Leasing activity remained generally lackluster across Los Angeles County in the third quarter as the countywide vacancy rate saw the slightest of dips and net absorption inched toward positive.
The county posted an office vacancy rate of 17.4 percent for the quarter, two-tenths of a point better than the prior period and one-tenth of a point better than the 17.5 percent posted in the year-earlier period. About a quarter-million square feet of inventory was taken off the 190 million-square-foot office market as the average per-square-foot asking rent moved upward 6 cents, to $2.98, over second-quarter levels, according to data gathered by Jones Lang LaSalle Inc.
The industrial market told another story, as the region’s position as an import-export hub kept that market essentially fully leased. Countywide, the industrial market boasted a 5.2 percent vacancy rate and an average asking rent of 54 cents a foot. The tightest market was central Los Angeles, which had a gaudy 3.4 percent vacancy rate on a market base of more than 190 million square feet. Asking rents in that submarket topped the region, coming in at 62 cents a foot, 6 cents higher than the year-ago period.
With the leasing market hewing to the status quo, the tale of the third quarter was investment activity, which was notable both for its volume and for prices that some of L.A.’s properties were able to attract.
“Almost counterintuitive to the office demand fundamentals is that investment sales activity in L.A. has been feverish,” said Arty Maharajh, vice president of research at Cassidy Turley Inc. “A number of large sales over $1 billion, typically reserved for a market like New York City, have either transpired … or will transpire in the near future.”
The quarter was bookended by the sale of MPG Office Trust, which announced in the second quarter that it had agreed to be purchased by Brookfield Office Properties Inc. for a deal valued at $430 million. That deal closed in early October and made Brookfield the largest holder of office space in downtown Los Angeles.
The biggest sales news of the quarter came in the form of an $858 million deal for the 2.8 million-square-foot City National Plaza, bought by CommonWealth Partners in a deal with Sacramento-based CalStrs and longtime investment partner Thomas Properties Group Inc.
On a per-square-foot basis, the priciest deal of the quarter was Lionstone Group’s sale of the four-building Lantana Media Campus in Santa Monica to Jamestown 28 for $328.4 million, or $677 a square foot.
While that deal closed in the midst of the quarter, an even bigger one was brewing in Century City. The sprawling Century Park office campus, including Creative Artists Agency’s headquarters and the twin Century Plaza Towers, was put on the market by a unit of J.P. Morgan Asset Management. The 3.2 million-square-foot office complex was expected to fetch as much as $2.5 billion.
The values of those trophy properties reflect in the continued strength of the Westside office market.
The vacancy rate in Century City was 13.8 percent in the quarter, healthy, but still in the middle of the pack for a Westside market that has three submarkets – Beverly Hills (10.8 percent), Santa Monica (13.3) and Olympic Corridor (12.5) – coming in even tighter.
The San Fernando Valley office market was the healthiest overall, with a marketwide vacancy rate of 14.8 percent on a base of 38.3 million square feet. The Valley tightened a bit, with vacancies falling slightly from the previous quarter’s 15.3 percent and significantly from the 16.3 percent posted in the year-earlier period. Rents, true to Economics 101, responded to the growing scarcity of space by rising to an average of $2.45 a foot in the quarter, a full 22 cents above the prior quarter’s rate and 27 cents higher than the year-earlier period.
Looking toward year-end, David Solomon, a senior vice president at CBRE Group Inc. expected the market to stay strong.
“We’ll likely continue to see steady measured improvement,” he said. “I’m not hearing about any new large requirements that are targeting the Valley that would have a material effect, but I’m not hearing about anything negative, either.”
The Hollywood submarket saw the greatest increase in vacancies, rising to 15.4 percent in the quarter from 14.2 percent in the second quarter and 10.2 percent in the third quarter of last year. Despite the increase and the return of a modest 25,000 square feet to the Hollywood inventory, developers remain bullish on the market.
In addition to a raft of residential and mixed-use development, the 330,000 square feet of office space under construction in the 2 million-square-foot Hollywood market is second only to the 400,000 square feet being built in the much larger downtown L.A. market.
The Glendale-Burbank-Pasadena market also moved back into positive net absorption territory, as nearly 60,000 square feet came off the market in the third quarter. That helped take the vacancy rate down a couple notches to 18.5 percent from 18.8 percent in the prior period.
Pasadena, the largest office market of the three cities, continues to lead with a vacancy rate of 14.5 percent.
The 115,000-square-foot former headquarters of Avery Dennison Corp. will undergo a rehabilitation and conversion into a creative office campus, a change Anneke Greco, a Jones Lang LaSalle vice president, said would appeal to a growing number of high-tech companies spun out of the city’s research and entrepreneurial establishments, such as Caltech and Idealab. In the past, many of those startups relocated to Silicon Valley or San Diego, but many are now putting down roots in Pasadena. Proposals are out to several prospective tenants and there is already significant interest in the property, Greco said.
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