L.A. Office Rent Remains a Bargain, Study Says : Real estate: Costs in downtown rank ninth out of 13 U.S. urban areas. Low taxes, moderate electricity costs and a glut of space are credited.
Aided by low real estate taxes, moderate electricity costs and a glut of space, downtown Los Angeles has become one of the least expensive major office markets in the country, according to a new survey.
For the second straight year, Los Angeles ranked ninth out of 13 urban areas in total rental expenses, with average annual costs of $30 per square foot, according to the New York-based brokerage firm Julien J. Studley Inc.
That compares to average square-foot costs of $47 for mid-town New York, $40.50 for Washington and $31 for Atlanta. Only Cleveland ($28.50), Cincinnati ($27), Columbus, Ohio ($25.50), and Houston ($24) were less expensive than Los Angeles.
The survey highlights just how much office building owners have had to restrain rents and offer other financial concessions in the wake of a 1980s building boom that has left most cities drowning in excess office space. Experts say any reductions in rental income could jeopardize the ability of office building landlords to repay the estimated $360 billion in commercial real estate loans outstanding nationwide.
“This could cause problems for banks and lenders in general,” said Mark Coleman, director of the real estate practice of the Deloitte & Touche accounting firm. Lower rents, he said, could permit “tenants to swap leases to get a better deal and that’s a real concern for everybody.”
The survey looked at average rental costs for new office space for a full-floor, 10-year lease. Total average rental figures include net cost of rent, real estate taxes, electricity and operating expenses such as maintenance and heating.
Boston, pummeled by a massive retrenchment in its high-tech, insurance and financial services industries, posted the most dramatic decline in average rental costs, dropping $7.25 to $34.75 in 1991 from $41 a square foot in 1990.
Average rental costs decreased 50 cents a square foot in downtown Los Angeles between 1990 and 1991. The city’s glut of office space--about 23% of the 34 million square feet that has been built is vacant--has given rise to the lowest net rents in downtown Los Angeles in 10 years, said Merritt Adams, a branch manger at Studley’s downtown office.
The relatively low total rental costs, the study found, stem from the huge leasing concessions landlords have been offering tenants nationwide.
In Washington, for example, landlords are offering tenants an astounding $115 per square foot in free rent or the cost of renovating their offices before moving in. Tenant allowances are also high in Chicago, an average of $114 a square foot, and in Los Angeles--$90 a square foot. By comparison, Houston landlords offer only $17.50 a square foot in leasing concessions.
Real estate taxes, which are passed on to tenants, have also cut into the profit margins of landlords forced to hold the line on other rental costs because of slack demand.
Real estate taxes in midtown New York represent 21.3% of total rental costs after rising $1 a square foot in 1990 to $10 this year. For tenants in Washington, average real estate taxes have risen to $6.25 from $5 a square foot.
In Los Angeles, landlords may be squeezed even tighter as the city girds to absorb another 5.1 million square feet of office space that will be complete this year or in 1992.
But the relatively low cost of leasing space in Los Angeles may give the city a big advantage over higher priced areas once the office market recovers, experts say.
“Any time you have lower rental rates, that helps attract business,” said Jacque Ducharme, a senior vice president of Studley who worked on the survey.
Bargain Rents
Downtown Los Angeles has one of the lowest average square-foot costs for office space in the country.
Location 1990 1991 Midtown N.Y. $47.00 $47.00 Washington $38.50 $40.50 Chicago $37.50 $38.25 Downtown N.Y. $41.50 $36.50 Boston $41.00 $34.75 San Francisco $34.00 $32.50 Philadelphia $31.90 $31.25 Atlanta $32.50 $31.25 Downtown L.A. $30.50 $30.00
Source: Julien J. Studley Inc.
