Bottom is near for building owners; recovery is another matter
Southern California property professionals are saying good riddance to 2009’s rising office vacancies and falling rents, and conjuring hope for somewhat better times later this year.
The recession brought layoffs to many white-collar companies, prompting tenants to downsize their offices and sometimes plead for rent reductions. Strapped landlords saw their revenues fall as fewer tenants paid less money to occupy their buildings.
Real estate brokerage Colliers International tellingly headlined a recent report: “2009: End of a year gone bad.” And the folks at Voit Real Estate Services began a retrospective with the line: “Let’s just say it’s nice to have 2009 behind us.”
Perhaps the best news coming out of the fourth quarter was that the ongoing rise in commercial vacancies slowed noticeably, and many expect the rental market to finally bottom out by the middle of this year. Unfortunately for landlords, though, it may take a long time for their buildings to fill up again. That means more bargains ahead for tenants.
Overall office vacancy in the fourth quarter in Los Angeles, Orange, San Bernardino and Riverside counties was 18.5%, a substantial jump from 14.4% a year earlier, according to commercial real estate brokerage Cushman & Wakefield.
“Vacancies are up, and I believe they will continue to go up this year as we have continued job losses,” said Joe Vargas, leader of the company’s Southern California offices.
Rents vary widely by neighborhood, but average monthly rents landlords asked for at the start of negotiations fell to $2.41 a square foot from $2.68 in the fourth quarter of 2008.
For most companies, last year’s theme was “hold the fort,” never mind “grow the business.” Few expanded into a larger space, even if they did move. More than 40% of all lease transactions in 2009 were renewals at the same amount of space or less, Vargas said.
“In a normal year, people upgrade or need more space” when their leases expire, he said. “Last year was about controlling expenses.”
An office market recovery is on hold until companies start hiring -- and keep hiring, brokers agree. Right now, many firms have shrunk but are still renting the same amount of space they had in fatter days. Before they can grow enough to expand into bigger offices, they need to do enough hiring to fill up what they already have.
“All the vacant space out there still doesn’t reflect all the jobs that were lost,” said Whitley Collins, regional managing director of real estate brokerage Jones Lang LaSalle.
Shadow space, as leased but unused space is often called, is impossible to measure accurately, but there is surely enough of it to slow the commercial real estate comeback. Office leasing growth usually lags behind economic recovery by six to nine months, Collins said. A local office market recovery might be as much as 18 months behind the economy now because of shadow space.
Also worrisome for landlords, Collins said, is that the recession provoked business owners to look hard at how they use office space and try to find ways to cut back. Efficiencies such as smaller work areas for employees and shared “hotel-style” offices for professionals who travel frequently may become permanent.
Law firms, which traditionally have had large, opulent offices, got religion during the recession, Collins said. Some firms that once set aside 700 square feet per attorney have cut back to about 500 square feet each, he said.
Among the few categories of businesses that are demanding more office space are healthcare and education, Vargas said. “People are going back to school to trade schools and universities to [help] find their next job,” he said.
Downtown Los Angeles was among the most stable office markets last year even though some of its largest buildings have substantial amounts of empty space, brokers said. Vacancy rose to 16.7% in the fourth quarter from about 14% a year earlier, but asking rents have fallen only 13 cents per foot to an average of $2.92 and downtown landlords are the most successful at getting close to the rates they want, Cushman & Wakefield said.
The larger Westside office market has been more volatile, but landlords there still seek the highest average rents at $3.43 per square foot, down from $4.12 a year earlier.
Orange County also has been volatile. Its offices were nearly filled during the boom years, but vacancy has almost tripled since 2007 to more than 20% and rents have tumbled, Vargas said.
Although unemployment is still high and dragging down the office market, the nation’s overall economic outlook has improved and that should help, brokers said. Business leaders are breathing easier than they were a year ago.
“In January 2009,” Collins said, “we were in a world where we didn’t know where the bottom was.”
