There was some improvement in Los Angeles County’s commercial office market in the second quarter, but despite gains in the U.S. economy, real estate recovery in the region is progressing slowly, with continued high vacancy rates in many areas.
Certain hot spots, including the Westside and the east and central San Fernando Valley, are seeing vacancy rates approaching single digits – although none is there yet. But other submarkets, such as the South Bay and Wilshire Corridor, still have vacancies above 20 percent, even as average asking rents have fallen or stagnated.
“While the economy seems to be getting better and commercial real estate is getting better, vacancy in L.A. County has been relatively unchanged. What’s happening is the bigger corporations have downsized and given back big pieces of space. And while we’re making up ground with the technology and entertainment industries, they’re taking up smaller creative spaces that are just not enough to move the needle,” said Jonathan Larsen, regional managing principal at Cassidy Turley.
According to data provided by Jones Lang LaSalle Inc., the county office market absorbed 153,784 square feet and the overall vacancy rate dropped to 17.5 percent from 17.6 percent in the first quarter of 2013. The vacancy rate is identical to the year-earlier period.
Class A asking rents rose 2 cents to $2.92 from $2.90 the previous quarter. Average rents are up from $2.88 from second quarter last year.
Pent-up demand from institutional investors, low interest rates and an influx of overseas capital combined to drive increased activity in commercial building sales in the quarter. Emblematic of the trend was the completed sale of downtown L.A.’s 72-story U.S. Bank Tower to a Singapore-based investor group in late June. Overseas Union Enterprise Ltd. paid $367.5 million for the landmark, the tallest building west of the Mississippi River.
In a deal that consolidated just under half of the premiere commercial office square footage downtown under one owner, New York’s Brookfield Office Properties agreed to buy four office buildings owned by MPG Office Trust Inc. for $430 million.
With 50,000 residents now, and an expected 100,000 within five years, the long-neglected downtown market is undergoing a renaissance, with major food retailers such as Smart & Final opening stores there.
“We’re getting a permanent shift into a live-and-work environment downtown that is similar to what we already see in Santa Monica and Venice,” Larsen said.
But until the vacancy rate downtown drops into the 10 percent-15 percent range from its current 18.1 percent, it is unlikely that Brookfield and other landlords will be able to start increasing rental rates. And with many professional services firms still cutting their square-footage requirements by 20 percent to 50 percent, that could mean a long wait.
Downward pressure
The downtown submarket is one of the most active in the county in terms of new construction, with several high-end hotels on the drawing board and a number of major renovations in the works. But rising interest rates could put the brakes on new development across the county, said Tony Morales, managing director at Jones Lang LaSalle.
“Even though rates were at an all-time low, and are still considered low for historic purposes, the jump is concerning people,” Morales said, predicting that some of the projects that rely on low interest rates to be viable might not get off the ground as rates rise.
That might bring about upward movement in rental rates if companies continue to hire, particularly in markets that are already heating up, and less new space becomes available.
Still, with many tenants holding long-term leases, coupled with unused space due to recession-era downsizing, Morales said even with increased hiring and fewer new projects available, the demand for office space might not be affected.
In the Westside submarket, Hines Global REIT Inc. purchased the Campus at Playa Vista, a four-building, 325,000-square-foot office complex that boasts technology tenants such as Facebook Inc. and Icann, a non-profit organization that assigns the world’s Internet addresses. That submarket continues to outperform the rest of the county, with asking rents more than 32 percent higher than in the region as a whole, according to Jones Lang LaSalle data, but those increased rates have so far not moved east.
The Tri-Cities submarket saw strong leasing activity and a number of investor sales in second quarter, particularly in Glendale and Pasadena. In addition, Pasadena has a couple of speculative development projects in the works for the first time in several years.
“We anticipate good tenant demand through the end of the year, driven by production studios and media companies in Burbank; back office, government and corporate finance in Glendale; and technology, engineering and health care in Pasadena,” said Natalie Bazarevitsch, senior managing director at CBRE Group Inc. “The majority of the tenant activity is occurring in Class A properties as companies continue to take advantage of favorable market conditions.”
Avery Dennison Corp., which sold its headquarters building in Pasadena, signed a lease for 54,000 square feet at 207 Goode Ave. in Glendale, an architecturally significant building with 134 freeway exposure that sat vacant during the recession.
The San Fernando Valley was a mixed bag in the second quarter, with areas like Sherman Oaks and Encino remaining strong with high demand and little space available. But the West San Fernando Valley submarket continued to be soft, with ongoing downsizing and a vacancy rate still above 16 percent.
And, in another boost to the West Valley, Farmers Insurance Group announced plans to relocate its headquarters, which has been in Park Mile since the 1930s, to Woodland Hills, where it already has space.
