Westside Tech, Entertainment Tenants Brighten Up Dreary Quarter

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You don’t have to go back far to see the Los Angeles County office market looking better.

This time last year, vacancies were lower, asking rents were higher and the office market absorbed more space – though those gains were mostly erased when the market fell into the summer doldrums and then entered a free fall in the fourth quarter.

There are still the familiar head winds of sluggish hiring, political uncertainty and the Eurozone crisis to sober up landlords, brokers and tenants alike. But now, halfway through the year, the office market is again muddling along in slow recovery, tacking on two consecutive quarters of decreasing vacancies and positive net absorption.

The bright spots are particularly prevalent on the Westside, where entertainment and tech firms continue to look for creative office space. The sprawling region accounted for the majority of absorption in the quarter, leading the county into positive territory. And it wasn’t the tech hotbed of Santa Monica driving it all – the pricey city actually saw some tenant departures – but nearby submarkets from Beverly Hills to Playa Vista.

“The Westside continues to show promising firmness,” said Chris Cooper, managing director at the Westwood office of brokerage Avison Young. “Creative space remains in demand. And where there’s spillover from Silicon Beach, vis-a-vis Santa Monica, the demand remains there as well. Century City and West L.A. remain very promising.”

The Westside took 253,000 of the 374,000 square feet that the countywide market absorbed during the quarter. It also posted the county’s second lowest vacancy at 16.3 percent, more than a point under the county’s total, according to Jones Lang LaSalle Inc. As would be expected, it commanded the highest rents, at $3.70 per square foot, compared with a county average of $2.88.

While rents increased 14 cents across the county for the quarter, brokers said it’s still a renter’s market, outside of Santa Monica. Vacancy rates remain high in submarkets ranging from the Wilshire Corridor’s 18.2 percent to the South Bay’s 20.8 percent. And while many submarkets merely treaded water last quarter, Pasadena surprisingly accounted for about one-third of the county’s positive net absorption as a series of small leases added up in the City of Roses.

Changing sentiment

Though brokers are still cautious after last year’s fourth quarter collapse, many said outlook among tenants remains more positive compared with the deep recession of 2008, when many lease seekers were only looking for month-to-month or one-year deals.

Still, there is apprehension about signing long-term leases, as employers are uncertain about growth. The county’s unemployment rate is hovering around 12 percent. The slow hiring cycle is keeping office markets at bay nationwide, even in New York’s Manhattan, where leasing activity has slowed well below its 10-year average and the vacancy rate is 9 percent, according to a report.

In the face of such uncertainty, some tenants took smaller spaces. For example, CBS Television Distribution signed a five-year lease for 53,000 square feet at the Water Garden office complex in Santa Monica, a step down from its 70,000-square-foot space across town at the Colorado Center.

Rather than bear the costs of moving, other firms are choosing renewals. The biggest lease deal in downtown Los Angeles during the second quarter was a 10-year renewal for 160,000 square feet signed by law firm Lewis Brisbois Bisgaard & Smith LLP.

Though downtown failed to deliver big new leases, buyers did step in to buy property in the area. Prices remain low compared with urban centers around the country despite the sharp growth of 20-somethings and young professionals increasingly making the neighborhood their home.

Institutional investors and high-net-worth buyers are aware of the good deals, too, said Bob Safai, a founding partner at West L.A. brokerage Madison Partners, who noted yields on 10-year Treasury bills have been driven down to under 2 percent by investors taking a flight to safety.

“There are a lot of people looking to place money,” Safai said. “But corporate America is being thoughtful about how they’re going to grow. We’re not out of the woods yet.”

Still, as far as big lease deals go, there’s a lot of money on the sidelines. With the presidential elections still months from resolution and the Eurozone crisis lingering on, Cooper said the caution is likely to continue through the end of the year.

“A lot of people are in wait-and-see mode,” he said.

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