Office Market Picks Up at Yearend

LOS ANGELES—The office market experienced a small boom at the end of the year with the 1.1 million square feet of positive absorption—making it the strongest quarter in 2015, according to the 4Q15 office report from Newmark Grubb Knight Frank. As a result, the vacancy rate dropped to 14.5%. However, while this was the strongest market in the quarter in the year, the net absorption rate fell 10.7% below the 2014 total. Still, the quarter showed a surge leading into the next year, and analysts are optimistic.

"This was the strongest showing for net absorption for the year, which is a really good sign moving forward," Michael Rudis, senior research analyst at NGKF, tells GlobeSt.com. "For part of the year, we were above the national rate, and now we are on par. That makes us really optimistic about the upcoming year. Employment growth is expected to pick up in the office occupying centers, like information, financial services and professional and business services, by 2.7% in the upcoming year. The means 25,000 new office using jobs. For those reasons, we are really optimistic for next year." Rudis notes that those jobs would account for 4 million square feet of new demand. Don't expect that to mean there will be 4 million square feet of absorption, he adds, noting that there is always the shadow market to consider.

The report shows Downtown Los Angeles and El Segundo as the markets to watch in the upcoming year, especially Downtown Los Angeles, which experienced its first "robust reductions" in 2015. The Westside market continued to lead the pack at the end of the year; however, Rudis said that the dynamic is changing in that market. "The Westside is always going to be the more glamorous market, but the dynamics on the Westside are changing. I don't think Santa Monica is the be all and end all of the Westside," he explains. "We saw a lot of tenants more out of the market this year, or sign leases to move out. Santa Monica closed the year with half-a-million square feet of negative absorption. You don't have to be in Santa Monica to be around other creative or tech tenants and it is really opening the door for other tenants to be in west L.A."

Overall, asking rental rates hit a historic new high of $3.01 per square foot, with an average of $3.37 for class-A product and $2.52 for class-B product, which surpasses 2008 levels. The biggest leases signed during the quarter included IPG's Century City lease, which was also the largest deal in the last decade, and Munger Tolles & Olson LLP's 150,000-square-foot Downtown L.A. lease and OneWest Bank's 136,194-square-foot lease in Pasadena.