WESTERN SNAPSHOT, NOVEMBER 2006

Los Angeles Office Market

Page

The downtown Los Angeles market continues to show improvement in occupancy, rental rates, new tenants, restaurants, bars and excitement. Long the home of office workers, the downtown’s streets now sport young college students and other new residents of the many converted and recently constructed loft buildings, which have literally changing the face of the city’s core.

Indeed, the conversion of much older office stock to residences has been a key factor contributing to the improvement in office occupancy rates. For decades, the many empty pre-war buildings had been a blight on downtown — obsolete as modern office space due, in part, to narrow floor plates that had facilitated outside air flow before air conditioning was invented. Today, these buildings offer abundant windows for apartments and lofts. Rejuvenated with new shops on the ground level, these buildings and their residents are bringing life after hours to what had been strictly a commuter downtown. Numerous restaurants, trendy bars and hip nightclubs are opening to serve the new residents, improving the amenities mix for office workers as well.

Outside investors and even hoteliers are finally noticing the change. LA Live, under construction north of Staples Center, will feature Ritz Carlton and Marriott Marquis hotels together with luxury condos, theaters and broadcast studios in the same 55-story tower. Still in the planning stages at the other end of downtown is the mixed-use Grand Avenue project, which will feature condominiums, at least one hotel and perhaps what could be the first non-government office building to start construction downtown in nearly 20 years.

The downtown office vacancy rate has dropped to 14 percent, with Class A space nearing single-digit vacancy for the first time since the bank mergers and corporate consolidations began in the 1980s. Today, downtown Los Angeles is unusual among major American cities for its lack of large corporate headquarters. However, it is the center of the freeway system and the hub for the area’s improving rail and bus networks. The combination of relative accessibility and lower rents, especially when compared to the west side of Los Angeles, has lured many office tenants.

Asking rental rates for Class A trophy buildings have exceeded $35 per square foot with concessions decreasing and free rent just a memory in some buildings. Due, in part, to so much space having been removed from inventory for loft conversions, Class B space has the highest vacancy at 17 percent with Class C at 14 percent. Rental rates have risen in the Class B buildings to $25 or 26 per square foot.

Downtown L.A. is facing a shortage of large contiguous blocks of space. With the signings of AT&T and Transamerica, the largest blocks remaining are Thomas Properties’ City National Bank Plaza, the space being vacated by Sanwa Bank at 601 South Figueroa and L.A. United School District’s former space in the KPMG Tower in Maguire’s Wells Fargo Center.

The prognosis for the downtown submarket for the next 12 to 24 months is very good. The largest port in the United States, located just down the freeway, is a vitally important economic engine that sustains many jobs in the region, including the central business district. Los Angeles is the first port of call for many immigrants anxious to establish businesses. As long as job growth remains strong, office vacancy will continue to fall and rents will rise.

At the south end of downtown, the University of Southern California (USC) has committed more than $300 million to new construction projects, with developers adding new student residential facilities just off campus. The university’s rapidly growing endowment is luring faculty, research talent and institutes to the downtown area. Other schools are expanding including SciArc and Colburn School. 

The hectic pace of loft and residential construction continues, with the bulk of activity in the South Park area. Some of the frenzy, however, has come out of the speculative market as many buyers fail to close upon completion of construction. A handful of developers are temporarily converting their condo projects to rentals.

Government has also been aiding the downtown’s growth. The Civic Center, already the largest in the country outside of Washington, D.C., is adding a new police headquarters, a federal courthouse and a 512-bed detention center. New parks are planned on former rail yards near Chinatown, and even the long-neglected Los Angeles River is being “revitalized.”

The light-rail Gold Line to East L.A. is well under construction, and the $640 million Expo Line — servicing USC, the Coliseum and running west to Culver City — has broken ground. According to Jack Kyser, senior vice president and chief economist of the Los Angeles Economic Development Corp, “this (rail) development is a powerful weapon in [the downtown’s] business-attraction arsenal. It just enables the downtown business community to draw from a wider base of employees.”            

Available office space with improving accessibility, amenities and excitement, together with new residents and expanding world-class cultural and educational institutions, make downtown L.A. more compelling than it has been in its history.

Eugene Page is senior managing director for Charles Dunn Company in Long Beach, California.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.