For Rent: Downtown : Move by B of A Will Worsen the Glut of L.A. Office Space
A recent decision by Bank of America to relocate former Security Pacific workers to its own regional headquarters will worsen the glutted office market in downtown Los Angeles and could further depress commercial rents and values there, property experts say.
Bank of America confirmed recently that it will move up to 1,000 employees out of the Security Pacific Plaza on fashionable Bunker Hill into nearby Arco Plaza, whose twin black towers have been a fixture in downtown Los Angeles for more than 20 years. B of A acquired Security Pacific last year.
As a result of the move, nearly half of the 1.4 million square feet of office space at Security Pacific Plaza will become vacant.
“I don’t know what’s going to happen when all that space becomes available, but I guarantee that it’s not going to be pretty,” said Chris Mahon, the broker who represented Arco Plaza in the negotiations with B of A.
Vacancy rates in downtown Los Angeles already stand at about 22%, a figure that rises to 24% when the space that’s available for subletting is included. The rate is the highest in Southern California and one of the highest in the nation.
If put on the market today, the Security Pacific space would boost the vacancy rate to 26%, according to the commercial real estate firm of Julien J. Studley.
By comparison, vacancies in the vast San Fernando Valley market now stand at 17.6%, and a mere 12.9% in the combined Burbank-Glendale-Pasadena region.
Elsewhere, vacancies stand at 10.7% in San Francisco, 14.9% in Washington and 16.1% in Manhattan and the rest of the mid-town New York area.
In a worst-case scenario, brokers say, the vacant space at the plaza could trigger another “rent war,” forcing all downtown developers to cut rents even further or make other costly concessions to lure new tenants and keep existing ones.
A further increase in vacancy rates could force more builders into default on their loans.
But some brokers note that downtown office rents have already fallen sharply, catching the eye of many companies that are paying as much as 30% more for similar digs in other parts of town.
B of A, headquartered in San Francisco, agreed with the owner of Arco Plaza, Tokyo-based Shuwa Investments Corp., to continue leasing 470,000 square feet of office and retail space at the project. Most of the former Security Pacific workers will occupy office space that has been vacant or underused.
Bank officials said the lease at Security Pacific Plaza will not be renewed when it expires in September, 1994. The facility at 333 S. Hope is owned by New York-based Metropolitan Life Insurance Co.
The impact of the move from Security Pacific Plaza will likely depend primarily on Bank of America’s timing.
“If B of A made the move right away and Met Life dumped all that space on the market now, there’d be problems,” said Jerry Eggleston, a broker with Cushman & Wakefield of California.
“But I don’t think B of A is ready to start moving people yet, and Met Life has more than a year to find a new tenant because the lease doesn’t expire until 1994.”
Rising Vacancies, Falling Rents
As vacancy rates have risen in downtown Los Angeles high-rises, rents have fallen. Vacancy rates (in percent): 1992: 21.3% 1991: 21.4% 1990: 13% 1989: 16.5% 1988: 14.2%
Rents (per-square-foot asking price for space in new buildings): 1992: $28.94 1991: $30.74 1990: $31.89 1989: $32.83 1988: $33.12 SOURCE: Julien J. Studley Inc., Grubb & Ellis
