. The submarket’s office vacancy rate rose to 15.6 percent in the first quarter from 14.5 percent the previous quarter.

Main Events

1. Bell Partners Inc. bought Bell South Bay, a 264-unit, 210,000-square-foot apartment complex at 11622 Aviation Blvd. in Inglewood, for $123 million, or nearly $466,000 per unit, from Fairfield Residential.
2. Beacon Capital Partners purchased two office properties at 5220 and 5230 Pacific Concourse Drive in Los Angeles for $42.5 million from LBA Realty.
3. Dynasty Footwear sold a 111,000-square-foot warehouse at 202 N. Nash St. in El Segundo for $43.1 m

San Gabriel Valley

The San Gabriel Valley’s industrial vacancy rate rose slightly to 2 percent from 1.8 percent in the prior quarter and 0.8 percent in the year-earlier period. Rents remained at 72 cents a square foot, up 12 cents from the first quarter of 2017. Nearly 2.2 million square feet was sold or leased. More than 861,000 square feet was under construction.

Main Events

1. Positive Investments Inc. bought Towne Centre office building, an eight-story, 83,000-square-foot property at 150 N. Santa Anita Ave. in Arcadia, for $25.6 million from the Farazian Family Trust of San Jose.
2. Charles Co. of West Hollywood sold a shopping center containing two retail properties at 2204-2216 Foothill Blvd. and 2204-2278 Foothill Blvd. in La Verne for $20.7 million to Chang Shu of Arcadia.
3. First California Investment acquired two properties, 1.14 acres of land and 108,000 square feet of office space at 801 Corporate Center Drive in Pomona for $19.9 million from Positive Investments Inc.