With interest rates staying low and talk of a real estate bubble remaining just that talk Los Angeles County's commercial real estate market kept sizzling in the second quarter.
Optimistic developers were building, buyers still able to get their hands on cheap money were purchasing, and companies bent on expansion were signing leases.
That was pretty much the case all over, but it was most striking in the 51.4 million-square-foot West Los Angeles office market, which saw its vacancy rate drop two points to 11.5 percent a big reason the larger county rate dropped more than a point, according to Grubb & Ellis Co.
"The current trend is vacancies shooting downward, and the real action is in West L.A.," said J.C. Casillas, research services manager for Grubb & Ellis. "The market as a whole is doing better and will continue to do so. There's new construction and people are taking large chunks of space."
In Santa Monica, Viacom Inc.'s MTV Networks signed a lease renewal in the quarter, expanding its 105,000-square-foot space at 2600 Colorado Ave. to 130,000 square feet at a cost of $46 million.
The deal, in the $3 per square foot range, was typical of the high price of lease transactions that was prompting some companies to look elsewhere. But with the city's vacancy rate plunging to 7.8 percent from 11.9 percent in the previous three months and 16.3 percent for the like period a year ago, it was what the market could bear.
Asking rents for Class-A office properties in Santa Monica rose to $3.37 in the April-June period, up from $3.19 in the first quarter and easily the highest amount in the county. Brentwood clocked in at $3.09 and all other markets were under $3.
Landlords were getting that kind of money, even though West Los Angeles has another 900,000 square feet coming on line in the next six to nine months.
Another sign of a still-sizzling market: the tiny Santa Clarita Valley office market saw its vacancy rate fall by more than half, to 3.4 percent, the lowest countywide. There, the hot housing market was creating demand for all sorts of professional services, such as insurance brokers and attorneys who need their own place to do business.
Overall, the countywide vacancy rate for office property dropped to 13 percent from 14 percent in the first quarter, as 1.6 million square feet of space was taken off the market with an equal amount under construction. A year ago, the vacancy rate was 15.7 percent.
Meanwhile, the lower vacancy rate was having its expected effect on asking rents, which rose to $2.48 for Class-A office properties countywide, up from $2.45 in the first quarter and $2.41 a year ago.
Landlords also were being stingier with concessions, such as tenant improvements and free rent. "The pendulum has swung to landlords' favor now," said Jim Kruse, senior managing director of CB Richard Ellis Group Inc. in Los Angeles.
Tenants trying to fight back by buying their own buildings ran into a problem. The low interest rates have kept a steady flow of capital chasing real estate, but there's little left to buy. And what was available didn't come cheap.
Typical of the prices seen in the second quarter, New York-based BlackRock Inc. bought a 32-story tower largely leased to Walt Disney Co. on Alameda Avenue in Burbank from Tishman Speyer Properties for $167 million, or $356 a square foot.
Even the chronically slow South Bay market is tightening somewhat. Credit some of that to refugees from the West Los Angeles market, as they seek to save close to a dollar per square foot in rent, Kruse said.
"There are a lot more users in the market now, and leasing is picking up," Kruse said. "There's been some large tenants looking for 40,000- to 150,000-square-foot spaces."
The surge in leasing activity could also be seen in a dramatic increase in L.A. County's net absorption the difference between the amount of space taken off the market by leasing and the amount put on the market.
In the second quarter, tenants absorbed 1.9 million square feet, up 50 percent from the first quarter and three times higher than a year ago. Two thirds of that activity was in West Los Angeles and a third of it downtown.
On the industrial side, the county's markets were even tighter, continuing to be dominated by extremely high demand from warehousing and distribution companies that are booming, along with the ports of Los Angeles and Long Beach.
Sales and leasing activity grew to 15.9 million square feet in the quarter, up from 12.2 million square feet in the previous three months.
Countywide, just 2.1 percent of the nearly 1 billion rentable square feet of industrial space was vacant, down from 2.2 percent in the second quarter and 2.9 percent a year ago. Industrial vacancy rates were as low as 1 percent in Central Los Angeles and 1.2 percent in the San Gabriel Valley, which has a particularly high concentration of Asian-owned import/export related businesses.
"Anything near the ports is hot. It's on fire, with logistics firms and distribution firms still looking for large warehouses. There's few options," Casillas said.
Those kinds of numbers have prompted developers to do what they can to put more product on the market.
In the Mid-Cities, which spans from Bell to La Mirada, that has meant that developers are seeking older buildings with sprinkler systems, leaky roofs and other problems that they can bring up to modern standards.
It also means that the handful of big industrial developments in the county, such as Grand Crossing in Industry and Gateway Pointe Industrial Park in Whittier are leasing up.
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