Los Angeles County office rental market shows gain in occupancy

Office vacancy in Los Angeles County decreased in the fourth quarter in the first year-over-year drop since the economic boom year of 2006.

The drop in vacancy to 18.4% was barely measurable at less than half of 1 percentage point, but it’s a further sign that the office rental market has reached an even keel and is poised for modest improvement, industry observers said.

“We are at the point where we want to be. We are stabilized and going in the right direction,� said Joe Vargas, regional manager of real estate brokerage Cushman & Wakefield.

Tenants maintained the upper hand in rent negotiations, he said, and many landlords will still offer such concessions as free parking and periods of free rent to secure leases in the months ahead. Landlords will, however, hold more firmly to their posted “asking� rents.

Average Los Angeles County asking rent in the fourth quarter was $2.51 per square foot per month, up a penny from the same period a year earlier, according to Cushman & Wakefield. Among the leading markets was Century City, where rent climbed 8 cents to $3.88 a square foot.

Entertainment, media and technology businesses — which often cluster in such Westside markets as Santa Monica, Venice, Playa Vista and Culver City — are expected to account for the bulk of the growth this year, according to real estate brokerage Jones Lang LaSalle.

“With the presidential election and ‘fiscal cliff’ issues behind us, the Los Angeles commercial real estate market will see some continued improvement in 2013 with tenants and investors having a more focused business plan,� said Peter Belisle, the brokerage’s southwest region market director.

As the economy stabilizes, Los Angeles will add about 80,000 jobs in 2013, Belisle said, and the unemployment rate will fall.

In previous economic cycles, such hiring led to increases in office occupancy and rents. In recent years, however, many businesses have done away with obsolete paper-based filing systems and libraries while simultaneously reducing the amount of work space allocated to each employee as open-space “collaborative� offices become more common.

That trend is still playing out, Vargas said, but future job additions are more likely to absorb office space than they were when the recovery started.

“We are going to start seeing shrinking vacancies,� he said.

The net gain in Los Angeles office occupancy in the fourth quarter was the strongest since 2007 at 1 million square feet, Cushman & Wakefield said. Big tenants making moves included DirecTV, PennyMac, Green Dot, United Talent Agency, Kaiser and Playboy.

Occupancy gains slowed in the hotter market of Orange County, but new tenant leases still drove overall vacancy down two percentage points to 16%.

The Inland Empire office market, while remaining soft, also improved significantly with a 2.2 percentage point drop in vacancy to 21.4%.

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