Positive Absorption Returns as Downtown L.A. Becomes Draw

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The downtown L.A. office market saw gains in the first quarter as more than 110,000 square feet were absorbed by a mix of relocations and internal expansion.

Tenants in the nearly 30 million-square-foot office market took 111,114 square feet back, helping to push the vacancy rate to 18.9 percent, down two-tenths of a point from the prior quarter, according to Jones Lang LaSalle Inc. It was the first time downtown experienced positive absorption since fourth quarter 2012.

It helps that downtown is earning a national reputation as the new hip place to be. In January, GQ magazine published a story naming it “America’s Next Great City” and the New York Times listed it among the top global destinations for travelers this year.

“That gives it a hype other than what the real estate brokers are talking about,” said John Zanetos, a CBRE Group Inc. vice president and broker in downtown. “All of the excitement and buzz has been largely focused around the residential, retail and hospitality sectors in downtown, but with that attractiveness comes some new demand.”

He said he has received a tremendous amount of interest in the area, especially in the growing number of creative office spaces, both from Westside creative and production companies as well as international firms.

Ted Simpson, a principal and managing director in the downtown office of Avison Young Inc., said he’s noticed the shift as well.

For instance, Steelcase Inc., a Grand Rapids, Mich., office furniture designer and manufacturer, moved its Southern California operations last quarter to downtown from Santa Monica. Online real estate data provider CoStar Group Inc. agreed to move its local operations from West Los Angeles to downtown.

“That’s a paradigm shift for downtown,” he said.

Still, recovery is not assured. Downtown’s core market of legal and professional firms is continuing to shrink; many tenants are simply finding ways to consolidate office space into a more efficient layout.

Tony Morales, managing director at JLL’s downtown office, said that’s going to continue to take a toll on the area despite the hype.

“The bottom line is that many of these professional service firms will give up more space in the coming years,” he said. “It’s going to leave small chunks of space through downtown so there will be a lot of choices under 50,000 square feet.”

For that reason, landlords were forced to continue to be competitive. They dropped the average monthly asking rate for Class A space by a penny to $3.15 a square foot.

But it’s not stopping developers from continuing to build and redevelop in the area. Last quarter, developer Shorenstein Properties acquired the former Ford Motor Co. factory in the Arts District and is believed to be planning a creative office campuses at the site. Notably, Korean Air continued to build its massive Wilshire Grand project, which will add 400,000 square feet of office space.

Main Events

Office furniture creator Steelcase Inc. relocated to downtown from Santa Monica. It moved to 1150 S. Olive St. in South Park, taking 13,500 square feet on the top floor for its Southern California operations and showroom.

San Francisco real estate firm Shorenstein Properties bought the former Ford Motor Co. factory in the Arts District for $37 million from a trust established by Imperial Toy Corp. The developer is believed to be planning a creative office campus for the 300,000-square-foot facility.

Hollywood developer CIM Group bought the 1.4 million-square-foot building at 350 S. Grand Ave., known as 2 California Plaza, from CW Capital Asset Management in a portfolio deal. The 52-story building had been owned by MPG Office Trust Inc., which fell into default on the building in 2011, and was taken over by CW in 2012.

Mediator and arbitrator JAMS Inc. signed a lease renewal for 33,000 square feet at 555 W. Fifth St. with landlord Brookfield Office Properties Inc. in what is believed to be downtown’s largest lease deal last quarter. Terms were not disclosed.

Online real estate data provider CoStar Group Inc. leased 17,000 square feet at 777 S. Figueroa St. It is consolidating and moving from its West L.A. and Glendora offices. Terms were not disclosed.

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