The Los Angeles County office market held steady in the fourth quarter, showing incremental gains in occupancy levels without any dramatic leaps. Steady improvement, even at a glacial pace, is becoming the postrecession norm.
“We’re starting to get some lift, but it’s not like the arrow is pointed straight up,” said Jim Kruse, senior managing director at commercial real estate services firm CBRE Group Inc. in Century City. “It’s like we’ve gotten off the runway but we haven’t raised the landing gear yet.”
Part of the drag in late 2012 was hesitancy about the global economy, the presidential election and the year-end “fiscal cliff,” said Connie Hwang, regional research director at Avison Young Inc. Another lingering factor is the overhang of empty space that traditional banking, finance and legal firms have been sitting on since the recession.
Taking up the slack have been entertainment, media and technology firms, which have been seeking the shared workspace and open floor plans of creative office buildings, mostly on the Westside and in the Burbank media district, Kruse said.
Landlords who attract those users are doing much better in boosting occupancy than those with traditional spaces that typically appeal to business service firms in sectors such as real estate and insurance. Those companies have not fully replenished their staffs since the recession and many are still not using from 10 to 15 percent of their space.
“The downturn allowed the market to recalibrate and forced companies to reconsider what amount of employees” they needed, Hwang said.
Overall, the county office market absorbed 118,530 square feet in the fourth quarter and took 1.2 million square feet off the market in 2012, according to data from Jones Lang LaSalle Inc. That’s down from 1.8 million square feet in 2011, when the market was first registering the recovery.
The county closed the year with an overall vacancy rate of 17.5 percent, the same level as in the prior quarter and three-tenths of a point lower than the year-ago period. Class A asking rents in the fourth quarter of 2012 rose four cents to $2.91 from $2.87 the previous quarter. Asking rents were up 14 cents from a year ago, when they were at $2.77.
The Westside office market gave back 2,687 square feet during the quarter but asking rents increased four cents to $3.77 in what is already the priciest office market in the county. The vacancy rate in the submarket stayed flat at 17 percent.
Nevertheless, demand is still high, particularly for creative space, said Chris Cooper, managing director for Avison Young’s Southern California office. “Rates in Century City are starting in the high $3 range and we’re even seeing some deals at $5 and higher,” he said.
Companies already ensconced on the Westside are staying put: Imax Corp. renewed its 65,000 square feet on Exposition Boulevard in Santa Monica. Digital branding firm Red Interactive Agency expanded to 30,000 square feet on Ocean Park Boulevard, also in Santa Monica. That submarket saw 168,000 square feet absorbed and vacancy rates plummet to 12.1 percent from 14.2 percent the previous quarter. Rents in Santa Monica lead the region at $4.73, up nearly 50 cents from a year ago.
As that market tightens, companies are looking for space in adjacent neighborhoods including Playa Vista, Culver City and Marina del Rey. Real estate technology firm Equator LLC renewed its 50,000-square-foot lease in the Howard Hughes Center in the fourth quarter.
While the Westside market held constant, pushing some companies further south in their search of affordable space, a return of more than 133,000 feet to the suburban Long Beach market offset an otherwise healthy fourth quarter in the South Bay.
Downtown Los Angeles saw net absorption of 3,000 square feet, a small gain but the first positive numbers that submarket has posted in a year. The fourth quarter vacancy rate downtown was flat at 17.8 percent compared with the prior quarter and slightly higher than the17.4 percent posted in the year-earlier period. Fourth quarter asking rents rose a penny to $3.16 from the prior period and were two cents lower than the year earlier.
The market is still in transition mode, Kruse said, with a younger demographic interested in living and working downtown and buying up the residential units that have come on the market in the past five years.
“We need a couple of the larger tech firms to move into downtown and take advantage of the under-35 employee base, the infrastructure and the transportation. The area has the potential to become something like the meatpacking district in New York City or the arts district in San Francisco,” said Jonathan Larsen, regional managing principal at Cassidy Turley. “Someone with 500 employees could get space there for much less than they would pay on the Westside.”
The Tri-Cities market saw 378,000 square feet absorbed and its vacancy rate drop to 15.9 percent in the fourth quarter, while the San Fernando Valley presented a mixed bag. Vacancy rates there went up across the board but some markets, like the Central Valley, were still relatively tight at 12.7 percent. The West Valley, where large tenants were hurt by the recession, still has a vacancy rate at 19 percent, though it saw 48,500 square feet taken off the market in the fourth quarter.
The slow recovery rate and continued high vacancy rate across the region means that it’s still a buyer’s market, said Steve Solomon, managing director at Jones Lang LaSalle.
“The only time you see rents spike is when you get under 10 percent vacancy rates. We’re not there yet,” he said.
Kruse is optimistic that 2013 is shaping up to be a stronger year.
“There are no more election-year debates. People are setting aside the distractions and getting back to business,” he said.
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