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ETC... ETC... NEWS
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West Los Angeles Maintains Lowest Office Vacancy Rate Despite Negative Absorption for the Third Quarter

11/02/15

Despite experiencing negative net absorption for the first time in three years, the West Los Angeles office market again demonstrated its bullet-proof character during the just concluded third quarter by maintaining the lowest vacancy rate of any major market in the greater Los Angeles area and by establishing a new record price ever paid on a per-square-foot basis for a Class A office property, according to Colliers International’s just released quarterly survey of the region’s office markets.

According to the report, overall demand for the three-month period ended Sept. 30 in the West Los Angeles market totaled an expected negative-350k sf. One year ago, demand during the same time frame totaled 637.4k sf, fueled by heavy leasing and a lack of new construction.

In its latest study, the brokerage firm disclosed that the Santa Monica submarket, although not alone in posting negative numbers during the three-month period, did record the largest amount of vacated space when two technology firms -- for completely different reasons -- moved out of approximately 450k sf. Both of the moves had been previously announced and were long anticipated. The fact that they both occurred in the third quarter was purely coincidental, the report noted.

Yahoo!, which had earlier announced its plans to reduce the amount of space it occupied in the region, moved into 130k sf of newly developed creative office space in the Playa Vista submarket, or what many observers euphemistically call “Silicon Beach.” The move continues a synergistic “clustering” trend begun there three years ago by other major technology firms, including Google, YouTube, Konami and Facebook, the report noted.

“Tech companies generally want to be located near each other and when a handful of well-known companies made the move to Playa Vista others soon followed,” said Executive Managing Director Hans Mumper, who oversees brokerage operations for Colliers in greater Los Angeles. “Being able to say you have an address in Playa Vista holds a certain caché, one that signifies your company is creative, in the vanguard, tech-minded and on the ‘cutting edge.’”

Riot Games, the popular video game publishing firm whose business has been on an expansion kick, vacated its space in Santa Monica and will now occupy larger quarters totaling 284k sf of newly developed creative office space in the Olympic Corridor submarket. While it did not move to Playa Vista, Riot Games did continue the trend of tech firms migrating south, where rental rates are lower and the office product is either newer or has been converted into creative space, the report added. .

According to Colliers, the main driver in the move of firms from traditional Class A office markets like Santa Monica to markets further south has been the availability of large blocks of newer product and lower rental costs. Based on the firm’s third quarter report, Santa Monica’s asking rents currently are $4.54 per square foot for a full service gross lease, while in the competing Marina del Rey/Venice market, which includes Playa Vista, prices come in at $3.39 per square foot full service gross.

“That’s a sizeable delta we’re seeing there,” said Colliers Senior Vice President Nico Vilgiate. “Even now, as pricing in the Marina del Rey/Venice/Playa Vista submarket begins to spike, El Segundo, where the price per square foot is more affordable still, already is experiencing substantial demand as the southward migration continues.”

Meantime, the market passed another milestone when Cain Hoy Enterprises, a Greenwich, CT-based investment firm, acquired a 97% occupied office property at 100 N. Crescent Dr. in Beverly Hills. The investment firm paid $130 mil, or a record $1,098 per square foot, for the 118.4k sf building.

This was the highest price ever paid on a per-square-foot basis for an office property not only in the West Los Angeles market, but in any of the more than two dozen office markets and submarkets tracked by Colliers in the entire Greater Los Angeles region. Two other notable sales that closed during the third quarter were 17373-17383 W. Sunset Blvd, which traded for $53 mil, or $511/sf, and 11050 Santa Monica Blvd in Century City, which sold for $11.5 mil, or $428/sf.

“Using recent past history and our research data to inform our current thinking, what we’re seeing in these acquisitions are investors who know that as long as the economy continues to strengthen in all sectors, especially in those industries like entertainment and digital media that have long favored a Westside address, their gamble on these properties will likely pay off handsomely,” Mumper said. “I don’t think we’re anywhere close to the end of the commercial real estate growth cycle in West Los Angeles. In fact, there are some observers who think we’re at the beginning of the beginning, although I’m reserving judgement on that claim until we see what happens over the next few quarters.”

Despite the unusually high, but not unexpected, rate of negative absorption in the third quarter, landlords remained bullish on the market, with average monthly rental rates on Class A, full-service gross leases increasing 3% to $4 per square foot, a rate not regularly seen since before The Great Recession of 2008, Colliers reported.

“Average asking rental rates in West L.A. have been steadily increasing since the fourth quarter of 2011, fueled largely by the market’s outsized and continuing demand factor,” Mumper added. “However, the difference between asking and getting can be quite distinct depending on a whole set of variables, including location, size, tenant credit and term of the lease. Everything’s negotiable; nothing’s set in stone.”

Vacancy rates, meanwhile, despite the negative absorption and delivery to the market of newly completed space in the third quarter, rose only marginally to 12.9%, compared to the 12.3% recorded during the previous three-month period. Highest vacancy rates within the West Los Angeles market were posted in the West Hollywood submarket at 18.3 percent, with the Olympic Corridor submarket posting the lowest rate at 9.2 percent, Colliers reported.

“What I think is very interesting for investors and owners to try to get their heads around is the fact that vacancies almost a decade ago in 2006 were substantially lower at 6.5% for the West Los Angeles market overall,” Vilgiate added. “Most of the questions we are currently being asked by our clients is, ‘Where are we in the cycle now?’ Our response, really, has been, ‘Welcome to the new normal.’”

To access Colliers International’s full third quarter West Los Angeles office market report, as well as market reports covering all of the region’s office, industrial and retail markets, please visit http://www.colliers.com/en-us/greaterlosangeles/insights.





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