Property Owners Push Up Rents Despite Rare Negative Absorption

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IDS Real Estate Group purchased the Beats by Dre campus at 8550 Higuera St. in Culver City from Hackman Capital for $108 million. The 127,447-square-foot creative conversion property is fully leased.

The Reserve, 13031 W. Jefferson Blvd., which achieved 100 percent occupancy last year, traded for $316 million. Worthe Real Estate Group and Shorenstein Realty Services sold the 399,373-square-foot campus to Invesco.

Canyon Catalyst Fund and Pacshore Partners partnered to acquire creative office buildings in Playa Vista and Malibu in two separate transactions totaling $36 million. Garbo Holdings sold its building at 12901 Jefferson Blvd. and Theory R. Enclave LLC sold the Enclave, a 32,417-square-foot office complex at 22619 Pacific Coast Highway in Malibu.

The Red Building at West Hollywood’s Pacific Design Center inked its first leases. Inaugural tenants are media-technology company Whalerock Industries, TV studio Gaumont International, British clothing retailer AllSaints and employment testing company Criteria Corp. Terms were not disclosed.

Advertising and marketing company Omnicom signed a 60,000-square-foot lease at Playa Jefferson, 12777 Jefferson Blvd.

Absorption. It’s not sexy, but it’s one of the key through-lines in the first-quarter Westside story.

Net absorption was negative for the first time in two years, as 75,303 more square feet came back on the market in the opening quarter than came off. Four submarkets contributed to the trend, according to data from Jones Lang LaSalle Inc., led by Century City, which put 158,000 square feet back into circulation.

“Leasing activity is still high and maintaining velocity, but the Northrop Grumman move-out, Yahoo downsize, Comcast relocation and downsizing to an owned project, etc., disguise the true state of the leasing market,” said Joel Frank, senior vice president for CBRE Brokerage Services.

With no large move-outs on the horizon, brokers expect absorption to rebound in subsequent quarters – even with 270,422 square feet under construction in the Marina-Culver City area and 280,000 square feet in the West L.A.-Olympic Corridor area.

“The construction activity is almost all preleased and will likely deliver with no vacant space to market,” reported Mike McRoskey, a JLL managing director.

“All markets in the Westside are on the rise,” he continued. “Landlords are pushing rates across the board as tenant options dwindle.”

Westside asking rates rose to $4.26 a square foot to end the first quarter, up 7 percent from the $3.99 asking rate of a year ago. Double-digit increases were charted in Beverly Hills (up 13 cents to $4.88), Santa Monica (up 11 cents to $4.86) and West L.A.-Olympic Corridor (up 11 cents to $3.89). Only West Hollywood’s asking rate ($4.53) remained unchanged.

Overall, vacancy on the Westside ticked up slightly to 14.3 percent in the first quarter, from 14.1 percent at year’s end, thanks to the aforementioned negative absorption. Beverly Hills tightened, charting the submarket’s only single-digit vacancy rate of 6.3 percent for the quarter. The largest decrease was in Brentwood, which has steadily dropped over the last year to 14.7 percent from 20.4 percent. The neighborhood’s comparatively lower rents ($3.62 per square foot) provide an alternative for tenants seeking proximity to both Beverly Hills and Santa Monica.

The overall performance turned an already popular Westside into “a much faster-paced market – it’s necessary for tenants to make quicker decisions as space that becomes available is taken quickly,” said Neil Resnick, principal at Avison Young.

Investors are as eager as tenants to get into the coveted market.

“We still have a lot of lift in rental rates compared to San Francisco, Seattle and New York,” said Bob Safai, principal with Madison Partners. “We’re at all-time prices per square foot and rental rates right now in Santa Monica and Beverly Hills, yet we still have values to buy at or below replacement costs. When people see that, they want to invest.”

The retail sector is also hot, according to Christine Deschaine, senior vice president of Kennedy Wilson’s brokerage group.

“There is so much demand, but we don’t have enough product to accommodate it,” she said. “

– Margot Carmichael Lester

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