Office rentals heat up in L.A.

Landlords are seeing more leasing activity as businesses expand.

Last summer, the largest landlord of Class A offices in downtown Los Angeles summoned architects to cook up six model suites intended to be hip enough to appeal to young firms in creative fields.

Such tenants had been passing over modern skyscrapers such as the Gas Company Tower in favor of converted old industrial buildings or lushly landscaped campuses near the beach.

Four of the suites in the tower have now been leased by Brookfield Property Partners to up-and-comers such as Theranos Inc., a healthcare technology company from Palo Alto, and Grid110, a new economic development organization that supports local earlystage start-ups by providing offices and mentors.

The new arrivals to downtown are emblematic of a wave of office leasing sweeping through the region as many operators of businesses in Southern Califor-

nia expand their rented quarters.

“We have had a very good year to date,” said Bert Dezzutti, head of the Western region for New York-based Brookfield.

The company has signed leases for 1.2 million square feet in downtown L.A. so far in 2015, he said.

The third quarter was another good one for most landlords, who ratcheted up rents to cash in on the growing demand amid shrinking supply, real estate brokers said. That pattern has held for the last several quarters as the economy slowly improved.

“There really seems to be no letup of steam,” said Steve Kolsky, an executive vice president at brokerage Newmark Grubb Knight Frank. “The office market has been very strong.”

Overall, asking rents in Los Angeles County increased 8% in the third quarter to $2.82 per square foot per month compared with the same period a year ago, according to real estate brokerage Cushman & Wakefield. Vacancy fell about 2 percentage points to 15.1%.

The trend is rooted in business expansion, Kolsky said, as the Great Recession gets smaller in the rearview mirror. Office leasing froze during the economic downturn and then vacancy began to rise as stressed businesses cut staff or reduced space to save money. That suffering apparently is over for many firms.

“We’re seeing a lot more expansions,” Kolsky said. “There are still a lot of large tenants in the marketplace looking for space.”

First to expand after the downturn were advertising and marketing firms, he said, which grew even as big financial services firms and insurance companies were still cutting back. By 2014, growth became more widespread among all types of businesses.

Investment management firm DoubleLine, for example, recently agreed to more than double its office space on Bunker Hill in downtown Los Angeles, to 67,000 square feet, when it renewed its lease at Wells Fargo Center, Cushman & Wakefield said.

Leading the way in new leases or expansions are tech firms and businesses that combine technology and entertainment, said Petra Durnin, managing director of research for Cushman & Wakefield. Law firms and other service providers that work with those businesses are also bulking up.

One of the biggest deals in the third quarter came from co-working space provider WeWork’s decision to open a second downtown Los Angeles location with a 91,000-square-foot lease in Brookfield’s Gas Company Tower. WeWork offices are an updated version of executive suites, in which tenants share workstations and such amenities as kitchens, conference rooms, coffee bars and private phone booths. Many of its tenants are individual entrepreneurs or small firms.

WeWork already occupies about 46,500 square feet in the Fine Arts Building, a richly embellished 1920s office tower on Seventh Street. Historic office buildings and old warehouses converted to offices have proved particularly attractive to “creative” firms that attract educated young workers, but distinctions between conventional corporate offices and creative offices are blurring.

“The old rules don’t apply anymore,” Durnin said. “Law firms are moving into creative buildings and young media companies are leasing space in traditional high-rises.”

The landlords of many such high-rises are doing their best to make unconventional firms feel welcome. They’re ripping out carpet and removing dropped ceilings to expose concrete and duct work.

Many office landlords now allow tenants to bring dogs to work, a policy that would have been unthinkable a generation ago.

Brookfield is not among them — yet.

“We’re developing new policies with respect to animals,” Dezzutti said.