Much like the unrelenting sun that baked its concrete streets, Los Angeles County’s office market was hot last quarter.
Several large lease deals helped the county absorb nearly 312,000 square feet of office space and pushed the third-quarter vacancy rate down a point from a year earlier to 16.6 percent, according to data compiled by Jones Lang LaSalle Inc. It was the fifth consecutive quarter of vacancy improvement, and it left landlords feeling bullish. Class A asking rates increased 14 cents from a year earlier to $3.04 a square foot.
“The Los Angeles office market is in recovery and it seems to be accelerating,” said Michael Soto, research manager in the downtown L.A. office of Transwestern. “Vacancy still seems high, but there’s strong absorption and companies are in expansion mode.”
The county’s largest leases occurred in the Westside, which continues to be one of the region’s strongest submarkets. There, Verizon Communication Inc.’s Edgecast Networks took 135,000 square feet in the Reserve at Playa Vista, while Edmunds.com Inc. leased nearly 132,000 square feet at Santa Monica’s Colorado Center.
“Space just kept filling up, so you have spiking rents,” said Jacob Bobek, a principal at Avison Young Inc.
In all, the Westside’s rates jumped up 23 cents year over year to $4.08 a square foot as vacancy rate dropped 1.7 points to 14.8 percent. Beverly Hills boasted the county’s lowest vacancy rate again – an impressive 8.5 percent, 2.3 points down from a year ago period – and the county’s highest asking rate, $4.82 a square foot.
But the biggest surprise of the quarter might have been the strength of the San Fernando Valley, which actually posted the lowest vacancy rate of all the large submarkets – beating even the Westside. Its vacancy rate stood at 13.3 percent, down four-tenths from the prior period and 1.5 points from the year earlier. The market absorbed 170,433 square feet in the most recent quarter.
Trevor Belden at Industry Partners said he’s seen a number of the Valley’s local companies, from media to professional firms, move into expansion mode recently and that other companies, such as Clear Channel Communications, are now looking for tens of thousands of square feet of office space there.
Activity was also booming in Hollywood, which had the largest amount of construction of any submarket as an impressive 532,000 square feet of new office space is coming out of the ground. The submarket reported a vacancy rate of 13.8 percent, down from the prior period’s 14.2 percent, as it absorbed 7,665 square feet. The largest driver was NeueHouse, which signed a lease for 93,000 square feet at Kilroy Realty Corp.’s Columbia Square project, a 675,000-square-foot development under way at the former CBS Studios.
In fact, all major submarkets showed improvement from the year-ago period – except downtown. That 29.8 million-square-foot submarket saw its vacancy tighten by one-tenth of a point to 19 percent from the prior period as it absorbed 24,327 square feet. (An improvement from the more than 107,000 square feet it gave back in the previous quarter.)
Because of the limited number of building owners – Brookfield Office Properties Inc. owns more than 40 percent of the high-rises – landlords were still able to increase rental rates. Asking rates for Class A space increased by a nickel from the prior quarter $3.23 a square foot.
Still, no one is writing downtown off. It saw some of the market’s biggest sales.
The 458,000-square-foot building at 801 S. Figueroa St. traded for $175 million, or $382 a square foot, when Cornerstone Real Estate Advisers bought it from Mani Brothers Real Estate. It was only the second time since the recession began that a downtown building changed hands for more than $350 a square foot.
In fact, investment sales continued to remain the strongest facet of the office market across the county.
“This is the only place investors see value for returns,” said Arty Maharajh, vice president of research at Cassidy Turley Inc. “L.A. is a bargain relative to other global gateway markets.”
Indeed, much of the interest is coming from Chinese and foreign investors. A JLL report this summer revealed that of the $6.4 billion the Chinese invested in the United States last year, $780 million was spent in Los Angeles.
Chinese and Asian investors are also helping to drive development in Los Angeles, which totaled 1.64 million square feet in the third quarter. Shanghai’s Greenland Group is under way on its $1 billion Metropolis project, and Korean Air and Hanjin Group are building the $1.1 billion Wilshire Grand project.
All of which is a sign that the L.A. market is expected to continue to grow through at least the next year.
Jim Kruse, a senior managing director at CBRE Group Inc., said landlords across the county should be encouraged by the third quarter and look forward to the coming year.
“It feels good,” said Kruse. “We track what tenants are touring and are looking to lease; those lists are pretty robust and as good as they’ve ever been.”
Signs are even better for the industrial market. The county reported a vacancy rate of 3.5 percent, down 1.7 points from the year-ago period as about 15.9 million square feet of industrial space was bought or leased. Central Los Angeles was the tightest market, posting a 2.8 percent vacancy rate, with San Gabriel Valley close on its heels at 3.2 percent. With the industrial market virtually full, it’s not surprising that developers are under way on almost 2.9 million square feet across the county.
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