Although the Westside of Los Angeles continues to benefit from the expansion of entertainment, digital media and tech companies, overall office leasing activity remains moderate. Limited expansion has translated into a negligible reduction in the region’s excess supply. Following the trend of the last seven quarters, the region’s availability rate was basically unchanged, remaining at 19.4 percent overall and decreasing slightly from 20.7 percent to 20.6 percent for Class A properties, according to the Los Angeles Studley Report, Studley’s analysis of office market conditions in the city and surrounding areas.
“While the creative sectors have been steadily absorbing space, Los Angeles’ traditional professional and business services industries continue to streamline operations,” said Mark Sullivan, Studley executive vice president and Southern California regional manager. “The Downtown office market, which depends on demand from the traditional users of office space, has been particularly affected.”
Regional overall leasing activity totaled three million square feet, down 0.4 percent from last quarter. On a trailing four-quarter basis, overall leasing—11.9 million square feet—declined by 9.6 percent from the previous quarter and by 10.8 percent from the third quarter of 2012.
Little change in asking rents
Third quarter rental rates reflected the minimal and isolated improvement in the market; in fact, the slight increase in rents may be tied more to activity in capital markets than to leasing fundamentals. Class A asking rents inched up by 0.4 percent from $29.98 to $30.10 per square foot but concession packages remain elevated in most submarkets, meaning that effective rents in much of the region are well below $30.00. The overall asking rent, $28.93, increased by 0.7 percent from last quarter.
Renewals dominate transaction activity
As Los Angeles area companies continue to remain cautious, renewals dominate transaction activity particularly in Downtown Los Angeles. Several significant renegotiations were completed in the third quarter. For example, Davis Wright Tremaine LLP signed a 10-year renewal for 43,801 square feet at 865 South Figueroa and California Bank & Trust renewed for 40,000 square feet at 550 S. Hope Street.
“Given the uncertainty in the broader economy and the ample opportunities available to tenants, landlords are eager to retain tenants,” noted Mike Catalano, Studley executive vice president and branch manager of the firm’s West Los Angeles office. “This mindset dovetails perfectly with companies’ hesitancy to take on the additional expenditures associated with relocations.”
Third-quarter top transactions
The largest transaction of the third quarter was Beats by Dr. Dre’s 110,000-square-foot-lease at 8550 Higuera Street in Culver City, represented by Studley.
The top 15 transactions include:
Los Angeles office market activity remains moderate with the exception of the more dynamic sectors on the Westside, and lease renewals versus relocations continue to dominate activity overall. With creative tenants relocating out of Class A projects and into product not currently included in office inventory, vacancy has decreased at a slowed pace. As has been true for the last several quarters, Los Angeles is attracting more interest from investors than tenants. As a result, tenants willing to sign long-term leases will remain in a very favorable position with an abundance of “flight-to-quality” opportunities available.
Los Angeles Studley Report – Q3 2013