While first quarter vacancies in the Los Angeles County office market remained unchanged from the previous quarter, asking rents in what has very much become a landlord's market continued their upward climb.
The countywide vacancy rate stood at 9.5 percent in the first quarter compared with 11 percent a year ago, according to Grubb & Ellis Co. That's the lowest level since the commercial real estate services company began tracking the market in the mid 1980s.
Even more impressive was a 14 percent jump in average asking rents for Class A space in the past year to $3 a square foot. Class B tenants also are feeling the pinch: asking rents for older office properties also are up another 9 percent to $2.29.
"We're in an interesting time right now because there is a huge pushback from landlords to raise rents," said Brent Mirkin at CB Richard Ellis Group Inc. "At this point we haven't seen enough executed leases to indicate whether they're getting their asking rents, but a lot of the new owners have the ability to wait to make these rates."
Santa Monica is the priciest market in the county, with Class A asking rents skyrocketing 31 percent over the past year to $5.17 a square foot. In downtown L.A., technology company Oversee.net agreed to pay $3.37 per square foot it moves into a 45,000-square-foot space at City National Plaza this summer. That's well above downtown's $2.89 average asking rent during the quarter.
And despite the addition of 780,000 square feet of space in Century City with the opening of 2000 Avenue of the Stars at Century Park, rents in the submarket are up 16 percent to $3.62, an indication of the intense demand for a Westside corporate address.
"The people who need to be on the Westside are going to stay put and pay the prices," said J.C. Casillas, client services manager at Grubb & Ellis.
Los Angeles' demand-supply imbalance not only is requiring brokers to be more creative in locating space for prospective tenants but is causing sticker shock for existing tenants.
"It's a difficult climate to make a deal in, because there's a further gap between where a tenant has been paying and where they need to pay based on all the sales that have been going on," said Peter Best, managing director of Jones Lang LaSalle Americas Inc. "Many of the new owners are not your traditional real estate owners. They're commodity buyers. Now it's a matter of how far they can drive price."
That situation is only likely to worsen as Arden Realty Inc. sells pieces of its portfolio in one of the most highly anticipated deals of the year to date. Initial bids on 34 properties that the real estate company has on the market were due April 20, with deals likely to be struck by last spring or early summer.
Prices like those are putting pressure on suburban tenants, too. Up more than 20 percent to $3.18, Pasadena rents are close to what Santa Monica's landlords were asking a year ago. In Burbank, where the vacancy rate has plunged to 3 percent from 7.3 percent, rents are up 13 percent to $3.10.
Even Glendale, which has suffered from defections by some major tenants, saw some recovery in the quarter with Class A rents up 9 percent from a year ago $2.71. That accompanied a drop in the vacancy rate to 14.7 percent, compared with 16.2 percent in the fourth quarter, though that still lags its Tri-Cities neighbors.
Rent inflation is even hitting El Segundo and the surrounding beach cities, which have become the escape valve for businesses that want to be on the Westside but can't afford to. Rents are up 7 percent to $2.36.
That's not surprising given that El Segundo continued to see the greatest net absorption of any submarket, with 310,093 square feet leased during the quarter. The bulk of the space was taken by Northrop Grumman Corp, Raytheon Co. and MD Synergy.
Landlords looking to flip both properties and land also are benefiting from Westside's popularity. ScanlonKemperBard Cos. sold Culver City's Corporate Pointe for $51.3 million after buying it only two years ago for $39 million, making some cosmetic upgrades and bringing up the occupancy rate to 85 percent.
In one of the highest prices paid per square foot for land in Santa Monica, NMS Properties Inc. purchased the 3.3-acre Santa Monica Studios site for $27 million $189 per square foot of land and $359 per square foot of building and plans to build a mixed-use development there. Molasky Pacific Properties LLC assembled the parcel in 2004.
"Unlike the last cycle, where you would have been seeing a lot more cranes in the air by now, developers just can't find the land or get the entitlements in the Westside area," Best said. "What will be coming on line in the Playa Vista area will serve as a rental release valve, but the least expensive of that space is going to go for at least $3.50 a foot."
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