The Los Angeles County office market continues to improve, but the third quarter wasn’t exactly stellar.
In fact, brokers were more likely to describe it as uneven.
In many ways, the fortunes of the county were split in two: Areas such as the Westside benefited from the growth of creative firms, while downtown Los Angeles and other markets popular with more traditional companies struggled.
“There are some premier markets where we’re starting to experience some real strengthening. It’s all fueled by tech, entertainment and media,” said Jim Kruse, senior managing director at commercial real estate services firm CB Richard Ellis in Century City. “There are still some (areas) that are struggling – finance, insurance and real estate are overspaced.”
Overall, the county office market absorbed 145,000 square feet in the quarter and has gobbled up 1.1 million square feet of space this year, according to data from Jones Lang LaSalle Inc. Still, the vacancy rate was stagnant at 17.5 percent and Class A asking rents dropped one penny to $2.87.
The Westside office market – which includes the bustling tech hub of Silicon Beach as well as West Hollywood – absorbed 51,000 square feet during the quarter. Already the priciest office market in the county, asking rents increased three cents to $3.73.
Vacancy rates in the submarket actually increased, however, due largely to the newly opened Pacific Design Center in West Hollywood, which sits mostly vacant.
Kruse said there is nonetheless demand for creative space that is priced right, as media and technology firms seek out beachside locales and trendy digs with exposed pipes, on-site cafeterias and open spaces. One such place is the Reserve – a converted post office distribution center in Playa Vista that will house the likes of celebrity gossip outlet TMZ when it opens next year.
Then there’s Demand Media Inc. The online content creator signed a $23 million deal to move its headquarters into a 52,000-square-foot Santa Monica office formerly occupied by MTV.
“The product that is active is the creative space,” Kruse said.
For all the action on the bustling Westside, there was also positive net absorption in the South Bay, which was helped by satellite provider DirecTV Inc. starting its move into expanded headquarters in El Segundo. The submarket has also begun courting Silicon Beach firms driven south by increasing rents in Santa Monica and adjacent neighborhoods.
But the picture is entirely different in downtown Los Angeles, where 161,000 square feet of space came back on the market during the quarter, vacancy rates rose to 17.8 percent and asking rents dropped four cents to $3.15.
The market was in negative territory despite some megadeals, such as a 15-year, 135,000-square-foot lease signed by PricewaterhouseCoopers at 601 S. Figueroa St. But that transaction actually represented a net loss for downtown, since the accounting firm will downsize from 160,000 square feet in Two California Plaza at 350 S. Grand Ave.
That reflects the new normal for large firms that have emerged from the recession looking to cut costs and take up less space, said Jonathan Larsen, regional managing principal at downtown commercial real estate services firm Cassidy Turley.
“A lot of the corporate tenants are shrinking 10 to 20 percent and trying to fit more people in less space,” he said.
They’re doing it with some creativity of their own. For example, some are doing what is known as hoteling, in which a company uses less space by having employees work from home some days and use temporary workstations when they come into the office.
Besides downtown, another laggard was the Wilshire Corridor, where tenants in the Park Mile neighborhood put space back on the market as they fled to neighboring areas.
Still, some experts aren’t discouraged by the slow growth in the quarter. Larsen expects a pickup in deal activity next quarter as firms close year-end deals. Prospective tenants might also want to get ready to get back to business when the economy picks up steam.
“People are saying, ‘Let’s be optimistic,’” he said. “A lot of the companies are financially doing well – they may have less space and people – but they want to be prepared and ready to go and not distracted by their facilities.”
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