DTLA Office Tenants Renew Years Early

LOS ANGELES—The office market in Downtown Los Angeles is still stagnant, especially compared to the activity in the multifamily, retail and hotel sectors, but office tenants in the market are convinced that is going to change. Wilson Elser and Gordon & Rees, two large law firms based in the Downtown market, just renewed a combined 95,000 square feet several years early to avoid potentially higher rents in the next few years. It is an interesting idea considering that the Downtown market still has a vacancy rate in the high teens—or as much as 20% according to some sources—and large blocks of available space.

"There are still lots of large blocks of space available, but there has been momentum downtown in the residential and retail sector for the last three to five years, but the office sector has been fairly stagnant," Andrew Lustgarten, the corporate managing director at Savills Studley, tells GlobeSt.com. "But, it feels like that is starting to change. There have been small winds for downtown, and although the vacancy rate is still in the high teens, it is trending down every quarter and it feels like we are one big lease away from the office market taking off the way retail and residential have." Lustgarten negotiated the two leases along with Mark Sullivan, EVP with the global tenant advisory firm at Savills Studley. 

Landlords are allowing these early lease renewals because today, there is plenty of available space in the market, and, while tenants see that, the anticipated momentum is encouraging them to renew leases early and secure lower pricing with long-term leases before the market explodes. "We started the process early because we all feel the momentum and we wanted to lock in pricing before it got away from us," adds Lustgarten. "Both tenants felt like pricing is better today than it will be in 2016 or 2018 when they would have to renew their lease. You are seeing that with more and more tenants. Brookfield owns half of the class-A market and they are getting pretty good rents on renewals. It feels like this is the calm before the storm."

Wilson Elser signed a lease for 41,441 square feet at City National Plaza, where they have been since 2005. Their lease expired in late 2016, according to Lustgarten. Gordon & Rees renewed and expanded their existing lease by 10,000 square feet at the US Bank Tower, occupying more than 50,000 square feet in the building. This lease didn't expire for several years, but the firm wanted to renew now before pricing increased further.

Even with high vacancy rates, rents for renewing clients are climbing faster than rents for new clients, which are being offered concessions to move to the market. These rising rents are largely being driven by Brookfield, which has a strong market hold since its acquisition of the MPG portfolio. "I think the problem is that there have always been a lot of options," explains Lustgarten. "If you are an 10,000-square-foot tenant, for example, I don't think there is a single building in the market that doesn't have 10,000 square feet. Every single building is the landlord's competition. Now, that there has been some consolidation with Brookfield's acquisition of all the MPG stuff, the market has stabilized a little bit. Because there is less diversity and you have one landlord controlling half of the class-A trophy market, they are single handedly propping up rents in Downtown Los Angeles."

However, when asked if these rents were then artificially inflated, Lustgarten said they were not. "As long as people are willing to pay it, it isn't artificial," he says, adding that new tenants are not paying higher prices—only renewing tenants. "They are getting a lot of tenants to renew at those high rents because many companies would have to pay $100 per square foot to move, so they would rather pay the higher rents and stay in place. "New tenants entering the market are definitely getting better deals that renewing tenants." The average rents in the market are about $36 per square foot, but renewing tenants are paying up to $45 per square foot to stay put.

While the market is attracting some creative office attention, the downtown market is still a hotbed for law firms, many of which have been in the market since before the downturn. As a result, they are willing to renew early to at least hold off the—what they see as—inevitable rental rate increases coming in the next few years.