First to Leave, First to Make Comeback

LOS ANGELES-When the economy fell apart in 2007, class B office space was hit the hardest in Downtown Los Angeles. These office buildings didn't have the benefit of a tenant base that includes large national and multi-national firms. They typically house the “mom-and-pop” tenants that are smaller, local companies who weren't well-equipped to handle the extreme volatility of an economic downturn. Not far behind class B tenants were the class A tenants. Those that were able to re-work their leases did and downsized. Those that couldn't rework them, left.

The vacancies left behind by exiting class B tenants, along with dramatic downsizing of the large class A tenant base, left Downtown Los Angeles office buildings with gaping holes in their stacking plans – much of that space still hasn't been filled. class A buildings like 633 W. 5^th St. (US Bank Tower) and 555 West 5^th St. (Gas Company Tower) have approximately 1 million square feet of available space between the two of them. Other comparable buildings have vacancy rates between 20% and 35%. 

Is there any hope that the millions of vacant square feet will ever be filled? Yes … and class B tenants are the first to make a comeback!

Class B buildings all over Downtown Los Angeles are enjoying their highest occupancy rates in years. Buildings like 315 We. 9^th St. (Coast Savings Building) and 617 S. Olive St. (Oviatt Building) have lowered their vacancy rates to single digits over the past 24 months from highs in vacancy of approximately 42% and almost 30% respectively. Smaller tenants such as sole practitioner attorneys, non-profits, creative users, and others have contributed to the class B market's occupancy increase.

As a result, we are seeing an increase in posted asking rates and a slight shift from an aggressive tenants' market back toward a landlords' market. In the recent past, landlords would be willing to discount their posted asking rates 15% or more in addition to impressive tenant improvement and free rent packages to make deals. Now, the concessions of TI packages and free rent are still being given, however, there is less room to negotiate asking rates. Two years ago, deals were being made at approximately $18.00/SF per annum, full service gross in class B buildings. Presently, those same buildings are making deals in the neighborhood of $24.00 per square foot, full service gross.  A 33% increase over a two-year period is pretty impressive, and there are signs this upward trend will continue.

The return of the class B office tenant is a good indicator of good things to come for the commercial real estate market in Los Angeles. We are already seeing signs of a “trickle up” effect among smaller, boutique, class A office buildings that Charles Dunn Co. represents. As the rental rates for class B office space continue to climb, the economic savings that were found in the past between class A- and B buildings decrease, making the decision increasingly difficult when deciding between the two for new office space. 

The future is bright for Downtown Los Angeles, and vacancies will slowly but surely continue to decline, which can largely be attributed to the small business/mom-and-pop office tenants that are making their way back into the market.

Chris Steck is a director with Charles Dunn Co. out of the firm's Downtown Los Angeles office and is a member of the top office brokerage team that services the downtown market. The views expressed in this column are the author's own.