22% Vacancy Rate for Offices Puts Brake on Commercial Development
It came as no surprise to South Bay commercial real estate agents when Hawthorne city officials announced the demise of a $200-million redevelopment project that was to have included up to 1.1 million square feet of offices.
The South Bay’s office vacancy rate of about 22% has made lenders jittery about financing more office development in the area, explained officials from two major commercial real estate companies.
And with 6-million to 7-million square feet of South Bay offices vacant, they said, developers are holding off on plans for new office development. Building owners are likely to postpone the second or third phases of projects that were to be built in successive stages, they said.
The South Bay has a higher proportion of unrented office space than downtown Los Angeles (15.5%), the Westside (13.3%) and the San Fernando Valley (19.8%), according to a study prepared by Cushman & Wakefield of California.
The study showed that in the second quarter of 1988, 7.1-million square feet of office space (22.5%) was vacant out of the 31.5-million square feet available.
Another study prepared by Grubb & Ellis Commercial Brokerage Services reached a nearly identical conclusion.
Both companies reported the vacancy rate dropped 1% or so in the second quarter of 1988 compared to the first. This is partly because space is being leased, but also because little construction is occurring and the supply of office space has not increased much, officials said.
“New construction slowed in 1988 and will be even less in 1989,” said Rich Davis, vice president and branch manager of Cushman & Wakefield’s South Bay office. His company’s study of 300 buildings--30,000 square feet or larger--showed only 376,111 square feet of new construction from April 1 to June 30, he said.
Construction Risky
Lenders and developers are reluctant to risk new construction when so much space is unoccupied, he explained.
“There is an excess of office space, particularly in the South Bay, and it doesn’t seem to have hit bottom yet,” Davis said.
The abandonment of the Watt redevelopment project in Hawthorne made news this month because it has been the subject of city debate and planning for 2 1/2 years and was to have provided $800,000 a year in revenues to the city. But many other South Bay office projects are quietly being put on hold, Davis said.
Developers who have completed the first phase of a multiphase development may decide to hold off on further phases, but would not have to announce this to the public, he said.
Jack A. Rosenberg, vice president and South Bay district manager for Grubb & Ellis, said local developers would probably hold off on new development until more of the existing space is leased. There is a 3- to 3 1/2-year supply of space available that is already built or under construction, he said.
The Grubb & Ellis study reported that within the South Bay, some areas are suffering more than others from high vacancy rates. (The figures show existing space, with offices that are being planned or under construction not included in the vacancy rate.)
The “Torrance freeway” area, near 190th Street and the junction of the Harbor and San Diego freeways, had the highest vacancy rate, with 35% of its nearly 3-million square feet of space empty.
The Los Angeles International Airport-Century Boulevard area also had substantial vacancies, with nearly 31% of 4.3 million square feet unoccupied.
The El Segundo-Manhattan Beach area had a vacancy rate of 18%, but this is the largest quantity of vacant space in any of the South Bay’s seven sub-regions--1.7 million square feet is empty out of an inventory of 9.7 million square feet.
Carson had the lowest vacancy rate in the South Bay, with 8.3% of its 707,325 square feet of offices vacant.
Local commercial real estate agents said that although owners may be singing the blues, this is an advantageous time for tenants.
Office-building owners are offering six to 12 months free rent on 5-year leases and 12 to 24 months free on 10-year leases, according to the report. “In addition, generous tenant improvement allowances and free parking are being offered to tenants,” it said.
Average asking rents range from $1.25 to $2.50 a square foot, according to Grubb & Ellis.
Davis of Cushman & Wakefield said that owners are reducing rents and paying tenants’ moving expenses to help fill up buildings.
Rent reductions of 25% to 35% are being offered in El Segundo, where cutbacks in aerospace and defense industry businesses have left a huge amount of space vacant, he said.
In the midst of this rather gloomy picture, some major deals have been signed and some 500,000 square feet of space was leased in the second quarter, Davis said.
The South Bay’s vacancy rate is comparable to suburban office markets across the nation, according to Cushman & Wakefield. Officials reported that continuing reductions in new office construction nationwide has caused a slight decrease in the suburban office space vacancy rate, to 21.6% in the second quarter from 21.9% in the first.
“By and large, suburban markets, like the cities (nationwide), showed improvement across the board,” said Arthur J. Mirante II, president and chief executive officer of Cushman & Wakefield.
“With construction levels considerably lower than what we’ve seen in the last few years, and demand holding relatively steady, the vacancy rate should hover around its current level throughout the year.”
