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L.A. County office market improves as new leases edge out renewals

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The office market in Los Angeles County is picking up, even in long-suffering downtown L.A., as businesses once chastened by the Great Recession are opening up their purse strings.

A growing number of businesses are taking the plunge and moving their offices when their leases expire. New leases edged out renewals in the second quarter, suggesting that many companies are feeling confident enough to take on substantial moving costs.

And although many standard office towers are still begging for tenants, unconventional "creative" office buildings such as former warehouses are attracting new occupants despite rising rents. Two of the biggest deals last quarter were in old downtown buildings, the 1920s-era Millennium Biltmore Hotel Los Angeles and a vacant century-old auto dealership called the Desmond.

Entertainment giant AEG agreed to move more than 500 employees in its concert and ticketing divisions to the Desmond, which is undergoing a $13-million retrofit to make it suitable for office use. The move was noteworthy to industry observers because AEG agreed to move from a luxurious modern office complex in Mid-Wilshire to downtown's South Park neighborhood near LA Live.

"AEG going to The Desmond is a game changer," said Petra Durnin, a managing director at real estate brokerage Cushman & Wakefield. "Five years ago, they probably would have stayed put, but now there are creative options in downtown."

AEG's decision to consolidate near LA Live is "the first sign that the tanker is turning" in favor of the downtown office market, said David Binswanger, an executive vice president at Lincoln Property Co., which owns the Desmond and several office buildings in Southern California. "Tenants from other markets like Culver City, Santa Monica, Hollywood and Pasadena are starting to look downtown."

Web giant Yahoo, which has been in Santa Monica for more than a decade, is scouring the Los Angeles area for new digs, real estate brokers said.

Yahoo employees have toured several downtown properties including the historic Herald-Examiner newspaper headquarters — without finding a building that met their needs, according to people who know about Yahoo's real estate activities but are unauthorized to speak.

Yahoo is currently evaluating our real estate portfolio and potential office space options in the greater L.A. marketplace," a Yahoo representative said. "We encourage and solicit feedback from our employees as part of our site selection process."

Other creative firms such as clothier Nasty Gal, visual effects firm Magnopus, NBBJ Architecture and engineering firm Glumac have expanded their presence downtown this year, real estate brokerage Industry Partners said.

In June, tech firm NationBuilder agreed to rent almost the entire second floor of the historic Biltmore, which remains a busy hotel. NationBuilder's new offices will include a mix of open, collaborative space; exposed ceilings; red brick walls; glass conference rooms; and an outdoor walkway and lounge area overlooking Pershing Square.

Overall vacancy downtown still remains substantial. In the second quarter the average vacancy rate was 22%, up from 20.6% a year earlier, according to a new report by Cushman & Wakefield. Asking rents ticked up, however, from an average of $2.93 per square foot per month to $3.04.

Part of the reason for rising vacancy is that many big mainstream firms such accounting firm Deloitte have been shrinking their office footprints to create open, collaborative work spaces and cut real estate costs.

Deloitte agreed in June to rent 113,000 square feet in Gas Co. Tower on Bunker Hill. That's a substantial reduction from the 276,300 square feet it now occupies nearby at Two California Plaza.

"This continues to be the trend seen from the first quarter with companies right-sizing and being more efficient with their footprints," said Arty Maharajh, a vice president at real estate brokerage Cassidy Turley.

He predicts that downtown landlords will keep asking for higher rents while vacancy remains stagnant. And as more tech, media and entertainment business tenants test the waters there, conventional office towers will face increased competition from historic creative office properties such as the Desmond, Biltmore and PacMutual.

The overall renaissance since the turn of the century will eventually envelop the office market, which doesn't yet reflect the improving neighborhood, Cushman & Wakefield's Durnin said.

"There are 19,000 new residential units since 1999 and 600 new bars, restaurants and shops since 2008," she said. "Put this all together, and the whole is better than the sum of the office market."

Overall vacancy in Los Angeles, Orange, Riverside and San Bernardino counties fell slightly in the second quarter to 17% from 17.6% a year earlier, Cushman & Wakefield said. Asking rents climbed 6 cents to $2.39 per square foot per month.

The Westside remains the hottest market, with vacancy falling almost two percentage points to 13.7% and rents hitting $3.54 a foot.

roger.vincent@latimes.com

Twitter: @rogervincent

Copyright © 2014, Los Angeles Times
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Real EstateBusinessRentalsOffice and Retail SpacesBusinessRental ServiceDeloitte Touche Tohmatsu Ltd.
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