A Tightening Office Market
The high-rise market is looking up.
Los Angeles County’s business owners appear to be increasingly bullish about the future as they expand their offices to accommodate growth.
Though office occupancy changed little across most of the nation in the third quarter, the county’s vacancy rate tightened to an average of 15.5%, according to a survey by real estate services firm Cushman & Wakefield.
A double-digit vacancy rate still favors tenants over landlords, but the mark for the three months ended Sept. 30 reflects a significant decrease in empty offices from a year earlier. At that point, the vacancy rate was 17.4%. Average monthly rent in L.A. County remained flat at $2.06 a square foot.
The lower vacancy rate “is an extremely positive sign, as it is apparent that business owners are taking more space in anticipation of a stronger economy,” said Joe Vargas, regional director for Cushman & Wakefield.
In particular, the securing of office space may portend a burst of hiring, which has remained surprisingly weak both nationally and in California for this point in an economic recovery.
The Westside showed the greatest improvement, with the vacancy rate dropping to 14.9% from 17.2%. About one-third of Los Angeles County’s 2 million square feet of net space absorption this year has occurred on the Westside. The market was one of the softest in the county after the dot-com implosion, with a vacancy rate of almost 20% at the end of 2002.
Downtown Los Angeles also saw a meaningful decline in its third-quarter vacancy rate, which dropped to 17.3% from 19.6% the year before. In all, the central city has absorbed 468,581 square feet of space since 2003’s third quarter.
Office landlord James Thomas, chairman of Los Angeles-based Thomas Properties Group, said that white-collar service businesses, including law firms, accounting firms and finance companies, were among those expanding.
“We think that job creation is occurring and that it is being reflected in increased activity in the market,” Thomas said. “We’re very optimistic that things are heading upward in terms of occupancy, rental rates and absorption.”
Less enthusiastic is real estate broker Jerry Porter of Cresa Partners, who represents tenants in lease negotiations with landlords.
“A good quarter doesn’t mean the general economy has turned around,” he said. The office market won’t fully recover “until we get closer to 10% vacancy and hold at that level for a year or two.”
Porter acknowledged that the recent uptick in absorption of empty space was a positive sign for building owners, but he attributed much of that to a handful of tenants, at least on the Westside, where he specializes.
Bulking up, he said, are defense contractors, biotech firms and electronic media companies. Also, software security company Symantec Corp. is building a research-and-development campus in Fox Hills.
Another company that has been signing leases is Union Bank of California. During the third quarter, the bank extended its agreements on about 150,000 square feet of office space, mostly in Los Angeles County, and took on an additional 30,000 or so square feet.
Craig Poletti, Union Bank’s vice president of real estate, said that many landlords were looking to beef up their roster of long-term tenants so that the property owners are more attractive to lenders and can borrow heavily in the current low-interest-rate environment.
That makes landlords willing to negotiate with tenants that want to “blend and extend” their current leases, as the practice is known. Under such deals, tenants agree to stretch out their agreements, even though they aren’t close to expiration, at more favorable rates than they currently have.
“We think this is an opportune time” to lock up space, Poletti said.
The Burbank-Glendale-Pasadena area remains one of the healthiest office submarkets in Southern California, with a vacancy rate of 11.8% compared with 14.2% a year earlier. In the last 12 months, the market has had a net absorption of 305,574 square feet of space despite the addition of nearly 200,000 square feet of new offices.
Long Beach was another bright spot, with the vacancy rate falling to 10.6% from 12.1% a year earlier.
North Los Angeles County, including the San Fernando Valley, reported a fairly healthy 11.1% vacancy rate, well below the 13.6% level of a year earlier.
For its part, the South Bay continued to be the weakest market in the region, with a vacancy rate hovering around 19%.
