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Southland office market may be starting to bounce back

COMMERCIAL REAL ESTATE QUARTERLY REPORT

For the first time in years, L.A. County vacancy rates drop and average rents climb. Still, with a few notable exceptions, most markets remain quite soft.

July 22, 2012|By Roger Vincent, Los Angeles Times
  • John Barganski is head of leasing in Southern California for Brookfield Office Properties, owner of Ernst & Young Plaza in downtown L.A.'s financial district. Brookfield signed seven leases for a total of more than 200,000 square feet in the second quarter. The company is also renovating its mall downstairs.
John Barganski is head of leasing in Southern California for Brookfield… (Mel Melcon, Los Angeles…)

Southern California's long-languishing office market finally managed to utter a convincing peep in the second quarter as stubbornly high vacancy rates dropped a smidgen.

It doesn't signal that landlords' troubles are nearly over. Most markets — with a few notable exceptions — are considered quite soft, which means tenants are in a superior bargaining position.

Still, overall vacancy in Los Angeles County slipped to 18.6% from 19.1% in last year's second quarter, according to real estate brokerage Cushman & Wakefield. It was the first year-to-year vacancy decline since the second quarter of 2007. Meanwhile, average monthly rents last quarter climbed 7 cents to $2.52 per square foot.

The improving climate for local property owners marks a change from years of rising vacancy and falling rents that began with the last economic downturn.

"My sense is that L.A. County and Orange County are kind of slowly improving, slowly inching out," said real estate analyst Jed Reagan of Green Street Advisors.

Results may vary, as the old warning goes.

Orange County's traditionally desirable John Wayne Airport area office market is reviving as tenants take advantage of depressed rents to move up from less popular markets such as Santa Ana and Anaheim.

Affection from growing tech companies has made Santa Monica and Venice so hot that they are lifting nearby areas such as Culver City and Playa Vista, where office space is more plentiful and rents are cheaper.

Vacancy in aging office buildings near Los Angeles International Airport, meanwhile, continues to rise and topped 35% in the second quarter.

Downtown Los Angeles, which has been weak since an orgy of office construction ended in 1992, finally threw off some sparks as average rents rose 5 cents to $2.91 per square foot.

Improvement will continue, some observers say, as downtown becomes known as a growing residential neighborhood with multiplying recreational options such as bars, restaurants and professional sports.

Brookfield Office Properties Inc., owner of Ernst & Young Plaza in the financial district, signed seven leases for a total of more than 200,000 square feet in the second quarter. Downtown property experts placed the combined value of the leases at more than $60 million. The largest was with law firm Caldwell Leslie & Proctor.

"It's times like this when people who have to make leasing commitments say, 'I may not find this in the next cycle,' so they take advantage," said John Barganski, Brookfield's head of leasing in Southern California. "We have achieved the bottom of the market."

Like some other downtown properties, Ernst & Young Plaza at 7th and Figueroa streets is in a better location than it was when it was completed in 1985. A subway station later opened across the street, and Staples Center and L.A. Live are bustling destinations with new condos and apartments a few blocks away.

Brookfield is upping the ante with a $40-million renovation of its mall downstairs, which is set to reopen in October with new restaurants and stores, including Target and Sport Chalet.

"There are certainly a lot of amenities downtown that didn't exist 10 years ago," Cushman & Wakefield executive Joe Vargas said.

"We're not seeing a lot of tenants moving out. There is a dynamic that is new."

Substantial growth in occupancy and rents, however, will remain hard to come by downtown and in most other markets, he said.

As has been the pattern for years now, a majority of deals are renewals of existing leases instead of moves to new quarters. Many employers are hesitant to face the cost of building out new offices and the price of the move itself.

"This economy is sluggish and flat; choppy at best," Vargas said. "We are not going to see any real change until we see significant job growth, and that doesn't appear to be on the horizon."

roger.vincent@latimes.com

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