Tenants Face Large-Space Squeeze : But Downtown Office Sublease Vacancies to Increase

With a 19.1% vacancy factor in the downtown Los Angeles office market, it would appear that any prospective tenant would have a wide choice of buildings and sites.

But characteristically, nothing is ever that orderly here.

Actually, an anomaly is in the making shortly for those seeking two or more floors of large spaces.

John C. Cushman III, who has been instrumental in the creation, growth and vitality of the entire downtown district, says companies needing significant amounts of space there--400,000 square feet or more--will soon have “no place to go” as pending transactions for such spaces are finalized.

That situation may arrive by the end of this year, he predicts, in reviewing the present state of downtown real estate, which is gradually tightening up for firms in need of large amounts of space in one building.

Commenting on a newly completed, 80-building space-status survey in the central business district, Cushman said that 62 buildings are completed, 5 are under construction and 13 are proposed. The structures include a total of 23,237,322 rentable square feet, of which 4,446,194 rentable square feet are vacant.

Two of those projects, the Wilshire/Bixel and the Wilshire Finance buildings, are outside the central area in the so-called “City-West” or Crown Hill section, west of the Harbor Freeway.

Cushman, who heads Cushman Realty Corp., said the annual absorption of rentable space downtown averaged about 700,000 square feet per year from 1980 through 1985. Since 1980, demand has not kept pace with increased office supply and that situation is expected to continue for the next three to five years. Furthermore, over the past 5 1/2 years, vacancy rates have increased from 2.8% to 19.1%.

“Even with the 19.1% rate, 1.4-million rentable square feet of new office space is currently under construction, of which 42% is pre-leased. Notwithstanding these pre-leasing commitments, the vacancy rate will rise as this space is completed by the end of the first quarter of 1987,” he said.

“It should be realized that many of the pre-leased commitments have been entered into by tenants presently located in the downtown area who are relocating to buildings which are often better located, more efficient and of better quality, which in some cases will result in a reduction in total occupancy.”

Following completion next spring of the Coast Federal/1000 Wilshire Building and the Biltmore Tower, no new major office projects will be completed in the central business district prior to late 1988 or early 1989, when the first of the 13 currently proposed buildings may be completed, he said. Those structures, totaling 9.2-million rentable square feet, are planned and approved.

“Although several of these projects are likely to be built on a speculative basis, most of the developers will wait to commence construction until they reach a 30% to 40% commitment range,” he added.

Cushman referred to the recent phenomenon in the commercial office market of the increasing availability of short-term direct and sublease space, created by the overbuilt nature of the market over a two-year period.

“The larger and/or prestigious tenants are able to negotiate growth space of 50%-100% of the space initially leased on an option basis at predetermined intervals during the term of the lease. The shorter-term expansion space, particularly units of space available for a term of 10 years or less, is being offered for lease on extremely favorable terms and conditions,” he said.

The most difficult and complicated aspect of the office market, he said, involves the available sublease space.

“Over the next three years, large blocks of contiguous sublease space will be available over and above the 715,000 rentable square feet . . . which is presently available for sublease. An additional 700,000 to 1.2-million rentable square feet of sublease space may be available within the next 12 months as a result of the availability of lease takeover space,” he said.

“The energy industries and banking institutions are also experiencing less-than-favorable conditions, resulting in significant cutbacks. The availability of large blocks of sublease space will result in a highly competitive market with rents as much as 40% below existing market rates for direct space in recently completed buildings.

“Developers with ‘take-over’ space and major tenants alike will be disposing of sublease space at ‘fire sale’ prices in order to reduce their losses as quickly as possible.”

Large blocks of sublease space are and will be available within the next three years, particularly in the twin-tower Atlantic Richfield Plaza. (Major tenants including Arco, Bank of America, Peat Marwick, Mitchell & Co., Mitsubishi are expected to have space available for subleasing after their anticipated reduction of presently used space. )

At present, there are limited large blocks of contiguous space of two floors or more available on a long-term direct basis in prime buildings within the central business district, Cushman said, adding that his firm’s research “suggests that a market window will exist, favoring landlords in the central business district, who will have space available for lease in 1987.

“These factors suggest that there will be substantial demand for well-located, institutional quality products able to accommodate large users by late 1988 or early 1989.”

He alluded also to the growing politcal pressures to force high-density development away from suburban areas and toward the central business district and other concentrated office building nodes within the Los Angeles Basin.

Local, national and international real estate developers will continue to be attracted to the real estate opportunities available in downtown Los Angeles, he said.

“Over the long term, the district will continue to grow and strengthen as Los Angeles is further perceived as the financial center of the West, as well as the gateway to the Pacific Rim.

SUMMARY OF DOWNTOWN VACANCY July, 1986 Total Direct Sublease Total Total Period SquareFootage Vacancy % Vacancy %-- 1909-1931 3,358,482 1,171,843 35% 15,668 5% 1,187,511 35% 1949-1963 1,276,028 288,329 22.5% 86,263 7% 374,592 29% 1966-1974 8,820,067 601,435 7% 296,166 3% 897,601 10% 1979-1984 6,683,038 368,998 5.5% 281,435 4% 650,433 10% 1985-1986 3,099,707 1,300,057 42% 36,000 1% 1,336,057 43% Totals 23,237,322 3,730,662 16% 715,532 3% 4,446,194 19.1%