Rents in Los Angeles continued to rise hitting the range of $48 to $72, which has slowed the momentum of leasing activity. Space is at a premium and tenants have fewer relocation options. Also, the cost of relocating has increased dramatically because of rising construction costs, affecting both rents in new construction and the cost of customizing existing space.
In fact, tenant-improvement allowances provided by landlords now are only covering about half the cost of necessary improvements, forcing tenants to pay for the balance. Tenants are therefore carefully considering their renewal options before risking high relocation costs and the disruption involved with moving.
Buildings continued to sell for record prices. Landlords are playing musical chairs, buying large portfolios and quickly selling portions of them to other landlords in the region. The number of players also is shrinking with Blackstone Group LP, Douglas Emmett Inc., GE Capital/Arden Realty Inc. and Maguire Properties Inc. now dominating the marketplace. Also New York-based landlords have entered the market and are trying to raise rents higher than ever anticipated in Los Angeles.
Also impacting the market is the lack of new supply. With few new office buildings set to be completed in the next 12 months, tenants have fewer near-term options. Longer term there is some relief, as 4 million square feet is being planned in various L.A. submarkets. These planned developments include the Red Building in West Hollywood, Corporate Pointe in Culver City, the Lantana development in Santa Monica, Howard Hughes Center and Tishman Speyer’s Playa Vista development in the Marina del Rey area. These projects are not expected to be completed until late 2008 or early to mid-2009.
Even though overall leasing activity has slowed recently, established companies launching new operations are tying up significant amounts of new space. For example, Google is in negotiations for 180,000 square feet and Fox Interactive is in the market for 500,000 square feet.
Rents Increase
Rents continued to climb in the second quarter. Overall rent in the region increased from $29.34 in the first quarter to $30.63, up from $27.03 during the second quarter of 2006. Class A rent hit $32.73, up from $31.30 in the first quarter and $28.99 last year.
On an annual comparison, the only submarket to post a decrease in overall rent was the Santa Clarita Valley, where the rate fell by 2.8% to $30.61. This submarket also was the only one to record a yearly decline in its class A rate, which dropped by 2.4% to $31.11.
Leasing Slowdown
Quarterly leasing in L.A. in the second quarter was 3.1 million square feet, down by 1.3% from first quarter and by 29.6% from a year ago. Class A leasing declined 10% from the first quarter to 2.4 million square feet and fell for the year by 28%.
Availability Slightly Up
Reversing a trend, the region’s overall availability rate, 12.1%, registered a 0.1% quarterly increase. However, the rate declined by 0.8% for the year. The class A rate, 12.6%, followed a similar pattern with a modest quarterly gain of 0.2% and a moderate yearly decline of 0.7%.
Submarket Focus
On the Westside, several major submarkets remain notably tight. These include Beverly Hills/West Hollywood, where the overall and class A availability rates stood at 7.3% and 7.2%, respectively, and Santa Monica, which registered an overall rate of 10.6% and a class A rate of 10.5%. Asking rents in these submarkets have skyrocketed.
In Beverly Hills/West Hollywood, overall rent rose 27.5% since second quarter 2006 to $46.86 and class A rent rose by 27.7% to $46.95. Rents posted even greater annual increases. In Santa Monica the overall rate grew by 36.3% to $55.94 and class A rent jumped by 37.8% to $57.43. Asking rents for class A space in Century City rose to $43.24 during the second quarter, up by 16.2% annually.
Several companies have recently relocated from the Westside’s Marina del Rey into El Segundo. Among these companies are Ignited LLC, Tandberg Television and Mixed Signals.
Looking Forward
Leasing activity is anticipated to remain slow in the third quarter. Looking further ahead, due to the high prices on the Westside, some of the lower-priced, adjacent markets such as the airport area, El Segundo and Warner Center will become more attractive relocation options and can be expected to pick up tenants.
Analysis by Studley Inc.
