Tenants have leased approximately 10.1 million square feet of office space in the last six months, the strongest two-quarter leasing total in several years. Entertainment, media and technology firms continue to propel much of the market activity, but there’s been increased demand by law firms, educational institutions and select financial services companies as well.
As a result of this uptick in activity, overall asking rents continue to trend upward, rising by 1.7 percent in the first quarter of 2015 to $31.02 per square foot, according to the Los Angeles Savills Studley Report, an analysis of office market conditions in the city and surrounding areas. Class A asking rents rose from $31.64 to $32.12, an increase of 1.5 percent.
“The push in pricing has been driven primarily by the expanding creative sector and largely concentrated in West Los Angeles,” said Mark Sullivan, Savills Studley executive vice president and Southern California regional manager. “However, as rents continue to escalate in Santa Monica and surrounding areas, tenants are becoming more resourceful in their search for alternative locations, including Tri-Cities and Downtown where prices remain well below pre-recession peaks.”
The overall availability rate was essentially unchanged in the first quarter, averaging 18 percent, and the Class A rate declined slightly from 19.5 to 19.2 percent. El Segundo emergingEl Segundo has recently emerged as an attractive alternative for innovation-sector companies priced out of Santa Monica or Playa Vista. The submarket has a growing number of options that appeal to progressive companies as well as access to an expanding local labor pool.
Bixby Land Company recently signed Sanrio, creator of the popular Hello Kitty character, to a 28,584-square-foot-lease at 2101 El Segundo Boulevard, a highly amenitized, creative office property completed in 2014. The 114,000-square-foot building is now 80 percent occupied.
Several developers in Downtown Los Angeles are looking to emulate Bixby’s recent success. Realty Partners acquired Figueroa Courtyard, a five-building, 270,169-square-foot office park near the Bunker Hill Financial District and is expected to reconfigure and renovate the property.
“The demand for creative space continues to increase, with newly constructed and renovated office properties enjoying relatively strong demand from both tenants and investors,” said Mike Catalano, Savills Studley executive vice president and branch manager of the firm’s West Los Angeles office. “Developers across submarkets are scrambling to find buildings that are suitable conversion candidates.”Marketing and law firms contribute to leasing activityAs the broader U.S. economy gains traction, the Los Angeles office market is seeing movement from a variety of industry sectors, in addition to the media and entertainment companies that have accounted for much of the recent leasing activity.
Advertising and marketing firms, which have experienced increased demand for their services, have cautiously re-entered the marketplace. Omnicom leased 60,000 square feet at 12777 W. Jefferson Boulevard and Ignited Minds signed a 52,282-square-foot lease in the South Bay.
Similarly law firms, while not necessarily increasing their footprints, have become more active. There’s been a flurry of law firm deals in Century City, including Milbank, Tweed, Hadley & McCloy, 56,527 square feet at 2029 Century Park East; and Polsinelli Shugart, 56,524 square feet at 2049 Century Park East. Additionally, the law firms of Singer, Wolf, Goldman & Holtz; Covington & Burling; and Hecker Law Group have signed mid-sized leases in Century City.
The top 10 transactions in the first quarter of 2015 include:
- Dreamworks Animation* 497,4031000
- Flower St Glendale Beachbody Holdings: 132,9203301
- Exposition Blvd Santa Monica City of Los Angeles: 125,591350
- S Grand Ave Downtown LA Irell & Manella LLP: 125,2501800
- Ave of the Stars Century City Southern California Edison: 125,0002
- Innovation Way San Gabriel Valley Nickelodeon: 113,760203
- W Olive Ave Burbank Nickelodeon: 108,4103000
- Alameda Ave Burbank Eurofins Scientific: 100,000931
- Corporate Center San Gabriel Valley USC School of Social Work: 80,0471149
- S Hill St Downtown LA Cast & Crew Entertainment: 70,2302300
W Empire Ave BurbankInvestment OutlookInvestor demand remains robust for premium properties in superior locations. The Reserve in Marina Del Ray, for example, sold for $316 million ($791.24 per square foot), with a reported cap rate of 4.3 percent, well below the already depressed average cap rate of 6.5 – 6 percent. Newport Beach’s Invesco Real Estate bought the fully leased 399,373-square-foot building from Shorenstein Properties and Worthe Real Estate Group.
Fully leased creative office space properties with elevated occupancy are also in great demand and are selling at prices that are more than double the market average. Los Angeles-based IDS Real Estate Group paid $108 million ($847.71 per square foot) for the three-building Beats by Dre complex in Culver City.
“The Los Angeles region has lagged the nation in terms of economic growth, but we are now seeing some encouraging signs. Our recovery is still limited to select submarkets and industry sectors, but tenants are taking advantage of opportunities to secure work environments and attract talent, and investors are bullish,” said Sullivan.
Click to access full report: Los Angeles Office Sector Report (Q1 2015)