Los Angeles County’s commercial real estate rebound was in full swing last quarter as the office vacancy rate declined, asking rental rates rose and construction increased. The activity underscores the belief that the nearly 194 million-square-foot office market has left the doldrums of the economic downturn behind.

The countywide vacancy rate dropped 1.2 points to 16.7 percent in the quarter ended June 30 compared with the year-ago period, according to data compiled by Jones Lang LaSalle Inc. The vacancy rate was about one-third of a point lower than the prior quarter. All but two of the county’s submarkets reported year-over-year vacancy rate declines.

The overall vacancy decline was fueled by tenants taking nearly 490,000 square feet of office space off the market, a dramatic turnaround from the year-ago quarter when the market gave back 236,876 square feet. The increase in demand allowed landlords to push Class A asking rates up to $3 a square foot, up 2 cents from the previous quarter and 19 cents from the year-ago period.

Jim Kruse, senior managing director at CBRE Group Inc., said companies’ interest in moving and expanding has picked up.

“The velocity of tenants that are touring space (for lease) has kicked up about 15 percent over two quarters ago,” he said. “Business leaders and executives are feeling good.”

The Westside was the hottest submarket – again. Vacancy there dropped 2.2 points year over year to 14.6 percent as companies absorbed nearly 250,000 square feet. Asking rental rates were, not surprisingly, up 18 cents over the year earlier to $4.02 as landlords felt emboldened by dwindling supply.

Video-game maker Riot Games did a deal for 77,000 square feet at the Westside Media Center at 12312 W. Olympic Blvd. with landlord Kilroy Realty Corp. while talent agency 3 Arts Entertainment renewed and expanded in Beverly Hills’ Golden Triangle with a 16,400-square-foot lease at 9460 Wilshire Blvd.

Beverly Hills held the county’s lowest vacancy rate, 8.8 percent, a seven-tenths of a point improvement over the previous quarter. Santa Monica was the second-tightest market with a vacancy rate of 9.4 percent, down a point from the year’s first quarter.

Neighboring South Bay started to fill up, too. Vacancy declined 1.1 points to 21.9 percent year over year.

Hollywood’s vacancy rate over the same period remained flat at 14.2 percent due to expanding office inventory, even as companies took 21,108 square feet off the market. Among them was Tax Credit Co., which signed a deal with Kilroy for 12,900 square feet at the 22-story office tower at 6255 W. Sunset Blvd.

Even the San Fernando Valley picked up steam. The submarket’s vacancy rate fell four-tenths of a point from the prior quarter to 13.7 percent. There, Santa Monica’s Universal Music Group signed a deal for 146,600 square feet with Hines at its 21301 Burbank Blvd. property in Warner Center.

Optimism reigns

So what’s happening? The economy is strong and people are optimistic, according to Arty Maharajh, vice president of research at Cassidy Turley Inc. But it’s also the proliferation of creative space – desirable to the rapidly growing tech and media industries – that has seeped into nearly every office submarket in the county.

“Creative space has become the great equalizer among the submarkets,” he said. “Tenants used to say, ‘Show me a survey with Santa Monica or Beverly Hills,’ and now it’s like, ‘Show me a survey that has Santa Monica, Beverly Hills, Pasadena, South Park and the Arts District.’”

It’s taking a while to impact downtown Los Angeles, though. The submarket again struggled as its stock of high-rise towers remains out of style. Vacancy rose to 19.1 percent, up two-tenths of a point from the previous quarter and a full point higher than the year-ago period. More than 100,000 square feet was put back on the market. Contributing to that was U.S. Bancorp, which downsized by about 50,000 square feet to 105,000 square feet in the second quarter, and Deloitte, which downsized by about two-thirds to 112,000 square feet.

Still, the overall market fundamentals are moving in the right direction and the employment rate continues to improve.

It left developers feeling confident, too. Planned construction grew by 33 percent to 1.64 million square feet. Leading the activity were Tishman Speyer, which broke ground on a 204,000-square-foot office campus in Playa Vista, and J.H. Snyder Co., which pulled permits for a new 105,000-square-foot office building in Hollywood.

The investment market is heating up as well.

“It feels early in the recovery, so everyone is positioning themselves accordingly,” said Michael Soto, research manager at Transwestern.

Among the most notable sales, DivcoWest bought Continental Grand Plaza, a 491,000-square-foot office complex at 300 and 400 Continental Blvd. in El Segundo, for $124 million, and the 339,500-square-foot, five-building office park at 300-460 N. Sepulveda Blvd. for $75 million.

Of course, the county’s strongest arena is its industrial market, with the largest industrial infill deal ever signed in the county occurring last quarter. The deal saw 99 Cent Only Stores Inc. lease 615,000 square feet at KTR Capital Partners’ Garfield Corporate Center, 6100 Garfield Ave., in Commerce.

The county reported an impressively low industrial vacancy rate of 4 percent, a half-point drop from the previous quarter, as tenants took back 13.3 million square feet. The San Gabriel Valley had a virtually full market, with a vacancy rate of 2.7 percent, down nearly a full point from the prior quarter. Developers are feeling bullish about it and have 3.15 million square feet of industrial space under construction.

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