Something remarkable happened last quarter in Los Angeles County’s office market.
Nearly all submarkets showed lower vacancy rates as the commercial real estate recovery went into full swing.
Overall, the county vacancy rate fell to 16.2 percent in the quarter, one point lower than a year ago, as companies took 630,358 square feet off the market, according to Jones Lang LaSalle Inc.
That tightening allowed landlords across the 193 million-square-foot market to push the county’s average monthly Class A asking rates up 19 cents from the previous year’s level to $3.09. Rates were up 5 cents from the previous quarter.
“This was probably the strongest year in commercial real estate in Los Angeles County since 2006,” said Michael Soto, research manager at Transwestern. “Over the last two years, we have talked about market recovery but have always qualified it by saying it was being driven by (certain) areas or types of properties. In 2014, the recovery was much more broad based and you had market fundamentals improving across the entire market, from San Fernando Valley to the South Bay.”
One of the biggest signals is that fact that there were more than 10 deals done for more than 30,000 square feet in the county last quarter, according to Jim Kruse, senior managing director at CBRE Group Inc.
“The last time I saw something like that was ’06 (during the height of the market),” he said. What’s more, “our tenants in the market list – a list of who’s touring for space – is a robust list.”
Another signal was that much of last quarter – and the year as a whole – could be defined by a steep growth in investment sales.
Arty Maharajh, vice president of research at brokerage DTZ, said he calculated more than $60 billion in investment sales in the county last year.
“Last year and the previous year together combined to equal more investment sales than we saw in 2007, which was the most commercial real estate investment we have ever seen,” he said. “More investment sales activity supports the notion that L.A. is a global gateway city and the recovery here is legitimate.”
Walter Conn, president of brokerage services at Charles Dunn Co. Inc., said that the improving market and economy in Los Angeles is contributing to the boom in investment sales now. Unlike some other large cities such as New York or San Francisco, there’s still upside left in the office market.
“There are still trophy buildings trading at premiums,” he said. “The money coming in right now is really aggressive, especially as an institutional play.”
But consider this: The priciest office building sale last quarter was under $500 a square foot, nominal compared with New York, where office buildings can trade for more than $1,300 a square foot.
“L.A. office prices are relatively cheaper than New York, San Francisco and Seattle,” Soto said. “L.A. office market fundamentals are late compared to other cities, so now you are starting to see a lot of investment activity trying to acquire good assets as the market is improving. There’s a real rush to get in.”
Expansion mode
In this more robust environment, increased leasing activity helped lower the vacancy rate countywide.
Among the biggest deals was one done in Hollywood, which saw its vacancy rate fall to 13.8 percent, six-tenths of a point below the final quarter of 2013. There, Viacom Inc. signed a deal for 180,000 square feet to consolidate its MTV, Comedy Central, BET and Spike TV units at Kilroy Realty Corp.’s $420 million Columbia Square project, which is expected to open next year.
The Westside continued to be L.A.’s hot spot for the growing tech and media sectors. In all, the submarket’s vacancy rate dropped to 14.1 percent from 15.6 percent in the prior year’s final quarter. The county’s lowest vacancy rate, 7.2 percent, belonged to Beverly Hills, down nearly three points from the end of 2013.
The most noteworthy Westside deal was Yahoo Inc.’s 130,000-square-foot lease at Tishman Speyer’s Collective campus in Playa Vista. Yahoo will relocate from Santa Monica.
Even downtown Los Angeles, a perennially challenged office core, saw improvement as its vacancy rate fell four-tenths of a point from a year earlier to 18.7 percent. It helped that Oaktree Capital Management signed a lease to expand to 182,000 square feet at Wells Fargo Tower, 333. S. Grand Ave.
Of the major submarkets, the San Fernando Valley – perhaps surprisingly – reported the county’s lowest vacancy rate. It fell 1.4 points to 13.4 percent as a diverse mix of tenants expanded or moved in.
Nash Midzi, research manager at Avison Young Inc., said that the Valley showed some of the county’s greatest demand in the term.
“San Fernando Valley is probably the second-best-performing market outside of West L.A.,” he said. “They show great demand. It’s a very diverse industry base, while West L.A. is mostly just entertainment and media.”
With that much demand, developers are getting in on the action as well. In all, there’s a little more than 2 million square feet under construction. That’s nearly double the amount of construction in the year-ago period.
Jonathan Larsen, regional managing principal at brokerage DTZ’s downtown L.A. office, said this is all pointing to a very active office market in 2015.
“It’s going to be a wild ride this year, more wild than last year, but it’s going to be fun in commercial real estate,” he said. “Clearly the L.A. area has come onto the world stage in a bigger way than it has before.”
