Grubb & Ellis Survey of Los Angeles Area : Strong Tenants Market Found for Office Space

The Los Angeles area is experiencing an unusually strong tenants market in commercial office space as a record number of office buildings near completion, according to a study by a major brokerage.

Although overall vacancy rates will climb in 1986, last year’s healthy rate of office space absorption--the rate at which office space is leased--is expected to continue, said Ray Lupone, a senior marketing consultant for Grubb & Ellis Co., a Los Angeles-based commercial real estate brokerage firm. Grubb & Ellis will analyze its 1986 forecast at a seminar today at the Sheraton Grande Hotel.

“It’s got to be the strongest market for a tenant” in several years, Lupone said, adding that the tenants’ good fortune began last year as construction boomed. The strong tenants market--characterized by flat lease rates and such landlord concessions as free rent and office improvement packages--will last until midyear, he said.

But if tenants are waiting to make their deals, “they’re going to be surprised,” Lupone warned. “I don’t see this repeating until the next building cycle in four or five years.”

A record 12.4 million square feet of office space is expected to be added to the Los Angeles-area market this year, breaking last year’s record of 10.59 million, Grubb & Ellis said. Overall vacancy rates have risen to 18% from 16.6% a year ago and are expected to climb above 20% this year.

Downtown Rate Jumps

Development of office buildings will slow during the rest of the decade because of building moratoriums, lack of land and a surplus of office space, the company said.

The vacancy rate in downtown Los Angeles has leaped to 17% from 8.4% a year ago as 2.8 million square feet of office space was added in 1985.

But the net absorption rate in the central business district increased in 1985 to 934,000 square feet from a depressed rate of 650,000 square feet in 1984.

Vacancy rates will rise above 18% during most of 1986, but the absorption rate will also rise as the downtown area draws tenants from other cities, Lupone said. For example, several New York law firms last year established large offices in downtown Los Angeles, he said.

“The New York firms feel they have to be here,” Lupone said. “There really is something west of Mississippi.”

The market will tighten during the next 18 months in the central business district as office space is absorbed and fewer new buildings are built, the company said.

West Los Angeles has emerged as the area’s strongest office market because of increased development during the last two years and heavy demand for prime office space there, Grubb & Ellis said. West Los Angeles’ 15% vacancy rate is the area’s lowest, it added.

In addition, the Westside eclipsed the downtown area for the first time in the amount of office space under construction, Grubb & Ellis said. A total of 3.74 million square feet will be under construction in West Los Angeles in 1986, compared to 3.38 million in the South Bay and 3.19 million in the greater downtown area, which Grubb & Ellis defines as the central business district, the mid-Wilshire area, Pasadena, Glendale and the San Gabriel Valley.

First Decline Since 1983

The San Fernando Valley has seen explosive growth during the past two years, but that is expected to ease in 1986, Grubb & Ellis said, with new construction expected to drop to 1.9 million square feet this year from 3.8 million square feet in 1985.

As a result, vacancy rates in the Valley will record their first significant decline since 1983, the company said. The current 19% vacancy rate, which compares to 13% a year ago, is expected to decline to between 15% and 17%. Grubb & Ellis projected that absorption will reach between 1.7 million and 2 million square feet from 1.26 million square feet in 1985.

The industrial market for the entire Los Angeles Basin will grow at a slightly slower pace in 1986 than it did last year, the company said.

The existing industrial space inventory of about 709 million square feet will increase by 13.7 million square feet in 1986, compared to an increase of 20.1 million square feet last year.

Grubb & Ellis predicted a 2% growth rate in overall retail development but a gradual slowdown in construction of the small-business developments known as strip centers.

Demand for investment properties in the Los Angeles area during 1985 exceeded supply, the company reported, despite the abundance of new office buildings.