REAL ESTATE QUARTERLY: Tenants’ Race for Space Reaches Prerecession Pace

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Tenants leased up more office space in Los Angeles County last quarter than they had since before the recession.

More than 1 million square feet came off the market, amounting to the highest net absorption number the county has seen since the fourth quarter of 2005, according to data collected by Jones Lang LaSalle Inc. The countywide vacancy rate declined six-tenths of a point to 16.1 percent in the second quarter compared with the previous period and 1.1 points versus the year-ago period.

The tightening allowed landlords to push up Class A asking rates by a cent to $3.13 a square foot.

“The market was pretty vibrant and is continuing to be strong,” said Jonathan Larsen, principal and managing director at Avison Young. “It’s a good tenant market and a good landlord market. It’s a happy medium right now.”

The county’s office market is becoming less segmented by industry. The tech and creative firms that were once concentrated on the Westside are beginning to spread out to downtown Los Angeles, Hollywood and the San Fernando Valley. The willingness to locate away from Venice and Santa Monica is giving companies more flexibility in both the type of offices they occupy and the rates that can pay.

“If you take a 50,000-foot overview of the market when you evaluate what’s going on, healthy job growth was a big part of it,” said Mike Arnold, executive vice president and managing director at Newmark Grubb Knight Frank’s Century City office.

The county’s dipping unemployment rate was 7.1 percent in April, down from 7.8 percent in the same month a year ago. Growing job numbers typically mean companies begin to expand their office space as well.

Among the largest deals last quarter, DaVita HealthCare Partners Inc. took 185,000 square feet in a 10-year deal at the Apollo at Rosecrans creative space project in El Segundo. The deal contributed to the half-point decline in the vacancy rate of the South Bay to 21.7 percent and positive absorption of 131,565 square feet.

In Burbank, Walt Disney Co. renewed its lease for 111,000 square feet at 2411 W. Olive Ave. The 11-year deal lent some strength to the market where many feared the entertainment giant might consolidate those employees on its studio campus.

Josh Wrobel, managing director at JLL’s downtown office, said the absorption is likely to continue. There are a number of large companies in the market for space that may sign deals by the end of the year.

“Netflix, Buzzfeed, IPG, Endemol and Herbalife have been looking around,” he said. “That’s 1 million square feet. It would be a big impact.”

Overall, most of the submarkets reflected an improving economy last quarter.

Hollywood reported the county’s lowest vacancy rate, 12.7 percent, as tenants there absorbed 29,479 square feet of office space. Among the notable deals, Broad Green Pictures leased 36,000 square feet at J.H. Snyder Co.’s 959 Seward St. creative office project that is expected to open next month.

The Westside continued to excel as well. Its vacancy rate dropped eight-tenths of a point to 13.5 percent. There, Beverly Hills’ vacancy rate dropped to 5.5 percent from 6.3 percent the previous quarter and 8.8 a year ago.

Not all markets showed improvement in their vacancy, but that’s not necessarily reflective of the activity. For instance, the Tri-Cities submarket saw its vacancy rise a half-point to 15.3 percent as a Pasadena office development known as the Pasadena Playhouse opened and added 155,000 square feet of vacant space to the market.

To illustrate just how desirable that market is, the new building already has attracted three firms, including the U.S. headquarters of Chinese e-commerce company Alibaba Group Holdings’ film division. It leased the entire 22,000-square-foot top floor in the project last quarter from landlord IDS Real Estate Group.

The tightening market will be tested, however, as nearly 2 million square feet of office space is under construction in the county. Most of that is in Hollywood, which reported more than 1.1 million square feet under construction in projects such as Kilroy Realty Corp.’s Columbia Square.

Investment is still strong, too.

A 23,557-square-foot creative office property sold for $1,004 a square foot – the highest price per square foot ever in the county. New York real estate investment firm Joss Realty Partners bought the property at 1315 Lincoln Blvd. for a total of $23.7 million from a partnership of Lincoln Property Co. and ASB Real Estate Investments in April.

In the Miracle Mile, a joint venture of San Francisco’s Swig Co. and Boston’s Intercontinental Real Estate Corp. bought a 400,000-square-foot office building at 6300 Wilshire Blvd. for $151 million, or $371 a square foot.

“That’s an expensive price, but if you are an investor, that’s a serious relative discount to what you pay for other Class A office properties in San Francisco or New York or Boston,” said Michael Soto, research manager at Transwestern’s downtown L.A. office.

If the office market looks good, the industrial market looks even better. Countywide, the vacancy rate was at 2.7 percent, down three-tenths of a point from the previous quarter as tenants bought or leased more than 24 million square feet.

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