It was the year of the office market in Los Angeles County in 2005, and the fourth quarter did nothing to counter that notion.
Led by the Westside, North Los Angeles and downtown submarkets, the countywide vacancy rate for office property dropped to 11.4 percent from 12.2 percent in the third quarter and from 14.8 percent at the end of 2004, according to Grubb & Ellis Co.
That occurred as 1.4 million square feet of space was taken off the market and nearly that much was under construction. It underscored a recent report by CB Richard Ellis Group Inc. that found the Los Angeles office market among the most improved of any office sector worldwide last year.
The market saw the third-sharpest rises in rent and third-sharpest drop in vacancies of any major office market worldwide. Consider downtown: in the fourth quarter, downtown vacancies dropped to a little less than 15 percent compared to 19 percent a year earlier.
“In the office market, we’ve seen some real tightening now,” said Lewis Horne, executive managing director for CB Richard Ellis’ Greater Los Angeles office. “Even the South Bay, which has been the weakest market, is now starting to solidify.”
Santa Monica continues to be the priciest submarket for Class A office space, with the average asking rent of $3.48 per square foot, up nearly 11 percent from a year ago. Century City and Beverly Hills clocked in second and third at $3.02 and $2.98, respectively not surprising given that technology and entertainment companies continued to lead Westside leasing.
Among the biggest deals: Fox Interactive Media, a division of media giant News Corp., leased a 165,000-square-foot Beverly Hills office building at 407 N. Maple Drive owned by Tishman Speyer Properties LP. Terms of the deal were not disclosed, but assuming a standard 10-year lease and Beverly Hills asking rents of $3.25 a foot, the lease could be worth nearly $65 million.
Class A rents in the hottest areas are now closing in on the heights of the dot-com boom, and likely will surpass them in coming year, said J.C. Casillas, Grubb & Ellis’ research services manager.
One of the largest deals of the quarter took place in the South Bay, which has trailed the rest of the county since the collapse the region’s defense industry in the early 1990s but is ranked second largest in rentable space.
Defense appears to be leading the strengthening in that submarket. Northrop Grumman Corp.’s missile defense unit signed a five-year lease for 192,000 square feet in San Pedro with an estimated value of $23 million for building owner Tutor Saliba Corp. The new lease adds 32,000 square feet to an existing Northrop facility there, and comes on top of Northrop’s $12.5 million four-year lease for 216,617 square feet in El Segundo in June.
Even so, office vacancies in the South Bay only dropped to 18 percent from 20.6 percent a year ago. But the opposite is the case for that area’s industrial market, with increased import and export activities at the ports of Los Angeles and Long Beach filling the last available warehouse space there and little vacant land left to increase capacity.
“You’re talking about an industrial market in Los Angeles that’s virtually at 98 percent occupancy,” Casillas said. “And most of the land that’s available to build on, you’ve got residential developers looking at too, and bidding up the price.”
Port-related activities have helped drive asking rents up 20 percent to 65 cents a square foot, surpassed only by the 67 cents being sought in North L.A.’s significantly smaller industrial market.
“There’s less than 1 million square feet left to build on in the South Bay and most of that is going to be built out this year, so that just spills over into the rest of the region, ” Casillas said.
The hot commercial real estate market throughout the county continues to attract investors, with announcements in the quarter that more large office properties changed hands. Among the news: Developer Wayne Ratkovich in October agreed to pay close to $105 million to buy the 500,000-square-foot, 32-story People’s Bank building across the street from the Los Angeles County Museum of Art.
“There’s a tremendous amount of money chasing a limited amount of product,” said Joseph Faulkner, executive vice president for the Los Angeles office of Charles Dunn Co.
