Large sale and lease deals across Los Angeles County last quarter helped further cement the notion that the county’s office market has recovered.
The countywide vacancy rate fell nearly a point to 16.1 percent in the first quarter compared with the year-ago period.
“We did not get off to the biggest start countywide during the first quarter in comparison to the fourth quarter of 2014,” said Jim Kruse, senior managing director at CBRE Group Inc. “But there was a tremendous amount of business that was transacted.”
Among some of the biggest were the sales of two Westside creative properties.
Worthe Real Estate Group and Shorenstein Properties sold Playa Vista’s Reserve creative office building, which houses TMZ and Microsoft Corp. among others, for a jaw-dropping $316 million, or about $790 a square foot, to Atlanta’s Invesco. That’s an impressive premium to the combined $76.5 million the sellers spent to buy and renovate the former U.S. Postal Service distribution property in 2011.
Meanwhile, IDS Real Estate Group bought the Beats by Dre properties in Culver City’s popular Hayden Tract from Hackman Capital Partners for nearly $110 million. The deal included two buildings totaling 109,000 square feet that house Beats as well as a 17,800-square-foot property occupied by Steelhouse Inc. Hackman acquired the two Beats buildings for $25.3 million in 2007 and the third property for $2.8 million in 2012.
“You are starting to see these creative office developers – who bought these projects several years ago, renovated them and got them leased – starting to do their exits and the numbers are astounding,” said Transwestern’s Michael Soto. “A lot of these projects are being treated like trophy Class A-type office properties in terms of their pricing.”
That helps explain why investment in this type of office space is on the rise across the market.
In downtown Los Angeles, Rising Realty Group bought Figueroa Courtyard, a five-building, 270,000-square-foot office campus, from U.S. Bancorp last quarter for an undisclosed sum. Rising plans to renovate the property into a creative office campus.
Leasing wasn’t half-bad either.
In one of the top five lease deals in the county, Nickelodeon leased 113,760 square feet in a project that is being built by Oklahoma City developer Accord/Bro Members at 203 W. Olive Ave. in Burbank with plans to consolidate some of its offices. The Burbank-Glendale-Pasadena Tri Cities market saw the vacancy rate drop three points to 14.8 percent and Class A asking rates rise 12 cents to $2.84 a square foot monthly.
The largest lease deal was done downtown, where the city of Los Angeles leased 126,000 square feet at 350 S. Grand Ave. after being forced to move from a building that was damaged in the DaVinci apartment fire last year. That submarket’s vacancy rate declined a slight three-tenths of a point to 18.6 percent, though some said the numbers didn’t reflect just how hot that market is right now.
“There’s a lot of activity occurring outside the core and that’s not getting picked up,” said Arty Maharajh, vice president of research at Cassidy Turley. “The data is not able to reflect a lot of stuff that’s going on is outside Class A and B.”
For instance, Hyperloop Technologies Inc., which is creating the technology to fuel Elon Musk’s proposed Hyperloop traveling tubes, signed a deal for 6,500 square feet in the Arts District and committed to growing to up to 38,000 square feet by the end of the year.
Still, even the typically sleepier suburban markets had some significant improvement in their office markets.
Of note, San Gabriel Valley had the second-highest absorption of any submarket in the county. Tenants took nearly 112,000 square feet off the market, which helped drop the area’s vacancy rate seven-tenths of a point to 13.1 percent. Activity was led by Southern California Edison, which leased 125,000 square feet at 2 Innovation Way in the second-largest lease deal in the county last quarter.
The San Fernando Valley came in with the county’s lowest vacancy rate: 13.5 percent. That’s down six-tenths of a point from the year-ago period.
Hollywood followed with a 14 percent vacancy rate, beating what had typically been the typically strongest market: the Westside.
Still, the beachside submarket continued to perform remarkably. At 14.3 percent, the Westside has the third-lowest vacancy rate, down from 15.1 percent in the year-ago quarter. Among the big Westside deals was Omnicom Media’s lease for 60,162 square feet at creative office campus Playa Jefferson, 12777 W. Jefferson Blvd., with landlord Vantage Property Investors.
The market is showing no signs of slowing.
“I think absent a major shock to the world economy, everyone feels the office market here in 2015 will be better than 2014,” said Transwestern’s Soto. “There’s so much optimism in the L.A. office market.”
The industrial market was no exception. It continued to be the county’s strongest commercial real estate sector. Vacancy dropped 1.4 points to 3.1 percent from the year-ago quarter as more than 19 million square feet were leased or bought. More than 3.5 million square feet of industrial space are under construction.
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