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Wednesday, Aug 10, 2022

South Bay Sets the Pace for LA Office Market

While most office submarkets in Los Angeles County have struggled to regain their footing after being knocked back by the pandemic, the South Bay has managed to step up in 2021.

It was the most active submarket in the county during the first quarter, according to CBRE Group Inc.

“The office market has fared pretty well given everything going on and compared to other markets in L.A. and around the world,” said Erik Stiebel, an associate at Avison Young Inc.

Several large deals of more than 50,000 square feet helped the area lead leasing for the quarter, according to CBRE

A significant amount of credit for the South Bay’s strong performance goes to El Segundo, which has seen several large leases and renewals in recent months.  

But the broader submarket has also seen landlords get creative in an effort to attract and retain tenants.

Short-term lease renewals have grown increasingly common, according to Steve Solomon, a managing director at Jones Lang LaSalle Inc.

“Most landlords that had tenants renewing were happy to let them stay month to month or do a one-year renewal instead of a five- or seven-year renewal,” he said.

Solomon added that there is also flexibility on terms for new leases. One downside for tenants is that landlords are not willing to offer high improvement allowances with short-term deals.

Despite the activity, though, the market is not where it was pre-Covid.

“It’s the same everywhere. Covid has really hurt the activity and velocity of deals. Everything went on hold. We’re starting to see some at least looking around. Not a lot of deals are getting signed as of yet, but there are a few in El Segundo that have happened,” said Eric Lastition, an executive managing director at Newmark Group Inc.

El Segundo heats up

Solomon agreed that the city is performing extremely well, saying “El Segundo is the hottest market.”

Two large recent lease signings took place at Hackman Capital Partners’ redevelopment of a former Northrop Grumman Corp. manufacturing and warehousing facility at 888 Douglas St.

The old aerospace site is spread across 30 acres in El Segundo, and Hackman Capital is turning it into a creative office complex.

In January, substitute meat manufacturer Beyond Meat Inc. signed a lease for 281,000 square feet. And L’Oreal USA signed a lease for 100,000 square feet in April.

Elsewhere in El Segundo, electronics company Belkin International Inc. signed a lease for 65,000 square feet at 555 S. Aviation Blvd. during the first quarter.

El Segundo Mayor Drew Boyles said the city, once known just for aerospace, has expanded its tenant mix and is now a favored spot among beauty, bioscience, tech, media and ecommerce companies.

Boyles said the mix of tenants has helped the city, as has its discount in rental rates compared to office space on the Westside and its location near both the beach and the airport.

“We were the only city in the South Bay that gained more office space than it lost in the fourth quarter of 2020,” he said.

There is roughly 1 million square feet of commercial space being worked on in El Segundo, a 10% addition to its existing supply, according to Boyles.

“It’s a massive number, especially in light of the pandemic,” he said.

Lastition added that in El Segundo, “there’s a lot of renovation projects that are going on down there that are really cool,” drumming up tenant interest.

Stiebel added that a lot of the buildings and projects in the area were “Covid friendly” with stand-alone buildings and open parking lots that don’t require elevators to get in and out.

Attracting tenants

Solomon said office space in the South Bay and L.A. County as a whole would likely “feel the pain for another year to 18 months. If you are able to sign a lease today, you are going to get a great deal if you’re a tenant.”
Solomon added that rental rates are about 5% off from where they were pre-Covid. And the amount of concessions offered, such as more free rent and higher tenant improvement allowances, are about 10% higher than before. That means a tenant can get a deal with about a 15% spread compared to pre-Covid lease deals.

“Landlords have been the most aggressive they’ve ever beeen, offering a lot of free rent. And tenant improvement (allowances) are pretty high now, higher than pre-Covid,” Stiebel said.

Lastition said most landlords are not lowering rents on paper, but he is seeing higher tenant improvement allowances, more free rent and more flexibility on rental rates once a tenant and landlord start negotiations.

And he expects activity to pick up.

“You’ll see a lot more deals being done in the fourth quarter and into 2022, but the third quarter will be strong, too,” he said.

Top Office Sales in the First Quarter

  1. Buyer: Hawkwood Ventures
Seller: EverWest Real Estate Investors
Address: 2400 Marine Ave., Redondo Beach
Price: $24 million

  2. Buyer: Mahmood Yoonessi
Seller: KRT Investments
Address: 3939 Atlantic Ave., Long Beach
Price: $9.9 million

  3. Buyer: Donald Devine Separate Property Trust
Seller: Cross Development
Address: 1525 Long Beach Blvd., Long Beach
Price: $8 million

Top Office Leases in the First Quarter

1. Tenant: Beyond Meat Inc.
Address: 888 N. Douglas St.,El Segundo
Square feet: 281,000
Lease type: New
2. Tenant: L.A. County Public Social Services
Address: 20101 Hamilton Ave., Torrance
Square feet: 133,000
Lease type: New
3. Tenant: General Services Administration
Address: 301 E. Ocean Blvd.,Long Beach
Square feet: 121,000 square feet
Lease type: Renewal
4. Tenant: Belkin International
Address: 555 S. Aviation Blvd.,El Segundo
Square feet: 65,000
Lease type: New

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans covers real estate for the Los Angeles Business Journal. A USC grad, Madans has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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