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L.A. County Office Vacancies Down, Rents Up, Report Says

The tighter market reflects a national trend: A strong economy fuels business expansion.

January 19, 2006|Roger Vincent | Times Staff Writer

Los Angeles County's office market tightened further during last year's fourth quarter as business expansions pushed vacancy rates down and rents slightly up, according to data released Wednesday.

The average vacancy rate fell to 12.3% from 14.8% a year earlier, while monthly asking rents ticked up 5 cents to $2.11 a square foot, real estate brokerage Cushman & Wakefield said.

For companies planning a move, it means they have fewer options than they did a year ago, analysts said. Tenants also may have to pay more rent in the future, especially in the region's most sought-after markets.

The tighter office market in Los Angeles reflects a national trend: The strong economy fuels the growth of businesses, which then require more space.

The accelerated leasing of empty space and the dearth of new construction is pushing the region's office market toward a balance between the interests of landlords and tenants that hasn't been seen for decades. A 10% vacancy rate is considered equilibrium. In previous real estate cycles, developers built new buildings well before excess space could be leased, holding rents and landlord profits down.

Good-quality office buildings are filling up, and there is little available sublease space, which often rents for less than market rate, said Andrew Ratner of Cushman.

Key to the market's health is the rate of net leasing, which measures the reduction in available space. More than 4.5 million square feet was taken off the market last year as only 791,000 square feet of new office space was completed.

The tightening supply means "there is no question that rents are going to go up," Ratner said.

By the end of this year, average vacancy in the county will fall to near 10%, he predicted, and rents will increase 5% to 10% in popular districts such as West Los Angeles.

Westside vacancy last quarter dropped to 9.2% from 13.3% a year earlier, and average rents climbed 10 cents to $2.73. Almost 1.2 million square feet was taken off the market last year, surpassing all other county markets.

Although downtown Los Angeles has the best bargains for renters, industry experts said, even that long-suffering market is showing signs of righting itself. Vacancy was 14.3% in the fourth quarter, down from almost 17% a year earlier. Asking rents were up 8 cents to $2.15.

Several older downtown office buildings have been converted to apartments or condos as part of a residential renaissance. That, in turn, has sparked interest in the area among office renters encouraged by the availability of housing nearby, as well as restaurants and stores. There has also been almost no new office construction since a building boom ended in 1992.

Holding rents down, however, is City National Plaza. Thomas Properties Group bought the massive two-tower complex at South Flower and 5th streets in 2003, when it was only about 25% leased. Thomas then spent millions to make it a competitor among top-tier properties, adding hundreds of thousands of square feet to the market.

Today, the plaza is about 60% leased, President Jim Thomas said, and he and other landlords are starting to raise rents a bit as downtown recovers from overbuilding and the loss of several large corporations in the 1990s.

One more large lease of about 125,000 to 150,000 square feet would fill the bulk of the plaza's empty space and reduce its drag on the market, Thomas said.

Downtown "is really coming to life," said Jonathan Larsen of Transwestern Commercial Services. Service companies are leading the expansion in the central business district, he added.

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