L.A. County office market recovery spreads beyond Westside in 2nd quarter

Expanding companies scooped up office space around Los Angeles County in the second quarter as the real estate recovery spread beyond ever-popular markets such as the Westside.

Long-standing distinctions about which neighborhoods are appropriate for certain businesses are breaking down in the county as the differences between conventional white-collar offices and so-called creative space fade. Buttoned-down lawyers and casually dressed technology workers are mingling in skyscrapers and renovated brick warehouses.

The shift reflects changing tastes in offices over recent years as a growing number of businesses embrace more open floor plans where employees share space and are encouraged to collaborate in an informal atmosphere.

“The lines are getting blurred between the two tenant types and office types,” said Petra Durnin, regional research director for real estate brokerage Cushman & Wakefield. “People are now crossing markets in a way they haven’t before.”

Some tech firms, for example, that would have insisted on finding offices in Santa Monica or somewhere else near the beach are looking for space as far inland as downtown, Durnin said. And with entertainment and technology firms among the fastest growing businesses in L.A., landlords of all types of office buildings are eager to accommodate them.

The upshot is that the post-recession office market recovery that was once mostly limited to the Westside is spreading to other neighborhoods where there wasn’t much of an attraction until recently, Durnin said.

East Hollywood, in particular, is benefiting from substantial development, such as multimillion-dollar office complexes being built on Sunset Boulevard and on Vine Street by Kilroy Realty Corp. and Hudson Pacific Properties Inc. Among tenants headed to the area are TV networks owner Viacom Inc. and NeueHouse, a New York operator of avant-garde communal office space.

Overall, vacancy in L.A. County was 15.4% in the second quarter, down significantly from 17.7% in the same period last year, according to Cushman & Wakefield. Decreases exceeded two percentage points in nearly every county market in the second quarter, with the Burbank-Glendale-Pasadena area leading the way with a drop of 3.2 percentage points.

The improving vacancy rate was driven by a net gain in leased office space of about 2 million square feet in the first half of this year, roughly double the amount absorbed in the first half of 2014 — which was also considered a good year for landlords. Reflecting the widespread activity, El Segundo, downtown Los Angeles, Pasadena and Warner Center were among the leading markets, with a combined total of nearly 3.3 million square feet leased.

One of the biggest deals of the quarter was a 112,525-square-foot lease signed by architecture firm Aecom for space in a Grand Avenue office building in downtown L.A., where apartments, stores and restaurants are opening at a fast pace.

Landlords in downtown L.A., which has suffered from high vacancy for decades, are growing so optimistic about the way the city is changing that they are raising rents even though the market is still soft, said real estate broker Hans Mumper of Colliers International. Rates are up 6.25% compared with a year ago, according to Cushman.

“Hopefully the office market is catching up with multifamily and retail,” Mumper said.

Countywide, emboldened landlords asked for an average of $2.76 per square foot a month in the second quarter, a 5.7% jump from $2.61 a year ago. Typically, an increase of more than 5% is considered healthy growth by landlords.

Orange County, where the office market has been in recovery longer than in Los Angeles, “is still doing very well,” Durnin said. Vacancy dropped two percentage points from a year ago to 12.7%. Asking rents climbed 14%, from $1.91 per square foot to $2.18.

The market is expected to keep tilting in landlords’ favor in the months ahead.

“Barring some big event,” Durnin said, “I think things will continue this way until the end of the year.”

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