Though still high, the vacancy rate in South Bay office buildings has dipped slightly in recent months and is expected to drop sharply during the second half of the year thanks in part to the stepped-up defense spending of the Reagan Administration.
Figures released on Monday by Grubb & Ellis Co., a leading commercial real estate brokerage firm, show that the vacancy rate in the area stretching from Los Angeles International Airport to Long Beach fell to 23.6% at the end of June, down 1.2% since March.
However, Jack Rosenberg, vice president and district manager for the firm’s South Bay office, predicted that the vacancy rate--one of the highest in the Los Angeles area--could fall to 20% or lower by the end of October.
“Possibly the biggest reason for the drop is there hasn’t been a lot of new construction that has come onto the market,” Rosenberg said. “We built a number of new office buildings in El Segundo through Long Beach in ’83 and ’84, and we are slowly absorbing them. I think once you see the figures for the third quarter, you’ll see a large drop.”
Rosenberg’s view is shared by other brokerage firms. Michael Condon, a sales consultant for Coldwell Banker in Torrance, said that he estimates the present vacancy rate at 18% to 20% and that it could drop to as low as 15% as a number of firms, particularly aerospace and electronics companies, continue to lease new office space.
For example, Condon said, TRW Inc., an aerospace conglomerate based in Redondo Beach, has announced that it intends to lease 400,000 square feet of new office space now under construction in Redondo Beach, and Hughes Aircraft Co. has decided to lease space in the area.
While an exact figure was not immediately available, a TRW spokeswoman said that her firm has leased more space in the area as its work load has increased, and cited the contract that TRW was awarded in July, 1984, by the Department of Defense to build a new generation of communications satellites. A Hughes spokesman confirmed that that company will lease about 1 million square feet in Torrance, El Segundo and Manhattan Beach.
Other large firms have also leased significant amounts of new office space in the South Bay within the last two or three years as spending on defense programs has accelerated, Condon and other brokers said.
‘Huge Chunks of Space’
“One thing we have seen recently is a lot of defense companies coming in and taking huge chunks of space off the market at one time,” said Bruce Schuman, a broker with Julien J. Studley Inc., a national realty leasing, sales and consulting firm. “A lot of the office vacancies are being taken in huge sweeps.”
Despite the decrease in the vacancy rate, brokers say the South Bay is still a buyer’s market. While the incentives offered by developers to prospective tenants are not as hefty as they were last summer when Grubb & Ellis reported that the vacancy rate had jumped to 31%, some tenants are still being offered attractive concessions, particularly if they sign a lease before construction of a building is completed, according to area brokers.
One such example, said Condon, is Ashton-Tate, a Culver City-based computer software manufacturer.
After a 10-month search, the firm recently decided to move its headquarters to the Harbor Gateway area and consolidate its operations into one, 123,000-square-foot facility on Hamilton Avenue, said Barry Berke, senior vice president of operations at the 500-employee company.
Year’s Free Rent
Berke said Ashton-Tate, which expects to move into the building in October, was able to negotiate almost a year’s free rent, considerable office improvements, and the first opportunity to lease more space in the building when construction is completed on a second phase.
The company, which has signed a 10-year lease, will pay about $1.25 a square foot per month, below the $1.85-a-square-foot price that Condon said is probably average for the Harbor Gateway area.
According to Grubb & Ellis, the 24% vacancy rate means there is more than 4.75 million square feet of available office space out of more than 20 million square feet on the market. At present absorption levels, the firm estimates that the available space represents a three-year supply.
While he believes the vacancy rate will decline, Rosenberg said developments planned for the near future will probably keep the rate well above the 10% to 12% range that most developers and lenders find acceptable. He said that his firm predicts that about 5 million square feet of new space will be built in the South Bay in the next two years.
Can Absorb Space
Nevertheless, Rosenberg and others maintain that the South Bay, where office space has more than doubled since 1982, can absorb the space as more high-technology and non-aerospace firms continue to settle in the area and are joined by foreign companies such as American Honda, which is building a 1-million-square-foot corporate headquarters in Torrance. Its 70-acre site was the former site of a U.S. Steel plant.
“The market seems to be very strong,” said Jeff Eick, a partner in the Hermosa Beach development firm of Loomis & Eick, which has built six buildings along Pacific Coast Highway in the past four years and at present has office buildings under construction in Torrance and Manhattan Beach. “Even in 1982 when business was bad, we leased buildings we had. It took us longer, but they got leased,” he said.
According to Grubb & Ellis figures, the highest office vacancy rate in the South Bay region at the end of June was in Carson, where it stood at 44%. The airport area showed a vacancy rate of 35%, while the El Segundo-Manhattan Beach area, where many of the aerospace companies are located, showed a vacancy rate of 17%. In downtown Long Beach, the rate was 25%.