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L.A. County Office Market Sees Modest 66k sf of Absorption in First Quarter of 2015


The Los Angeles County office market recorded a modest amount of net positive absorption in the first quarter of 2015 as the vacancy rate remained stable at 16.4%, according to Avison Young’s First Quarter 2015 Los Angeles County Office Market Report. Net positive absorption of 65.7k sf was insufficient to impact vacancy in the region’s 204 msf office sector.

The amount of square footage under construction or renovation in Los Angeles County is 3.14 msf. Construction activity accounted for 1.5% of inventory in the first quarter of 2015, a slight increase from 1.2% in the first quarter of 2014. The majority of this construction is the renovation of under-utilized buildings into creative office space as opposed to new development.

These are some of the key trends noted in Avison Young’s report. The report covers office markets in West Los Angeles, Downtown Los Angeles, South Bay, L.A. North, Tri Cities, Hollywood/Mid-Wilshire and San Gabriel Valley.

New leasing activity -- the amount of square feet a tenant leases as new space -- increased 8.3% in the first quarter of 2015 from the fourth quarter of 2014, and 2.8% year-over-year.

“Tenants’ ongoing downsizing since the Great Recession has continued to challenge certain markets. The trend for tenants to operate their office space more efficiently has seen the average amount of space per worker decrease since 2010,” comments Avison Young Principal Scott Steuber, who is based in the firm’s Downtown Los Angeles office.

Specific markets such as South Bay and Downtown Los Angeles have historically dealt with the return of significant amounts of space to the market. While South Bay recorded the largest amount of negative absorption in L.A. County in the first quarter of 2015, the majority of demand for space emerged from the L.A. North market, which recorded positive absorption of 59.9k sf.

Technology, entertainment and media tenants were the primary drivers of leasing activity in Los Angeles County in the first quarter of 2015. Notable deals included: Nickelodeon Studios signing a 113.8k sf lease in Tri-Cities, Omnicom taking 60k sf in West Los Angeles, and Kinetic Content committing to 55.7k sf in the West Los Angeles market.

Suburban office markets recorded lower vacancy (15.9%) than the Downtown market (18.8%) in the first quarter of 2015. The Downtown market has historically had a significant presence of professional services firms that continue to downsize their office space needs. The suburban office markets continue to benefit from a diverse tenant base with an emphasis on tenants in the entertainment, media and technology industry.

Vacancy rates varied throughout the county, ranging from 12.7% in West Los Angeles to 20.9% in South Bay. Average asking rates also varied greatly throughout L.A. County with rents ranging from $3.92 per square foot (psf) on a full-service gross basis in West Los Angeles to $1.97 psf in Hollywood/Mid-Wilshire (also full-service gross). Asking rates continue to increase overall as improvements to office product and investment opportunities boost interest in the market.

Vacancy rates in Class A and B properties located in the Downtown Los Angeles market have narrowed since the first quarter of 2014 when they were 130 basis points (bps) apart. That gap had tightened to 40 bps by the first quarter of 2015. Class B properties have experienced more interest from tenants as creative tenants increase their desire to locate their offices in Downtown Los Angeles. Class A and B properties both participated in the market-wide increase in rental rates in Downtown Los Angeles.

“Since there were no major downsizings in the first quarter and the general business climate continued to improve, it's not surprising that Downtown L.A. vacancy rates declined,” notes Steuber. “With a year-over-year rental rate increase of 5.5%, Downtown L.A. rents are reaching levels never before seen due to the market dominance of a handful of landlords.”

The West Los Angeles market continues to be driven by growth in media, technology and entertainment companies. The majority of new leasing activity in Los Angeles County occurred in the West Los Angeles market. New construction is scheduled to deliver 586.8k sf in 2015. The majority of this space is preleased and is unlikely to impact vacancy.

“The West Los Angeles market is one of the hottest commercial real estate markets in the U.S.,” says Jonathan Larsen, Avison Young Principal and Managing Director of the firm’s West Los Angeles office. “Record office rents and sales per square foot in Santa Monica, Beverly Hills and Century City are at an all-time high with no end in sight.”

Sales activity remained strong across the county with $1.2 bil of capital invested in the first quarter. Most significant transactions were located in the West Los Angeles market. Investors continue to view office assets in Los Angeles County as a discounted alternative to other more expensive U.S. gateway cities.

The unemployment rate in Los Angeles County has decreased as job growth outpaces the national average. Tenants are demonstrating more confidence in their businesses, creating an increase in demand for space. Net absorption in 2015 is forecasted to achieve 1.8 msf of positive absorption, translating to a year-end vacancy rate of 15.5%.

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