The sputtering economic recovery fractured the commercial real estate market in Los Angeles County in the third quarter.
Vacancy rates rose in regions that showed signs of revival earlier this year, while submarkets that cater to the thriving technology and media industries continue to see improvements.
Though the market absorbed office space, brokers said the small decline in vacancies was only a nominal upturn. With national and county unemployment rates still high and economic uncertainty growing again, they don’t expect much improvement over the next year.
“There’s a lack of confidence in the market that has seeped into the minds of everybody out there,” said Jim Kruse, senior managing director at CBRE Group Inc. in Century City. “It has caused a lot of people not just to tap the breaks, but to put the breaks on.”
The office market absorbed more than 350,000 square feet in the third quarter, dropping the vacancy rate seven-tenths of a point from the previous quarter to 17.9 percent, according to Jones Lang LaSalle Inc. Class A asking rents rose one penny to $2.79.
But countywide improvements belie the dismal prospects of many submarkets. Hollywood, for example, sputtered during the quarter, returning more than 51,000 square feet to the market. The neighborhood’s vacancy rate rose 2.5 points to 29.2 percent, the highest in the county aside from only the Marina del Rey and LAX areas, two traditional weak spots.
Meanwhile, media companies that may have once crowded Hollywood are flocking to the Westside’s creative office spaces with exposed ceilings and concrete floors. The region’s vacancy rate dropped to 17.2 percent thanks to an influx of technology and new-media firms seeking a beachside address.
With technology and new-media companies continuing to gobble up space, Kruse said he expects those industries to lead any future recovery.
“If there’s anything that is going to drive L.A.’s economy, it’s going to be tech and media,” he said.
Also showing improvement was the downtown submarket, which absorbed nearly 102,000 square feet. The vacancy rate dropped to 15.6 percent as the area’s professional service firms were comfortable signing longer 10- and 15-year deals.
For example, in the area’s largest lease of the quarter, Skadden Arps Slate Meagher & Flom LLP signed a 10-year renewal for 156,000 square feet at One California Plaza.
Mark Sullivan, executive vice president at the downtown office of Studley Inc., said that the relative predictability of the market helped ease tenant concerns about signing such deals.
“When the market’s predictable, it’s easier for people to step up and make long-term commitments,” he said. “We had been in an extremely volatile market, and what you weren’t hearing was status quo.”
Meanwhile, the industrial market has remained more unpredictable. Countywide, the vacancy rate increased to 5.3 percent, up from 5 percent the previous quarter, and asking rents rose one cent to 51 cents.
Things aren’t looking up for the South Bay, which saw its logistics companies and warehouses hurt by a decline in holiday cargo traffic. Retailers, afraid consumers will not spend, are bringing in fewer goods from Asia. The area’s vacancy rate rose to 6.2 percent from 5.8 percent in the second quarter.
One market that remains strong is investment purchases.
In the largest sale of the quarter, engineering firm Parsons Corp. sold its building at 100 W. Walnut St. in Pasadena to Morgan Stanley Real Estate Investing and Lincoln Property Co. in a lease-back deal valued at $320 million.
The Santa Clarita Valley also completed its largest property sale of the last few years. The 194,000-square-foot Valencia Corporate Plaza was sold to Pacific Office Properties Trust Inc. for $31 million.
But Steve Solomon, managing director with Jones Lang LaSalle, said much of the deal-making is being driven by buyers taking advantage of low prices to snatch up property that can be renovated into trendy creative office space.
“If a building’s not leased, they can reposition it as a cool creative building and lease it up at nice rents,” he said. “There’s a limited amount of supply on the market that’s quality.”
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