The broader Los Angeles County commercial real estate market lost ground in the first quarter and the countywide vacancy rate inched higher as more inventory came back on the market.
The county has lagged much of the country in recovery and still has one of the highest unemployment rates of any U.S. metropolitan area. Ongoing downsizing at entertainment, legal and financial services firms contributed to vacancy rates rising in nearly every submarket in the first quarter.
In all, the county office market gave back nearly 607,000 square feet in the quarter as the countywide vacancy rate rose to 17.6 percent, up three-tenths of a point from the prior quarter and back to the same level as in the first quarter of 2012, when the region was first registering recovery. Class A asking rents declined to $2.90 a foot, a penny lower than the previous quarter, though they remain higher than the $2.74 recorded in the year-earlier period.
“Despite the fact that there has not been a ton of construction over the past several years and there is pent-up demand, there are many companies on 10-year leases that are restructuring,” said Mike McKeever, senior vice president at Jones Lang LaSalle Inc. “Most will give back space. Until the employment data changes, the market is going to be very challenging, especially for Class B and C assets.”
Foreign investment continues to be a bright spot in the region, illustrated by the March announcement that Singapore real estate investment company Overseas Union Enterprise would purchase the U.S. Bank Tower at 633 W. Fifth St. for $367.5 million, or about $265 per square foot, from MPG Office Trust Inc., which is unwinding its real estate portfolio. The deal for the 1.4 million-square-foot building, the tallest west of the Mississippi, is set to close in June.
“From a macro position, people around the world are looking for hard assets to put their money in where they are getting returns right now,” said Jonathan Larsen, regional managing principal at Cassidy Turley. “For those who want to park their money, they want to be in real estate.”
The county also benefits from its symbiotic relationship with the flourishing Bay Area. Silicon Valley companies are establishing satellite offices in Southern California, most, including Google Inc., YouTube Inc. and Facebook Inc., locating on the Westside. Microsoft Corp. leased two spaces in the first quarter, one in Santa Monica and another in Playa Vista, consolidating its Southern California operations on the Westside. Larsen said Amazon.com Inc., which has industrial space in the Inland Empire, is looking for 75,000 to 80,000 square feet of office space for its entertainment division on the Westside.
Despite all that activity, the vacancy rate in the robust Westside submarket ticked up to 17.4 percent, a half-percentage point higher than the year-earlier period, according to data from Jones Lang LaSalle.
Countering the progress on the Westside, the big loser in the quarter was the Tri-Cities market, where Walt Disney Co. vacated nearly 500,000 square feet in Burbank as it consolidated in company-owned space, driving the vacancy rate up to 18.4 percent from 15.9 percent in the prior period.
With layoffs announced in recent months at Disney Studios, DreamWorks SKG and NBCUniversal, the Burbank-Glendale-Pasadena market is likely to remain soft through 2013.
“The area’s large Class A buildings are in pretty healthy shape, but the smaller Class B and C stuff that is out of date is around 70 percent vacant,” McKeever said. “A lot of tenants migrated to the big buildings while the rents were down, but the smaller properties are suffering. And because they don’t work well as creative space, people don’t want to be in them.”
Demand for creative space is also driving activity in downtown L.A.’s financial, arts and fashion districts.
“As technology and media incubate, collaborate and mature on the Westside, the natural progression will be for them to migrate east to downtown,” Larsen said.
McKeever has seen the same trend, but wonders how much sticking power it has. “The Arts District has traditionally housed the garment industry, but it’s got a lot of buzz and some retail going in. We’re talking to a major institutional landlord who is interested and doesn’t want to miss the trend, but so far there’s not a lot of technology and social media firms coming down here,” he said.
To the south, the Long Beach area may be in for a year of upheaval, with the possibility that all three of its downtown Class A office towers will be put up for sale in 2013.
“It may be possible for someone to go in and control that entire market, but they will have to invest several hundred million dollars to do it,” McKeever said.
He is optimistic that the Hollywood market, which saw its vacancy rate jump nearly 2 percent in the first quarter, is in for a good year.
“They’ve got a ton of activity, with seven to nine office products going in,” he said. The area is centrally located, has access to mass transit and many smaller traditional buildings that might be converted to creative space.
While 2013 might continue to be a difficult year, Larsen said he expects the market to tighten up by late 2014 and into 2015.
