SPECIAL REPORT: Office Vacancies Decline Across L.A.

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The L.A. office market is looking up as vacancy rates dropped throughout Los Angeles County in the first quarter.

The first-quarter vacancy rate was 15.1 percent, down from 15.5 percent in the prior quarter and 16.1 percent a year ago, according to data from Jones Lang LaSalle. That squeeze helped contribute to an increase in average asking rents to $3.29 a square foot in Class A buildings from $3.25 in the prior quarter and $3.12 a year earlier.

Net absorption, the amount of inventory taken off the market, was much lower than in the last quarter, hitting 432,000 square feet compared with 1.6 million. There are 2.3 million square feet of office space under construction.

The office market tightened most significantly in downtown Los Angeles. There, the vacancy rate dipped to 16.6 percent from 17.9 percent last quarter. Rents went up, too, rising to $3.47 from $3.41 quarter to quarter.

“If the momentum of the first quarter sets the foundation for 2016, it’s going to be a strong year for the commercial property sector,” said Charlie Smith, chief operating officer of JLL’s Los Angeles County brokerage. “L.A.’s overall economy continues to gain steam with robust job gains. Industrial is leading the commercial property sector, and office and retail are also seeing strong demand.”

Hollywood has one of the county’s highest vacancy rates – 20.9 percent – though that could change soon. The current figure can mostly be attributed to space that’s been leased but not yet occupied, said Michael Arnold, executive vice president for Newmark Grubb Knight Frank in West Los Angeles.

Viacom, for example, is slated to take more than 180,000 square feet at Columbia Square by the end of 2016. Meanwhile, Arnold said, Hollywood’s 10 most desirable buildings, when calculated individually, have extremely high occupancy rates, ranging from 85.3 percent to full tenancy.

That’s also why Hollywood rents are so high – $4.26 a square foot compared with $4.30 in the prior quarter, and $3.84 a year ago. (The Westside remains the most in-demand office market, with rents at $4.62 a square foot.)

Netflix Inc. was one business recently drawn to Hollywood. The entertainment technology company signed a lease in February for 123,000 square feet in the Icon building, which is still under construction, adding to its previous lease there of 200,000 square feet. The deal represents a flurry of activity in the submarket as the busiest area for projects in the works. There are 889,000 square feet under construction.

In another sign of Hollywood’s promise, the 14-story CNN building on Sunset Boulevard sold for $127 million in February. New York’s Tishman Speyer snagged the 204,000-square-foot office tower for $622 a square foot, according to CoStar Group Inc., making it one of the quarter’s priciest deals.

But the biggest deal belonged to Douglas Emmett Inc., which bought four Westwood office towers with partner Qatar Investment Authority for $1.34 billion. That February deal translated to about $620 a square foot, and comprised more than half of the quarter’s investments, according to CBRE Group Inc. With the purchases, Douglas Emmett has become by far the largest landlord in Westwood.

Pasadena also saw a hefty transaction: the $257 million sale of Pasadena Towers to CBRE Global Investors in February. Beacon Capital Partners sold the property for a Pasadena record of $585 a square foot.

Looking ahead, the creative office trend appears poised to keep fueling new leases, sales, and construction throughout the county. About 405,000 square feet of creative office space became available in the first quarter, according to CBRE, building on 395,000 square feet that went on the market in the prior quarter.

Industrial record

Many industrial markets across Los Angeles hit record-low vacancies last quarter, as manufacturing, consumer goods, apparel, and logistics companies snatched up space. That demand, according to CBRE, pushed the county average down to 1.2 percent from 4.4 percent the previous quarter. Net absorption was 1.2 million square feet, boosted by preleasing in six of 10 new industrial buildings. Average asking rents were 71 cents a square foot, up 1 cent from the previous quarter. That translates to a 16.5 percent jump over the same period last year.

“Most tenants pursuing deals throughout the region possess less leverage during negotiations as landlords field multiple offers,” wrote CBRE researchers in a recent report.

The San Fernando Valley continues to command top-tier rents of 77 cents a square foot, but San Gabriel Valley rents shot up the most, hitting 74 cents a square foot. Vacancy there was also among the lowest in Los Angeles, at less than 1 percent. Rents will likely stay buoyant since projects under construction won’t hit the market for months. They include 115,000 square feet in Montebello from Alere Property Group and a million square feet in Compton, slated to be a Class A site called the Brickyard. The areas with the most projects under construction are the South Bay, with 1.9 million square feet, and the San Gabriel Valley, with 1.3 million square feet.

Retail rents

The most desirable retail market continues to be West Los Angeles, where the average asking rent is $7.69 a square foot. That figure reflected a jump of 53 cents over the previous quarter, which pumped up the average rate for the whole region. The rents reveal the tightness of the West L.A. market, with the 4.7 percent vacancy indicating a drop of 30 basis points from the prior quarter.

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