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LOS ANGELES—Ask the folks of CBRE how Los Angeles is doing now that the recovery has finally made its way there and you'll hear a lot of not-so-cockeyed optimism. We asked, and Gary Baragona, director of research and analysis, and Gabriel Hungerford, senior research analyst, told us a great turnaround story.

GlobeSt.com: Generally speaking, what are the challenges facing the Los Angeles market as the recovery continues to take hold?

Gary Baragona: Other than the massive delays that are a result of the recent labor disputes at the Port of L.A., we don't see a ton of downside. In the office sector, one of the main challenges is the repositioning of space. There are still a handful of tenants that are “rightsizing.” They laid off employees during the recession and found themselves with shadow space on their books. Most of the lease expirations in L.A. fell within the 2010-to-2013 period. So that became an opportunity for occupiers looking for more efficient space. But, for example, tenants that once needed 100,000 square feet may now look to reduce that need by five or 10%, although this is a case-by-case scenario. Other than that, on the office side, there's more opportunity than there was previously.

GlobeSt.com: And on the industrial side?

Baragona: Obviously the big challenge is the port backlog and what effects it will have. That trickles into industrial and to retail. The other challenge is robotics. What is the impact of future tech advancements on growth in employment? There have been a couple of studies and the consensus is that robotics and other advancements allow productivity to increase but employment slows and the nature of the jobs that are available will change.

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GlobeSt.com: As the office recovery continues to take hold, which L.A. submarkets are coming out of the gate strong?

Gabriel Hungerford: For a couple of years now our hot markets have been West Los Angeles and Hollywood. These were the first out of the recession with a lot of tenant demand, predominantly because of the technology/media market. The tech sectors have really driven job growth. Those markets also have the highest rent growth in L.A. overall. And now we're seeing additional demand filtering into adjacent areas like Playa Vista and Culver City.

GlobeSt.com: Then what becomes of the more traditional office occupants--the law firms and accountancies? 

Baragona: Law firms and other more traditional office occupiers are staying in more traditional markets, Century City and the Downtown core, for example. So you see a bifurcation in office segments: the traditional real estate, law and financial firms, and what we'll call the creative class: software developers and gaming, media and entertainment companies. Both segments tend to cluster with like companies.

GlobeSt.com: Is the same clustering effect taking place in industrial?

Hungerford: Yes, in the Downtown garment district and in South Bay or the Mid Counties, the demand there is really focused on third-party logistics, transportation and warehousing, due to the big influence from the ports of L.A. and Long Beach. 

GlobeSt.com: So what are vacancies and rents doing?

Baragona: Overall in L.A. there's a 15% vacancy, which is 90 bps lower than Q4 2013 and 50 bps lower than the third quarter of 2014.

GlobeSt.com: But 15% is still high.

Baragona: We look at equilibrium around a 15% threshold. But taken individually, West L.A. as a whole is 12.7% and Hollywood/Wilshire is 16.5. Those are the most active markets with respect to net absorption and leasing activity. Year-to-date, in West L.A. net absorption is 1.1 million square feet and L.A. County as a whole is 2.1 million. So 50% of the net absorption has occurred in West L.A.

GlobeSt.com: We talked about clustering effect in office and industrial. Along with that, are you seeing a Millennial clustering? And how does that inform office layout?

Baragona: It's Interesting you ask that. It comes down to company culture and demand and what constitutes a balance between focus work vs. collaboration. For a couple of years now we've studied the top tenants looking for space, specifically Downtown and on the Westside, and found that every year there were more tenants interested in this type of strategy.

GlobeSt.com: What are the hottest markets for development now?  

Hungerford: We're seeing a lot more developer confidence since the recession. In office it's centered around the hottest leasing markets and walkable amenities, developments that are geared more toward the “employee live, work, play experience” if you will, in markets where the demand for that is high but the product base is small. Playa Vista, once the largest undeveloped stretch of land in the county, is now being filled with office projects and a lot of retail and multifamily. And we're seeing a similar trend in terms of infill in Hollywood, where we have under-used studio lots being converted into mixed-use office projects. We're seeing big floor space, windows that actually open and higher parking ratios--which you are not going to find in existing buildings. It's like a pair of distressed jeans. They're going to pay top dollar to capture that vintage magic.  

Baragona: When we look at Downtown we have to look at the different elements and layers that provide the big story of revitalization that's taking place there, like the Korean Air Building going up in the Financial District. We're also seeing the development of condos and apartments being built around the entertainment corridor, along with retail, restaurants and other amenities. There are also a lot of industrial conversions, and people are paying top dollar in anticipation that these assets can be converted to another type of higher, best-use property.

Hungerford: We didn't mention industrial development, but it should be noted that Southern California in general has in the neighborhood of 20 million square feet of properties under construction.

GlobeSt.com: In general, what are you seeing in terms of cap rates and values?

Baragona: It's tough to generalize since the trends vary by submarket and whether we're talking traditional or creative assets. For example: In 2013, we did a study with our capital-markets people and we looked at the influence of the creative office trend on the investment market. The study showed that, during the previous 12-month period ending Q1 2013, the average price of office building trades in Los Angeles County was approximately $238 per square foot. Over that same time period, pricing on the Westside averaged more than $400 per foot. Recent trades for core creative office properties have been in excess of $600 per foot, illustrating the premium pricing for that type of asset in within markets like Santa Monica, Venice and Playa Vista.

Hungerford: Downtown L.A. asset pricing tops out at $550 per square foot.  Recent comps in West L.A. have been in the $800-square-foot range, and some properties that are coming to market are anticipated to fetch over $1,000 per square foot.