Real Estate Agents Tell Clients to Move Fast : Recovery: Sales pitch seems to be working as commercial tenants who waited out the Gulf War are now looking for space.
Psssst. Want a good deal on some premium commercial real estate?
Come to the Westside. It’s got great location. It’s got a huge supply of vacant space, and more coming through the pipeline. And the rates are the cheapest in years.
But there’s one other thing: Now that the war’s over and the economy appears to be on the upswing, you better get moving, because the word’s out and a buying frenzy has already started.
That, at least, is what some commercial real estate agents are telling their clients.
And the pitch appears to be working.
After a dreadful year that saw the commercial vacancy rates skyrocket to their highest level in years, tenants are starting to migrate to the Westside or expand the operations that they already have here.
“Recession? What recession?” asked Bruce Schuman, a vice president of the Julien J. Studley Inc. commercial real estate firm. “We have seen a tremendous turnaround. . . . The attitude (among clients) seems to be: ‘We’re not worried. The recession has bottomed out.’ ”
Developers, however, could sign up tenants at a furious rate for a long time without fear of running out of space. The fact is, the commercial building boom of the 1980s has left the Westside wallowing in office space--so much that it will take five years to absorb it, a new study by the Century City-based Price Waterhouse Real Estate Group has concluded.
Overall, Westside vacancies stood at 18.2% as the first quarter of 1991 ended, compared with 13.4% at the end of the first quarter of 1990, and 15.2% at the end of 1990, according to a survey by the Grubb & Ellis Co. real estate firm. Altogether, more than 7.7 million of the Westside’s 42.4 million square feet stands empty.
The Westside has been hit especially hard by businesses that have closed or cut back, and is suffering from the slow leasing experienced in the fourth quarter of 1990, said Peter Best, senior marketing consultant with Grubb & Ellis’ Westside office.
But the end of the war had a cathartic effect on many businesses that had delayed plans to expand or move during the conflict.
The market upswing since March, Best said, has been “remarkable.” He said at least 375,000 square feet of office space has been leased recently in Santa Monica and Century City.
“People are taking advantage of what is considered to be the bottom of the market,” Best said. “They are getting maximum concessions.”
Leasing activity will have to be vigorous in the coming months just to keep up with the new buildings entering the market. About 2 million square feet of Westside office space is under construction.
Santa Monica, for one, is bracing for three massive commercial projects: The Water Garden, which will open soon; a new phase of Colorado Place, where construction is well under way, and eventually, the Arboretum, where work is just beginning. A few miles away in Venice, work is also starting on the big Channel Gateway project.
Some Westside tenants are getting as much as a year’s worth of free rent, subsidies on parking and free high-quality tenant improvements like carpeting and wall treatments, said Dennis Macheski, director of research for Price Waterhouse.
“Effective rents are soft, getting softer, and likely to remain soft for a few years,” Macheski said. “If I were a tenant, I’d take out a long, long lease right now.”
Turner Broadcasting System and Morgan Stanley, the big investment firm, have signed leases in Century City, and Santa Monica continues to attract blue-chip tenants, Best said. Sony Corp.’s music entertainment division, for example, recently signed up as an anchor tenant at the Arboretum.
The Westside’s stellar reputation as a place to live and work means that even with the glut, landlords won’t ever have to give away the store, said Harry Bateman, research director for Grubb & Ellis’ Westside office.
“People aren’t making stupid deals,” Bateman said. “A tenant cannot expect to hold a landlord over the coals here.”
Landlords can still command $3.75 per square foot for premium office space in the 1999 Avenue of the Stars complex in Century City, and even $2.50 for new Class-A space like that in the Westwood Gateway in West Los Angeles, Bateman said.
Within several years, the market will regain its competitiveness, Macheski and others suggest. The surplus stock will get used up by then, and the anti-development climate and strict zoning laws will prevent much more from being built.
And the Westside’s strengths--its affluent, service-based economy, prized location, business amenities and prime real estate--will continue to be a magnet for corporate tenants from around the nation and even the world.
“One thing you always have to give the Westside--it has a great image,” said Jack Kyser, chief economist for the Los Angeles Area Chamber of Commerce. “It means the good life. And that helps in a recession because people are interested in the area, in looking beyond the recession.”
“The smart money says this is the time to build your market share, position yourself and get ready,” Kyser said. “That’s what is happening on the Westside.”
Office Vacancy Rates Vacancy rates for office space on the Westside reached the highest level in five years at the end of 1990. And during the first quarter of 1991, the sluggish economy and Gulf War pushed the vacancy rate higher still in most areas of the Westside.
Real estate analysts say the war and the recession caused businesses to delay decisions about leasing new offices during the last half of 1990 and the first quarter of ’91. And some large vacancies occurred for reasons not directly related to the recession. Beverly Hills, for example, lost two of its largest commercial tenants during 1990 when Drexel Burnham Lambert and Columbia Savings collapsed. And, meanwhile, completion of new office projects contributed to the rise in vacancy rates.
With the end of the war, however, has come what some commercial real estate experts say is a sharp turnaround in parts of the Westside. In recent months, they say, at least 375,000 square feet of office space has been leased in Santa Monica and Century City alone. But because of the drawn-out nature of lease and rental negotiations, such an improvement will not be reflected in the vacancy rates for several months.
1st quarter 4th quarter 1st quarter Area 1990 1990 1991 Beverly Hills 10.7% 19.9% 20.9% Brentwood 20.7% 15.8% 14.9% Century City 8.9% 13.3% 15.6% Hollywood/ W. Hollywood 7.0% 9.5% 11.2% Marina/ Culver City 20.9% 20.6% 22.3% Mid-Wilshire 10.0% 12.0% 16.4% Miracle/Park Mile 10.8% 13.3% 23.8% Santa Monica 11.4% 10.3% 14.3% West Los Angeles 15.9% 16.3% 16.8% Westwood 19.8% 19.3% 22.2% Westside region* 13.4% 15.2% 18.2% County total 15.0% 15.0% 17.9% Total rentable Westside space, in millions of square feet: 40.9 42.2 42.4 Total vacant Westside space, in millions of square feet: 5.5 6.4 7.7 Space under construction, in millions of square feet 2.2 1.7 2.0
* Westside regional totals do not include Mid-Wilshire area, which Grubb & Ellis classifies as part of of Central Los Angeles. Source: Grubb & Ellis Commercial Real Estate Services, based on buildings with 20,000 square feet or more of speculative, multi-tenant office space. Medical buildings excluded.
