LOS ANGELES—The Los Angeles office market hashad seen its strongest quarterly net absorption since 2005,according to the 2Q15 office report from PM RealtyGroup. The market had 1.6 million square feet of officeabsorption during the quarter, mainly in the class-A market.Additionally, direct vacancy rates decreased by 140 basis points to14.8% and class-A rental rates increased year-over-year by 4.1% to$2.85 per square foot and class-B rental rates climbed 3.5% to$2.31 per square foot.

“The absorption we're experiencing in Southern California is nowbroad-based—both tenant-type and submarkets,” MarkMattis of PMRG tells GlobeSt.com. “When the economicrecovery began a few years ago, occupancy gains were primarilyderived from tech, social media and entertainment tenants in techsectors, like Santa Monica, Playa Vista and Burbank. Withspace availability significantly constrained in those areas,tenants were forced to seek nearby, secondarylocations. Miracle Mile/Mid Wilshire, the San Fernando Valleyand especially the South Bay, primarily El Segundo, have allbenefited significantly. In addition, Los Angeles created over474,400 jobs since its trough in 2010 and it surpassed its 2007pre-recession peak of 4.3 million jobs. The absorption has nowmoved well beyond creative projects as traditional drop-ceilingoffice buildings are leasing up steadily as well.” As Mattismentions, job growth helped drive the surge. Year-over-year, LosAngeles gained 100,500 jobs, with the education and health,services and trade and transportation and utilities sectorsreporting the highest job gains.

The quarter saw some significant leases, including LewisBrisbois Bisgaard & Smith's 215,000 square footlease renewal at the US Bank Towerand AECOM's 112,525-square-foot lease atOne California Plaza. The challenge in the markethas really been renovating and turning over investment spaces,because of the demand for creative office, the renovation coststend to be higher. “The inflated cost of construction coupled withTitle 24, has increased the capital demands for landlords tocomplete new deals and renewals,” says Mattis. “A new buildout of raw space five years ago would cost about $50 to $55 persquare foot. Today with creative demands, high construction pricingand Title 24, the same build out is closer to $75 to $80 per squarefoot. When rental rates are above $40 per square foot, these dealscan pencil out, but at $30 per square foot, not so much. Inaddition, local municipalities are overwhelmed by the number ofrequested permits for tenant improvement work. Myrecommendation to the corporate service brokers is to get yourtours set up 9-12 months ahead of time if the prospect isconsidering a significant build-out.”

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.