Trends in the Los Angeles CBD Office Market
by Mickey Isen
Although it has lagged many of the other sub-markets in the Los Angeles metropolitan area, commercial real estate in the Central Business District (CBD) is increasingly attracting interest from both institutional investors and high profile tenants. Evidence that the LA CBD is finally turning is substantiated by the numbers. Vacancies have declined steadily since the beginning of 1998, and it is estimated that direct vacancies now range from 15 to 18 percent. The CBD, with an estimated 30 to 33 million square feet of viable commercial space, has absorbed just under 400,000 square feet of space since January 1998.
In spite of the improvement, there still remains significant opportunity for tenants looking to move into the CBD as there currently are more than 20 large blocks of contiguous space exceeding 50,000 square feet available for lease in Class A and B buildings throughout the CBD. As a result, lease rates have not reached the lofty levels of the West Side, San Fernando Valley or Glendale sub-markets, which are pushing $50 per square foot annually at the most prestigious addresses. Currently, lease rates in the CBD range from $16 to $30 per square foot annually.
Due to fierce competition for Class A space in those other coveted sub-markets, many companies are now looking to lease space in more affordable, alternative markets, thereby creating interest in the CBD and contributing to the absorption of vacant space. Several other projects, including the Staples Center Sports Arena, Disney Concert Hall, and the movie industry sound stages, are also contributing to the economic renaissance and positively impacting the CBD office market. This, in turn, has helped attract the interest of institutional investors and high-profile tenants. Recent transactions of note include Pacific Realty Trust’s acquisitions of 801 Tower on South Figueroa; Kennedy-Wilson International’s acquisition of the Wilshire Bixel Building; and Insignia/ESG’s purchase of 201 and 221 North Figueroa. The willingness of institutional investors to assume the risk associated with acquiring and reinvesting in this sub-market is a positive indicator for the CBD office market. Marquis tenants, such as KPMG Peat Marwick, Arthur Andersen, and City of Hope, have all signed leases for significant space in the CBD during 1998 and also must share in this belief.
There are, however, some risks that could slow the recent improvement seen in the CBD. Instability in Japan and throughout Asia could undermine economic growth in Los Angeles, since Asia is a significant trading partner with many local companies. Furthermore, new construction in the Tri-Cities sub-market also poses a risk. As tenants relocate into the new product, vacancies could subsequently increase in the older building in the Tri-Cities sub-market. The older commercial properties in the Tri-Cities sub-market offer a viable alternative for prospective tenants now considering the Los Angeles CBD. But based on the well-established trends of declining vacancies, rising lease rates, and increased investor interest, the prevailing sentiment is that the Los Angeles CBD will continue improving for the remainder of the year and into 1999.
Mickey Isen is Managing Director for Kennedy-Wilson Properties, Ltd.
