Renters ruled the roost again in the third quarter as Southern California's office market remained flat even though some employers are expanding again.
The bright spot in Los Angeles County continued to be the neighborhoods of Santa Monica, Venice and Playa Vista, where growing technology and entertainment companies are snapping up space, undeterred by rising rents.
As one travels east, though, the picture grows more spotty for landlords.
"It's like a wave heading out from Santa Monica," broker Josh Wrobel said. "Only a small bit of water hits downtown L.A."
Office vacancy in Los Angeles County was 18.7% in the third quarter, compared with 19% a year earlier, according to real estate brokerage Cushman & Wakefield. Average rent rose 3 cents to $2.50 per square foot per month.
Vacancy is rising downtown, however, even though the neighborhood is enjoying a sustained renaissance. Thousands of new residents who arrived in the last decade have a growing number of restaurants, bars and stores to patronize, and downtown is a regional destination for entertainment such as professional sports and musical performances.
The challenge for many downtown office landlords is that their gleaming high-rises were created to please the tastes of conservative white-collar corporations. The companies most in need of more space, however, are made up of creative types who find such office buildings too square to bear.
Many traditional companies such as law and accounting firms, meanwhile, are shrinking their offices. As their leases expire, they reduce their footprints. In some cases, the companies have fewer workers than they did five years ago. In other cases, they are putting more workers in less space by using open "collaborative" floor plans that are now in vogue.
"The standard for occupancy per person is going down," Cushman & Wakefield executive Joe Vargas said.
This month accounting firm PricewaterhouseCoopers announced that it had agreed to rent 135,000 square feet downtown next year. That's substantially less than the 160,000 square feet it has now, even though the firm is adding employees.
Downtown vacancy is 20.5%, up from 18.3% in the third quarter of last year. Landlords of a handful of prime buildings have vacancy closer to 10%, though, and are starting to demand higher rents. As a result, average rent was up 6 cents to $2.91 per square foot.
The news is better for landlords in Orange County, where office buildings near John Wayne Airport are filling up — third-quarter vacancy fell 4 percentage points to about 16% from the same period a year earlier. Among the large deals last quarter was an agreement by St. Joseph Health to lease more than 200,000 square feet at 3345 Michelson Drive in Irvine, Cushman & Wakefield said.
Southern Orange County is also tightening in favor of owners.
In general, the Southern California office market has stabilized, Vargas said, but won't grow much stronger in the near future.
"Tenants and investors are going to be on the sideline until Nov. 4," he said. Even after the national election, "nothing is going to significantly change unless we see significant job growth."
Landlord David Binswanger of Lincoln Property Co., which owns office buildings in both Los Angeles and Orange counties, is more hopeful about the coming months.
"Statistics are rearward looking," he said. "In meetings with decision makers and CEOs of small businesses, I hear that they are doing a lot better than last year and the year before that. We're optimistic about the next two years."