Deals by Small, Midsize Firms Feed Steady Office Market Recovery

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The Los Angeles County office market continued its tepid but steady recovery last quarter.

The office vacancy rate inched down only three-tenths of a point to 16.9 percent in the quarter ended Dec. 31 compared with the previous quarter, according to data compiled by Jones Lang LaSalle Inc. The rate is down one-fifth of a point from the year-ago period.

Tenants took 687,356 square feet off the market, fueled largely by small and midsize leases across the region. It was the most space absorbed in the county since the first quarter of 2008.

“There were a lot of small to midsize deals in the fourth quarter,” said Michael Soto, research manager at Transwestern’s downtown L.A. office. “There were some large new deals that happened, but for the most part, a lot of the big leases were renewals. The demand overall for the L.A. office market mainly came from small and midsize companies that were confident to expand.”

Video game creator Riot Games Inc. inked the largest deal in the county. It signed a lease to expand by nearly 50 percent to occupy the entire 284,000-square-foot Element LA, a 12-acre media campus in West Los Angeles under renovation by Hudson Pacific Properties Inc. Riot is moving out of popular but crowded Santa Monica, which boasted one of the county’s tightest markets with only 11.2 percent vacancy.

For the Westside as a whole, vacancy was 15.6 percent, a nine-tenths of a point improvement from the previous quarter and the lowest of the county submarkets. In fact, the Westside’s Beverly Hills market posted the county’s lowest rate, 10.1 percent, as buyers scooped up space in the coveted Golden Triangle.

Jim Kruse, senior managing director at CBRE Group Inc., said the Westside might be improving at a more accelerated rate than the rest of the county because it is home to many rapidly expanding tech and media industry companies, but the other submarkets aren’t too far behind.

“West L.A. gets a whole lot of airplay for not only those transactions but for the industries that are leading the way,” he said. “But (the county) is a tale of multiple little cities. Downtown (Los Angeles) is tough, but the rest of the markets have been doing better on a quarter-over-quarter basis.”

Indeed, downtown struggled last quarter as downsizing tenants gave back more than 222,000 square feet. It left the office market with a 19.1 percent vacancy rate, up seven-tenths over the previous quarter.

But the majority of the county’s other markets saw improvement anywhere from one-tenth of a point to nearly six points.

The Tri-Cities of Burbank, Glendale and Pasadena, which had been reeling from a nearly a half-million-square-foot vacancy left when Walt Disney Co. decided last year to leave Burbank, saw its vacancy rate drop 1.2 points to 17.2 percent as all three cities absorbed space.

The South Bay tightened up slightly, posting a three-tenths percent improvement to 19.9 percent vacancy, as El Segundo produced a vacancy rate of 10.7 percent, the county’s second lowest. El Segundo has become attractive to creative and tech firms looking for large and affordable beachside office space. There, community and e-commerce website operator Internet Brands Inc. expanded and renewed its lease at 909 N. Sepulveda Blvd. to 60,000 square feet last quarter.

The overall market improvement left landlords feeling bullish enough to push countywide asking rates for Class A office space up 6 cents to $2.96. It was a 13 cent increase from the year-ago quarter.

However, brokers say Los Angeles is likely to continue on this modest recovery pace for at least the next year. Jonathan Larsen, regional managing principal at Cassidy Turley Inc., said that’s thanks to a slowly recovering economy here.

“A big driving factor is that we have such a high unemployment rate, still over 10 percent,” he said. “Markets like San Francisco, Orange County or New York are 5 percent or below. We are just not out of the recession here as far as getting jobs. The confidence of most decision-makers to hire more people and take more space is probably a year away.”

That pending recovery has inspired investors, who have been snapping up properties at near record prices and speed as they prepare for L.A.’s continued improvement.

The biggest sale in the quarter of a single building was Comcast Corp.’s acquisition of a 814,000-square-foot Class A office building at 10 Universal City Plaza in Universal City for $395 million, or $485 a square foot. It bought the building for more than twice the $190 million, or $233 a square foot, that the selling partnership of Normandy Real Estate Partners and Morgan Stanley & Co. paid for the property in 2003.

Meanwhile, Northwood Investors bought the London hotel in West Hollywood from Blackstone Group for $195 million, or $975,000 a room, in one of the largest hotel deals ever in Los Angeles.

“There’s no one that’s running an institutional fund that’s not scouring Los Angeles,” Kruse said. “There will be no slowdown of institutional interest, and I think it’s going to be very competitive multibid situations.”

Developers have taken notice of the competitive sales market and improving leasing market. More than 1.1 million square feet of office space are under construction around the county, with 400,000 square feet planned as part of Korean Air’s Wilshire Grand mixed-use hotel project under way in downtown.

Meanwhile the industrial market in Los Angeles continued to outshine the office market. The countywide vacancy rate fell one-tenth of a point to 5.1 percent as companies bought or leased 10.6 million square feet in the fourth quarter.

The strongest market was Central Los Angeles, which is virtually fully occupied with a vacancy rate of only 3.7 percent. Industrial asking rates increased a penny to 55 cents a square foot in the most recent quarter, inspiring developers to begin construction on more than 1.8 million square feet there.

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