A slight decrease in unemployment levels, a decline in new construction and the continuing influx of foreign investors all were contributing factors as the Los Angeles Basin’s overall office market continued its positive yet irregular recovery in 2013 and sustained its climb back into positive territory as the new year began, according to a new report issued by Colliers International.
Although some submarkets surveyed showed better results than others, the basin as a whole experienced its third-consecutive quarter of positive net absorption, declining office vacancy rates, higher levels of occupancy, and a slight rise in rental rates during the fourth quarter of 2013,setting the stage for a continuing recovery in 2014, the report said.

“While it is still to be considered a fragile work in progress depending on which submarket you study, if 2013 proved anything to us, it is that even the worst economic cycles have to end, however slowly that end may be,” said Colliers Executive Managing Director Hans Mumper, “We have turned the corner in most of these submarkets in terms of vacancies and leasing activity, and there is growing interest from investors, both domestic and foreign, in all categories of office space, which is a positive sign that should strengthen the economy and the office markets unless something unforeseen and unpredicted takes place.”

According to Colliers, vacancy rates in office space declined 10 basis points to 17.4 percent at year-end and leasing activity reached nearly 4.9 million square feet in the fourth quarter, closely matching that of the third quarter and leading to positive net absorption of 1.4 million square feet for the year. But due to its massive geographic range and number of submarkets, its recovery varied greatly submarket-by-submarket, company officials noted.

Nationally, in terms of sheer size, the greater Los Angeles office market ranks just below New York City and Washington, D.C. in total amount of office space and is spread over a much broader and more diverse geographic area than either of those markets. It also is the most populous region in the United States and includes the counties of Los Angeles, Orange, Ventura, Riverside, and San Bernardino.

Importantly, the Colliers report also revealed a drop in unemployment levels throughout the region from 10.4 percent one year ago to 9.4 percent at the end of 2013. While there is no direct correlation between rising employment levels to lower office vacancy rates, it is one of several factors that contribute to higher rates of occupancy.

“If the overall economic recovery can maintain some of its momentum, we should see a continuing improvement in the office market, which always lags a recession by about six to 18 months depending on the severity of the downturn,” Mumper said. “As it now stands, the office market recovery in greater Los Angeles looks like a checker board of up’s and down’s depending on the individual submarket. But, overall, we believe the cycle has begun its long-anticipated return to a more consistent and positive pattern.

Strengthening leasing activity during the year led to 1.4 million square feet of positive net absorption, including 504,900 square feet in the fourth quarter, the third consecutive quarter of positive absorption Colliers noted.

Following is a market-by-market breakdown of the greater Los Angeles office market in the fourth quarter and for the year:

Downtown Los Angeles
In the region’s highest profile market, multi-family land sales and construction-start activity was brisk, as was new retail leasing activity, both of which dominated activity during the year. Foreign investors such as Greenland Group have identified Downtown Los Angeles as a key U.S. investment market, but office leasing activity did not have the same results. Colliers reported total net absorption for 2013 in the downtown office market was negative 168,000 square feet, a relative improvement when compared to net absorption of negative430,900 square feet recorded during the previous year. Direct weighted average asking rents were $2.82 in the fourth quarter, an increase from the $2.80 per square foot recorded in the third quarter. New leasing activity during the fourth quarter of 2013 totaled 121,500 square feet, compared to 327,700 square feet in the third quarter, a decrease of 63 percent. Leasing activity in the fourth quarter was the lowest on a quarterly basis since 2010.
West Los Angeles
The West Los Angeles office market recorded positive absorption of 160,100 square feet in the fourth quarter, Colliers reported. Total vacancy rates increased 10 basis points to 15.6 percent from 15.5 percent due to the delivery of 230,900 square feet of new office space. Direct weighted average asking rents continued their upward movements as rents and reached $3.40 per square foot (FSG). New leasing activity was 4,586,000 square feet during the fourth quarter of 2013 the highest recorded on a quarterly basis since the third quarter of 2011.
Orange County
According to Colliers, which is regionally based in Irvine, in the fourth quarter of 2013, total vacancy in the Orange County office market declined 10 basis points to 15.1 percent from the previous quarter’s rate of 15.2 percent. Total net absorption narrowly remained positive with only 49,200 square feet, bringing the year-end total for Orange County to 1,185,400 square feet. The overall average asking rental rate reached $1.94 per square foot (FSG), which was an increase of 4 cents per square foot over the previous quarter. Leasing activity during the fourth quarter of 2013 totaled 1.52 million square feet, down from 1.83 million square feet of transactions during the third quarter 2013, the report noted.
Tri-Cities
This submarket, which includes most of the major film studios, managed to achieve positive momentum in 2013. Despite Disney putting nearly 450,000 square feet back on the market during the year, at year-end the Tri-Cities office market, which also Burbank, Pasadena and Glendale, rallied and saw its total vacancy rates during the fourth quarter decrease to 18.2 percent, the first such decrease in the total vacancy rate in 2013. Net absorption in the fourth quarter was 142,200 square feet, bringing total net absorption for all of 2013 to negative 446,600 square feet, a figure almost matching the amount of space Disney gave back. Direct weighted average asking rents remained at $2.63 per square foot (FSG) for the fourth consecutive quarter as landlords continued their strategies to attract and retain tenants. The Tri-Cities office market experienced a total of 1,223,800 square feet of new leasing activity in 2013.
Mid-Wilshire/Hollywood
According to the Colliers report, the Central Los Angeles submarket, which includes the Mid-Wilshire and Hollywood markets, ended 2013 with 6,000 square feet of net absorption. The total vacancy rate in the fourth quarter decreased 10 basis points to 20.7 percent. Direct weighted average asking rents increased slightly to $1.90 per square foot (FSG). New leasing activity in the fourth quarter was 187,100 square feet compared, to 118,000 square feet in the previous quarter, an increase of 59 percent. Year-to-date new leasing activity in 2013 was 805,300 square feet, which surpassed the 644,600 square feet of activity recorded in 2012.
San Fernando Valley and Ventura County
Colliers reported that by the close of 2013, the San Fernando Valley and Ventura County office markets saw total vacancies decrease to 16.9 percent, the lowest vacancy rate recorded since 2008. Net absorption in the fourth quarter was 127,500 square feet, bringing total net absorption for all of 2013 to 436,200 square feet, the report noted. Direct weighted average asking rents remained at $2.16 per square foot (FSG) for the sixth consecutive quarter as landlords continued their strategies to attract and retain tenants. New leasing activity in 2012 was 1,845,300 square feet compared to 2,372,400 square feet in 2013. A majority of the new leasing activity in 2013 occurred in Class A buildings with Class B buildings close behind.
South Bay
At year-end 2013, the South Bay office market saw total vacancies decreased to 22.5 percent, the first decrease in the total vacancy rate in 2013. Net absorption in the fourth quarter was 110,100 square feet, bringing total net absorption for all of 2013 to minus 482,500 square feet. Direct weighted average asking rents remained at $1.99 per square foot (FSG) for the ninth consecutive quarter as landlords continue their strategy to attract and retain tenants.
San Gabriel Valley
In the San Gabriel Valley, vacancy rates for office space increased 60 basis points to 15 percent in the fourth quarter 2013. Net absorption for the same period was minus54,200 square feet, a slight improvement from the previous quarter of minus59,400 square feet of net absorption, Colliers said. Total leasing activity for the year was 452,300 square feet, which was more than double the activity experienced in 2012 (221,500 SF). The average asking rental rate for the San Gabriel Valley market remained level at $1.95 per square foot (FSG), but is still an increase from $1.89 per square foot from a year ago.