L.A. County office rental market perked up in 4th quarter
Los Angeles County’s office rental market finally showed signs of improvement in the fourth quarter as many businesses moved to new quarters and losses in occupancy slowed dramatically.
The market is still weak for landlords and is expected to stay that way for months, but the long slide appears to be over as companies grow more optimistic about their prospects, real estate brokers said.
“People are confident in their businesses and are committing to new leases,” said Joe Vargas, area leader at brokerage Cushman & Wakefield.
After the economic downturn, most while-collar firms chose to play it safe by renewing existing leases when they expired rather than spending the money to move into new digs. In the fourth quarter, however, 77% of the space leased was for new office quarters, representing moves or expansions.
Overall vacancy in the fourth quarter was virtually unchanged from a year earlier at 18.8%, though down from its most recent peak of 19.1% in mid-2011. Landlords asked for an average of $2.50 per square foot per month, down 6 cents from the end of 2010.
The fact that there have been two consecutive quarters of occupancy gains in suburban office buildings outside of downtown Los Angeles might be the best indicator that the county’s office market is entering recovery, Cushman & Wakefield said.
Century City, the largest suburban high-rise cluster of offices, had occupancy gains for the last two quarters but was down more than 200,000 square feet for the year.
Overall absorption — the net gain or loss in rented space — was negative 500,000 square feet for the year, a dramatic turnaround from 2010’s negative 2.7 million square feet.
“We still have a long way to go,” Vargas cautioned. “We are digging out of a big hole.”
Two of the biggest leases last quarter were in the same complex, the former headquarters of Hilton Hotels in Beverly Hills.
United Talent Agency agreed to occupy 120,000 square feet and magazine publisher Playboy Enterprises Inc. rented 45,000 square feet in the property on Civic Center Drive.
Energy drink maker Red Bull took nearly 40,000 square feet in the Westside Media Center on Olympic Boulevard.
“We saw some large deals,” Vargas said.
Orange County, where the office market crashed earlier as the subprime mortgage industry went into free fall, is further along in its recovery.
Landlords enjoyed more than 2.3 million square feet of absorption last year.
“This steady growth indicates that the office market is continuing its recovery, and we expect the market will continue to improve with anticipated job growth,” said Jerry Holdner, vice president of market research at brokerage Voit Real Estate Services.
Employment expansion will be led by professional services businesses, healthcare and research-oriented businesses such as medical, information technology and alternative-energy companies, Holdner said.
The average asking rent in Orange County was $1.91 a square foot, down 9 cents from a year earlier, but Voit predicted that the increase in leasing activity would turn that trend around.
Rents will firm up early this year and begin to increase in the second half, Holdner said.
Other markets stocked with medical, technology and entertainment businesses, such as Santa Monica, San Diego, Silicon Valley and San Francisco, are also expected to show improvement as those industries grow.
Regions without many of those businesses, such as the Inland Empire, are expected to recover more slowly.
The office vacancy rate in Riverside and San Bernardino counties was 23.6% in the fourth quarter, an improvement from 25.1% a year earlier.
National data also reflected gains, brokerage CBRE Group Inc. said. The U.S. office market improved steadily throughout 2011, ending the year with a vacancy rate of 16%, down half a percentage point from the end of 2010.