LOS ANGELES-Office leasing has perked up in Los Angeles County in the past year, but it’s still moving slowly, especially in comparison with the sizzling sales market. The contrast between the leasing and sales segments of the office market could hardly be greater, with rental rates rising ever-so-slowly as prices of office buildings continue to soar despite lukewarm leasing.

“The way investment prices are rising, it might create the impression that rents have gone way up, but that’s not the case,” SVP Whitley Collins of the downtown L.A. office of CB Richard Ellis tells GlobeSt.com. Collins notes that rental rates in Downtown Los Angeles have barely budged in years, but the prices paid for office buildings have nearly doubled in the past three years. It’s just one of a number of ways in which what’s visible on the surface reveals only part of what’s going on in the 185-million-sf Los Angeles County office market, which has recovered more than statistics might suggest.Collins says L.A. office investors are driven by the same dynamics that have boosted investment prices throughout the country: a surfeit of capital chasing a shortage of deals, low interest rates and investors who stick with real estate because they’re skittish about other investments. Because they’re leery of other investments, Collins points out, more investors are willing to accept the relatively low returns that many office properties are producing.Generalizing about the Los Angeles office market is difficult because it consists of dozens of different submarkets that are performing at different levels. The latest CBRE surveys show average direct vacancy rates in the region steadily declined each quarter of 2004 to slightly over 13%, with a couple of percentage points of sublease space on top of that, and with average asking rates pretty much stalled at about $2.12 per sf per month.Nonetheless, Collins says, the region’s office markets have probably recovered more than the numbers indicate. He explains that many companies held onto space that they weren’t using when the recession and the dot-com implosion put the brakes on the office market several years ago. Brokers refer to the space that remained leased but empty as shadow space or phantom space. “The actual vacancies in those days were actually deeper than the vacancies that showed in the statistics,” Collins says. By the same token, he says, statistics didn’t report the gains the office market was making when conditions began to improve and companies began to fill their formerly empty shadow space. “Coming into 2004, a lot of that shadow space had been filled, but it didn’t show in the statistics,” Collins says. “This year, we’ve seen a slow but steady climb in absorption.” The latest CBRE report shows that nearly one million sf was absorbed during the third quarter, with each major submarket in the region showing positive net absorption. But office market observers remain cautious in their optimism because the L.A. office markets, particularly Downtown, have stumbled in the past after starting toward a strong recovery. “Every year in Downtown for the past 10 years, some significant event has occurred that has added a significant amount of new space to the market after we seemed to be on our way to some good absorption,” Collins says. Mergers of oil companies, banks and accounting firms have dumped hundreds of thousands of square feet of sublease space on the market at one time, and few tenants have come in from outside Downtown to fill the space. “If you peel away the effects of those events, Downtown has probably had decent absorption,” Collins says. One of L.A.’s other premier office markets, West Los Angeles, could be facing a similar impact from the merger of MGM and Sony, which will likely mean 200,000 sf or more of sublease space hitting the market. “MGM and Sony haven’t announced anything about their space and they haven’t put any space on the market, but it’s just a matter of time until they do,” Collins says, so the MGM-Sony deal will be a significant factor in the West L.A. market in 2005. In Downtown L.A., he says, one of the biggest factors in 2005 and beyond will be Thomas Properties Group’s efforts to fill one million sf at Arco Towers. With annual absorption in Downtown of about 100,000 sf, Arco Towers will need to fill its space by enticing existing Downtown tenants as opposed to relying in in-migration from other markets, Collins reasons. CBRE’s latest surveys say downtown remains a tenants’ market, as is the South Bay, while the San Fernando Valley and Tri-Cities favor landlords, and a case can be made either way in West L.A.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.



Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2024 ALM Global, LLC. All Rights Reserved.