Commercial Scene : Most Southland Vacancy Rates to Climb as Office Supply Rises : Downtown L.A. Remains Exception With Expansion and East Coast Influx
Strong leasing demand and a dearth of new construction is expected to push office vacancy rates in downtown Los Angeles sharply lower this year, brokerage experts say, but vacancies in the big Westside market will rise as several new office complexes open their doors.
Vacancy rates in the San Fernando Valley will remain about the same, commercial brokerage agents believe, and the South Bay market will show some modest improvement. But vacancies in the Orange County and San Diego markets--already more than 20%--could go even higher if leasing activity does not keep pace with new supply.
“It’ll be a magnificent year in terms of demand, but an even grander year in terms of new product coming on line,” said Dennis Macheski, director of research services for Grubb & Ellis Commercial Brokerage Services.
Translation: Vacancy rates in most parts of Southern California are going to move higher in 1989.
Downtown Los Angeles is more the exception than the rule, Macheski said. Many companies already located downtown are expanding, while big East Coast firms--especially those involved in the legal, accounting and financial services industries--are opening West Coast offices.
Short-Lived Prosperity
As a result, said Macheski, today’s downtown office-vacancy rate of 14% could drop to 9% by the end of the year. But that prosperity could be short-lived. Rates could approach 20% by 1991, when several projects under construction finally open.
Despite a possible office glut in the early 1990s, the health of the downtown Los Angeles office market stands in marked contrast to many other major Southland markets. Here is how those other big office markets are expected to fare this year, and a glimpse of what’s ahead:
West Los Angeles: Several projects that were approved before Los Angeles voters passed the growth-cutting Proposition U in 1986 are opening this year or next. As a result, vacancy rates in the West Los Angeles/Mid-Wilshire area are expected to climb from about 12% today to 14% by the end of the year and could hit 16% in 1990, according to John Knott, a broker and vice president in Cushman & Wakefield’s Westside office.
Despite the rising vacancy rate, rents have been moving sharply higher--as much as 15% a year in some areas--because “the Westside is still a very glamorous area to have your offices and its location is terrific,” Knott said.
“Tenants are more cautious about taking on additional space commitments today than they were two or three years ago because of the higher rents, but it’s still a strong market.”
South Bay: This market’s vacancy rate stands at about 24%, a legacy of its building boom in the earlier part of the decade and cutbacks by big office-users in the aerospace and defense industry.
“But the worst seems to be over,” said Mike Condon, a vice president and broker in the South Bay office of The Seeley Co. He believes rates could fall to about 18% by the end of this year and to 15% by 1991, thanks to a near halt in new construction, the growing presence of Pacific Rim companies and the increasing number of firms relocating from West Los Angeles in order to reduce their rent by about 30%.
San Fernando Valley: Vacancy rates in this market are expected to remain near their current 12% level through most of this year and into 1990, as new office space continues to be absorbed by two types of companies: professional firms that concentrate on serving only local clients, and larger companies that eschew the glamour of a downtown address in favor of the Valley’s lower rents.
“Absorption is fairly strong and new construction is dropping,” Macheski said. “All in all, it looks like a wash for this year and next.”
Pasadena/Glendale: These two cities have combined to form one of the Southland’s fastest-growing office markets. By next year, according to Grubb & Ellis, the two will have a combined 7 million square feet of office space.
Pasadena’s vacancy rate, currently at 9%, is expected to rise sharply within the next 12 months as several new projects open. Glendale’s vacancy factor is already 16%, but few brokers are worried: It’s already the third-largest financial center in California (behind Los Angeles and San Francisco) and continues to attract large lending institutions and other financial-services firms.
Orange County: The county’s vacancy rate is already about 23%, and it could rise slightly this year “as a humongous amount of new office space comes on line,” Macheski said. A whopping 5.2 million square feet is expected to open in 1989, four times the amount expected in downtown Los Angeles.
Macheski said that all the new construction, combined with projects yet to open, will keep Orange County’s office vacancy rate above the 20% mark for four or five years. That means rents will rise little, if at all, between now and the mid-1990s.
“Long-term, the picture is brighter,” he said. “There’s a lot of anticipation that (future) slow-growth initiatives will slow construction in the early ‘90s, so owners in the late ‘90s will reap large rewards.”
San Diego: The downtown vacancy rate of about 12% could rise as high as 18% by early next year, as several new office projects open their doors. Rates in the county’s suburban markets range from 15% to 25%, according to Winston Elton, principal of the Goodkin Real Estate Consulting Group in San Diego.
Vacancies in San Diego’s suburban markets could get even worse over the next few years, as downtown owners offer attractive deals to lure tenants away from outlying areas.
“You don’t save much money by renting in the suburbs anymore, and all things being equal, most tenants would rather be downtown,” said Elton. “The downtown projects are sucking tenants out of the suburbs like a vacuum cleaner, and it’s a trend that should really take hold when we see all the new (downtown) projects open over the next year or two.”
Riverside/San Bernardino: Analysts do not pay too much attention to the Inland Empire’s vacancy rate--currently about 24%--because it is subject to wild fluctuations. That’s because the entire area has but 2.4 million square feet of office space, a mere fraction of the space in neighboring counties.
“If a couple of big buildings or big leases get signed, the area’s vacancy rate changes dramatically,” Macheski said.
However, Macheski and other analysts are bullish on the Inland Empire’s future, in part because both rents and land prices there are much lower than those in other parts of the Southland. Demographics are also working in the area’s favor: It’s population began to mushroom in the late 1970s, and rapid population growth is usually followed about 15 years later by a boom in office-construction.
Ventura: Like the Inland Empire, Ventura County’s office market is in its infancy and is dominated by smaller companies that take relatively small amounts of space. Its vacancy rate of 16% is expected to approach 20% within a year, as several new projects open.
Bill Kiefer, senior office broker in the Oxnard office of Grubb & Ellis, is not worried about overbuilding.
“Some of the firms that are already here are expanding, and a lot of high-tech and light-industrial companies are moving out here from the San Fernando Valley and West Los Angeles because they can cut their rent by 35% or 40%,” he said.
