Continued Strength Even With Office Vacancies Up

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Continued Strength Even With Office Vacancies Up
Toyota Motor Corp. campus

The overall office market in Los Angeles County showed continued strength in the fourth quarter despite a rise in the vacancy rate and net absorption that turned negative over the three-month period, as more space came onto the market than was leased.

A contributing factor to that 182,000-plus square feet of negative net absorption is the nearly 1.9 million square feet office space under construction that will eventually come onto the market, most of which is going up on the Westside – particularly Culver City, Beverly Hills, Santa Monica and Playa Vista.

Some of the new space might be leased but not yet occupied, which can throw off real estate metrics. Other factors can also alter the picture, real estate brokers say.

“Negative net absorption (can be) driven by some subleasing activity,” said Henry Gjestrum, senior analyst for Chicago based Jones Lang LaSalle Inc., which provided the fourth-quarter office market statistics.

Total office inventory throughout L.A. County rose about 0.1 percent, or more than 223,000 square feet, to nearly 192 million square feet.

Downtown, Tri-Cities of Glendale, Pasadena and Burbank, and the Westside each saw negative net absorption in the October-to-December period. Such a development could prove to be beneficial – especially as fourth-quarter Class A rents rose to $3.69 from $3.47 a year ago, brokers say.

“A little bit of negative net absorption might loosen up some space for tenants,” said Devon Parry, senior research analyst at Jones Lang LaSalle.

It looks as though tenants will soon have more options. About 1.9 million square feet of office space was under construction in the fourth quarter, a 58 percent increase from the third quarter. Much of the construction, about 816,000 square feet, took place on the Westside. More than half of that amount – 456,000-plus-square -feet – was underway in Culver City.

The Westside’s office vacancy rate bumped up to 14.8 percent in the fourth quarter. Century City and Santa Monica had some of the lower vacancy rates across the submarket.

Class A rents continue to be the highest on the Westside – a whopping $5.01 per square foot, up five cents from the third quarter and 18 cents year over year.

The marriage of technology and entertainment continues to impact Los Angeles County – with Hollywood being the major beneficiary. The relocation of Netflix Inc. from Beverly Hills east to a 14-story tower at Sunset Bronson Studios in Hollywood is emblematic of the shift.

It’s a major reversal of fortune for Hollywood, which was abandoned decades ago by the major film studios, except Paramount Pictures. The district’s attractiveness has been boosted in recent years by its central location, easy access of public transportation, such as the Los Angeles County Metropolitan Transportation Authority’s Red Line subway trains, and vibrant nightlife.

The increasing numbers of companies interested in Hollywood has pushed interest further and further east.

“It’s moving toward Western Avenue, which most tenants wouldn’t consider going to near five years ago,” said Ryan Phillips, an associate director at Cushman & Wakefield.

The South Bay saw perhaps the quarter’s most high-profile office real estate sale when the Toyota Motor Corp. campus in Torrance was sold to Irvine’s Sares-Regis Group for $270 million.

The office vacancy rate in various parts of that market remains high in Torrance even with the recent overall tightening.

Downtown showed strength in the leasing market as Adidas announced signing a 30,000-square-foot lease at The Row in the Arts District. Jerde Partnership announced it would move its headquarters to the CalEdison building at 601 W. 5th St.

The knock on downtown’s renaissance has been a lack of job growth compared to its residential market growth. But that might be changing.

“The more that people live in downtown, the more attractive it becomes as an office market,” said John Zanetos of CBRE Group Inc.

The county’s industrial market remains tight with vacancies at 1.3 percent, thanks to the ports of Los Angeles and Long Beach. The South Bay was the most expensive at 90 cents a square foot, up 13 cents from a year earlier. “Everyone’s really wondering how high the rents are going to go,” said Tina Arambulo, a managing director at Cushman & Wakefield. “That’s why leasing activity is down. They’re staying.”

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