L.A. office market has best quarter since the financial crisis as entertainment and tech firms keep expanding
To get a sense for how well the Los Angeles office market is doing, there probably isn’t a better barometer than Jerry Snyder.
The veteran developer has been in the industry since 1949 and built thousands of houses and apartments, along with shopping centers and offices, when he thinks the market is right. Among his past standout office developments are the Water Garden in Santa Monica and Wilshire Courtyard in the Mid-Wilshire district.
What is he up to these days? Not one, not two, but three separate office projects.
“Offices. That’s all I’m doing now,” said Snyder, whose new developments are worth a combined $500 million.
Two are being completed in Hollywood. The third is a 12-story tower being planned for a site behind his SAG-AFTRA Plaza on Wilshire Boulevard in the Miracle Mile district.
Snyder’s bullish take on the market is reflected in the impressive amount of office space that was absorbed during the fourth quarter in the Los Angeles region, something that bodes well for the local commercial real estate market in 2017.
Big office leases by such companies as Warner Music Group, City National Bank and Kite Pharma helped soak up 2.1 million square feet in Los Angeles and Ventura counties, the most in a quarter since 2000, brokerage CBRE Group Inc. said.
Absorption measures the change in occupied space when offices are leased or vacated and is considered a key measure of the real estate industry.
The disappearance of so much empty space suggests that landlords will hold the upper hand in the months ahead when it comes to negotiating leases with tenants in choice neighborhoods, said Petra Durnin, director of research and analysis at CBRE.
“When L.A. has a quarter as strong as the fourth quarter was, the following quarters are typically very robust in rent growth and occupancy,” she said.
The office markets in other big cities are slowing down, she said, but Los Angeles was slower to recover from the recession and is still on the upswing as local businesses expand or are formed.
“We’re still in growth mode,” she said. “The only challenge is that it has been a long recovery, so investors and occupiers are preparing for the end of the cycle. But 2017 will be a strong year for both leasing and sales.”
Entertainment, L.A.’s most famous export, has been thriving and driving the office market for months, industry observers say.
Web-based services Netflix, Amazon and Hulu are competing with established studios to create new shows. Video-sharing website YouTube, Internet media company BuzzFeed and mobile phone application Snapchat are also creating programming such as news and entertainment for their platforms.
Their preferred haunts as they are expand are Hollywood, Playa Vista, Venice and Santa Monica.
The melding of Silicon Valley and Hollywood is playing out in L.A., said real estate broker Tony Morales of JLL.
“Bay Area tech companies are trying to get a media component,” Morales said. “Tech with content is a unique hybrid here.”
Among Snyder’s new tenants in Hollywood will be film production company Broad Green Pictures and post-production sound company Formosa Group.
“Tenant interest has really picked up since the first of the year,” Snyder said. “I think people were kind of waiting to see what would happen with the election.”
Santa Monica, the preferred Southern California outpost of tech since the Internet revolution began, benefited royally from the trend last quarter and accounted for a fourth of all the absorption in greater Los Angeles, CBRE said.
It’s also one of the most expensive markets, with landlords asking for $5.61 a square foot per month, up from $5.43 last quarter and $5.41 a year ago.
The greater Los Angels office vacancy fell to 13.3%, down a percentage point from last quarter and down nearly 2 percentage points from a year ago. Average asking rents were $2.94 a square foot per month, up a nickel from a year ago.
The most active markets for leases and rent increases were in western Los Angeles County, including El Segundo, Culver City and Playa Vista. Burbank, Glendale and Pasadena were comparatively flat and the western San Fernando Valley, formerly home to some large mortgage banking operations, was weak by comparison.
Vacancy in downtown Los Angeles, where a torrent of mixed-used projects are under construction, was unchanged from the third quarter at 16.8% but down from 17.6% in the fourth quarter a year ago. Asking rents rose 3 cents from the previous quarter to $3.33 a square foot.
Although 2017 looks strong, Morales predicts a lull in leasing in 2018 and 2019 because that period will mark a decade since the financial crisis and resulting recession slowed the market to a crawl. Big leases commonly turn over after 10 years and put tenants back on the market, so fewer leases than average will turn over.
Still, developers hoping to catch the wave continue to build. There are 2.2 million square feet of office space under construction in greater Los Angeles, CBRE said, down about 250,000 square feet from last quarter. The most active district for development is Hollywood, where nearly 600,000 square feet are being built.
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