GlobeSt.com: Office rents have steadily increased, but office vacancy rates have fallen only slightly—and are still at 14%. How are we able to see such strong rent growth with a high vacancy rate, and what does this dynamic say about our office market?

Feld: Vacancy in this cycle is mostly confined to specific buildings and projects, rather than widespread market-related vacancies. For example, when you examine a submarket like Burbank, most of the vacancy is located in two buildings. So, vacancy and rents are much more controlled by owners rather than competitively slashing prices. With respect to how this affects rent growth, many investors and developers have purchased projects with vacancy and have renovated/repositioned these assets to take advantage of what we see as an insatiable appetite for all levels of creative office space. What this dynamic says about our office market is that we see a premium placed on creative office space and a significant driver moving forward that is different than previous cycles. Tenants want to change the way they operate and live in their space.

GlobeSt.com: Is creative office commanding higher rents than traditional office? Why or why not?

Feld: The answer is a definite yes. Again, the demand for creative office space is significant. Whether in a true industrial adaptive reuse scenario, old functionally obsolescent offices, or in high-rise office buildings, tenants of all kinds – including law firms, accounting firms, and other non-creative firms – want elements of the creative feel such as high volume/open space, open ceilings, glass window/office walls, polished concrete floors, open kitchens, etc. and they are willing to pay higher rents for it.

GlobeSt.com: How has this rent growth affected office investment?

Feld: Rental growth continues to fuel office sales. This growth is much more forgiving for investors who have overpaid or who will overpay. With tenants willing to pay higher rents, investors can pay more money to sellers and can invest more dollars into their renovation plans.

GlobeSt.com: Do you expect to continue to see office rents increase in 2017 and beyond? What is your forecast?

Feld: I do see rents continuing to increase in 2017 as we will see a continued transformation of the traditional office space market segment converted and transformed into creative office space. I think there is a relatively long runway for this trend as tenants desire to change the way they use and work in their space. The employment base and millennials are driving this change and real estate investors have jumped on the bandwagon.

LOS ANGELES—Office rents have risen steadily since the third quarter 2012. In fact, through the third quarter of this year alone, office rents have increased 7% in some Los Angeles submarkets, while the city's overall vacancy rate hovers at 14%. Silicon Beach, which include the Westside, Culver City, Santa Monica, Playa Vista, Marina del Rey and Venice, continues to command the most demand from tenants. It is also the market flooded with creative office supply, which is the office product that commands the highest rents. Hollywood has also become a vibrant office market with strong rent growth and tenant demand.

Rents are expected to continue to increase next year, and with it, investor appetite for office assets will remain strong. To find out more about the significant rent growth in the L.A. market and how it is helping to fuel activity, we sat down with Brad Feld, vice chairman at Newmark Grubb Knight Frank, for an exclusive interview.

GlobeSt.com: What is driving the significant rent growth that we are seeing in Los Angeles?

Brad Feld: Today's leasing market continues to enjoy significant rent growth for several reasons. Unlike previous development or boom cycles, there isn't an oversupply or an overbuilding of office product in any of the L.A. submarkets, while at the same time demand has stayed strong, steady and rational. Also, over the last several years, a significant percentage of buildings have traded hands at very high prices and have subsequently experienced significant capital investments made by investors in terms of renovations and repositionings, resulting in landlords charging more for higher quality space. Last, but possibly most important, the demand and effect of the creative space movement has created a widely accepted expectation for tenants and brokers that creative space costs more to build and therefore costs more to lease. This is all basic supply and demand economics.

GlobeSt.com: Office rents have steadily increased, but office vacancy rates have fallen only slightly—and are still at 14%. How are we able to see such strong rent growth with a high vacancy rate, and what does this dynamic say about our office market?

Feld: Vacancy in this cycle is mostly confined to specific buildings and projects, rather than widespread market-related vacancies. For example, when you examine a submarket like Burbank, most of the vacancy is located in two buildings. So, vacancy and rents are much more controlled by owners rather than competitively slashing prices. With respect to how this affects rent growth, many investors and developers have purchased projects with vacancy and have renovated/repositioned these assets to take advantage of what we see as an insatiable appetite for all levels of creative office space. What this dynamic says about our office market is that we see a premium placed on creative office space and a significant driver moving forward that is different than previous cycles. Tenants want to change the way they operate and live in their space.

GlobeSt.com: Is creative office commanding higher rents than traditional office? Why or why not?

Feld: The answer is a definite yes. Again, the demand for creative office space is significant. Whether in a true industrial adaptive reuse scenario, old functionally obsolescent offices, or in high-rise office buildings, tenants of all kinds – including law firms, accounting firms, and other non-creative firms – want elements of the creative feel such as high volume/open space, open ceilings, glass window/office walls, polished concrete floors, open kitchens, etc. and they are willing to pay higher rents for it.

GlobeSt.com: How has this rent growth affected office investment?

Feld: Rental growth continues to fuel office sales. This growth is much more forgiving for investors who have overpaid or who will overpay. With tenants willing to pay higher rents, investors can pay more money to sellers and can invest more dollars into their renovation plans.

GlobeSt.com: Do you expect to continue to see office rents increase in 2017 and beyond? What is your forecast?

Feld: I do see rents continuing to increase in 2017 as we will see a continued transformation of the traditional office space market segment converted and transformed into creative office space. I think there is a relatively long runway for this trend as tenants desire to change the way they use and work in their space. The employment base and millennials are driving this change and real estate investors have jumped on the bandwagon.