It’s still an office tenant’s market in the Southland
Tenants kept control of the office rental market in the second quarter as Southern California landlords confronted acres of empty space and felt pressure to reduce rents.
The number of signed leases continued to grow as business owners took advantage of the situation, brokers said, but most tenants who renewed their rental agreements decreased the amount of space they occupied. The average reduction was 15%.
“Rents are still weak,” spurring tenants to lock in deals, said Joe Vargas, an executive vice president at brokerage Cushman & Wakefield. “Tenants see a value proposition that can be accretive to their bottom lines for the next three to 10 years.”
More than 11 million square feet worth of leases were signed in Southern California in the first half of the year, a 43% increase from the same period in 2010, according to a report by the brokerage.
Office buildings have to get closer to full, though, before landlords can start pushing rents up. Owners in Orange County and the Inland Empire saw small gains in occupancy compared with the second quarter of last year, but in Los Angeles County vacancy was on the rise, ticking up 1 percentage point to 19.1%.
The office rental market is flattening out, Vargas said, though he has grown more pessimistic about the possibility of its getting stronger this year.
“We are all waiting for job growth,” he said. “We are all waiting for consumer confidence and the economy to continue to improve.”
Some encouraging signs for office landlords came in neighborhoods that traditionally are strong, such as the Westside, where occupancy held steady. Santa Monica even reported slight rent gains.
“West L.A. is the bright spot,” said Lewis C. Horne, an executive managing director at brokerage CB Richard Ellis. Growing businesses there include accounting firms, financial firms, media companies and technology businesses.
“Tech was the big story,” Horne said. “Any marketplace where there is tech, there is a lot of activity. Silicon Valley and Seattle are on fire.”
Southern California’s office buildings are much emptier than they were in the economic peak of 2007, but Horne sees rising optimism among landlords, some of whom have purchased buildings at prices that rival those of headier days.
“There is a sense in the market right now that business is getting back to some form of normal,” he said.
Landlord David Binswanger of Lincoln Property Co. had a metaphor: “I actually see what I would call kindling, a pre-burner of a recovery,” he said.
Vacancy is falling fast in so-called creative offices, a small niche product of nontraditional office space intended to appeal to people in creative fields such as entertainment or advertising. Binswanger also reported a rush of tenants interested in an older building Lincoln owns that is across the street from Playa Vista and rents for less than its properties there.
“The market,” he said, “is still incredibly price sensitive.”
