Despite starting off the year strong, the downtown L.A. office submarket had another weak quarter as its stable of traditional high-rise office towers continued to hemorrhage tenants.
The 29.8 million-square-foot market watched its vacancy rate rise a point to 19.1 percent in the second quarter ended June 30 over the year-ago quarter as tenants handed back nearly 110,000 square feet of office space, according to data compiled by Jones Lang LaSalle Inc.
“This is just a continuation of what has started in the last year where people are right-sizing,” said Tony Morales, managing director at JLL.
Right-size they did. Last quarter, U.S. Bancorp gave back about 50,000 square feet when it renewed its lease for 105,000 square feet at its U.S. Bank tower at 633 W. Fifth St.; Deloitte downsized by about two-thirds when it agreed to relocate to 112,028 square feet at 555 W. Fifth.
While a large vacancy rate typically would cause a drop in Class A asking rents, year-over-year rates actually rose 13 cents to $3.18. That increase came as ownership of most of the market’s high-rises consolidated in the hands of a small number of landlords. Brookfield Office Properties Inc., for one, holds nearly half of the high-rise inventory.
Still, there’s tremendous interest in downtown, it’s just not in the high-rises.
“What’s driving this market is the buzzword for the last several months: creative office,” said Christopher Steck, senior director at Charles Dunn Co. Inc.
For example, AEG signed a lease for 78,500 square feet last quarter at a former industrial building in downtown that Lincoln Property Co. transformed into creative office space. The sports and entertainment behemoth will consolidate its Miracle Mile, South Bay and downtown offices in the South Park building, known as the Desmond.
Creative space is blossoming in downtown as developers take advantage of the market’s inventory of old industrial buildings that easily convert to the coveted creative offices that attract young tech companies. It has hip amenities such as bars and restaurants and, soon, even a Whole Foods Market – plus a growing number of residences.
It’s catching the attention of some marquee tenants that have traditionally only been interested in beachside cities such as Santa Monica.
“There’s been a lot of interest right off the bat from some larger high-profile companies like Google and Yahoo,” said Carle Pierose at Industry Partners. “Just the fact that they are willing to look outside of the 10-405 box is exciting.”
Investors, even owner-users for that matter, remain interested in the market that most see as on its way up. Developer and investor Ben Neman closed on the acquisition of a carwash across from L.A. Live and plans to build a 476,000-square-foot mixed-user. It would join about two dozen other projects under way, including the 73-story Wilshire Grand by Korean Air, and the 19-story hotel and 38-story residential tower Metropolis by Shanghai’s Greenland Group.
– Jacquelyn Ryan
U.S. Bancorp downsized into 105,000 square feet when it renewed at U.S. Bank Tower, 633 W. Fifth St. The 10-year deal with landlord Overseas Union Enterprise was valued at $27 million.
AEG leased all of the office space in the 78,500-square-foot Desmond building in South Park. Owner Lincoln Property Co. is completing a $9 million renovation of the industrial building into creative space.
Software company NationBuilder signed a 10-year deal for 54,780 square feet at the Millennium Biltmore Hotel’s office component, 520 S. Grand Ave.
Downtown investor and developer Ben Neman bought the carwash across from L.A. Live last quarter. Seller Los Angeles Car Wash Corp. first listed it for $25 million in 2012. Neman plans to build a 476,000-square-foot mixed-use development.
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