Office Vacancy Rate May Rise to 30% in South Bay : Real estate: Report by Torrance firm projects a dramatic jump by the end of next year, as aerospace firms cut back and companies are burdened by loans.
The ongoing cutbacks and downsizing in the aerospace industry could push the South Bay’s office vacancy rate to 30% by the end of 1994, making the region one of the hardest hit markets in Southern California, according to an area real estate brokerage firm.
A vacancy rate of 30% in the fourth quarter of 1994 would represent a dramatic jump from the 21% vacancy rate recorded as of March 31 this year.
“The market is probably going to be worse in the South Bay because of the concentration of aerospace,” said Michael Condon, vice president of the Seeley Co. in Torrance, which made the projection in a recent report. “There is not that big industry to replace it.”
The study, based on plans by tenants to allow their leases to expire, surveyed about 30 million square feet of space in the South Bay, Long Beach and the Los Angeles International Airport areas.
Building rents, even in much sought-after high rises, have fallen 10% to 15% in the last two years, brokers say. In the competition for tenants, some owners and landlords are offering more incentives, such as a couple of months of free rent or free parking in buildings that charge fees for spaces.
In turn, brokers have tried to lure tenants from the Westside or downtown Los Angeles, touting the South Bay’s access to the freeways and the port. Last month, a group of business leaders, civic officials and hotel and restaurant owners mapped a strategy to attract tenants from the California Mart downtown to a proposed center for the wholesale apparel industry in Hawthorne.
El Segundo office buildings, which have a heavy concentration of aerospace firms, would bear the brunt of the new vacancies, according to the study. An additional 1.8 million square feet of vacant space is expected to come on the market by the end of next year, Condon said.
By contrast, other hard-hit markets, such as downtown Los Angeles, have about a 21% vacancy rate, but businesses there have not been affected by defense cuts to the same magnitude as in the South Bay.
“No one ever realized how dependent the South Bay was on the aerospace industry,” said Jim Biondi, senior vice president at the South Bay office of Grubb & Ellis Co. in Torrance. “Many people liked to say it was diverse, but it is not as diverse as we thought it would be.”
Biondi’s firm is projecting a more modest increase in the vacancy rate to about 23.2% by the end of next year. But there already is a large pool of space on the market arising from cases where tenants left before their leases expired and no subleases have been found. That space, estimated at 1.8 million square feet, would push total vacancy to about 29% if all of the leases expired by the end of 1994, Biondi said.
Northrop Corp., which has moved out of about 1 million square feet of space in the South Bay over the last two years, has plans to vacate another 1 million square feet by the end of 1994 or early 1995, spokesman Jim Hart said.
When aerospace firms leave, landlords face a dilemma: wait for a large company to replace the previous tenant, or seek smaller tenants by spending hundreds of thousands of dollars subdividing the space into smaller chunks.
“It’s brutal,” Condon said. “All those things add up. They could spend $15 to $20 a square foot just to get the place ready.”
Overton Moore and Associates Inc. in Gardena recently sold an 86,000-square-foot building in the Redondo Beach Business Court to Imperial Bank of Los Angeles. It was one of three buildings Overton Moore has up for sale after its prime tenant, TRW Inc., vacated the space. The defense contractor still occupies two buildings in the complex.
“We needed to do something with (the buildings),” said Don Koch, vice president of marketing at Overton Moore. They chose to sell rather than find a tenant to lease because “you have to take the opportunity that comes along.”
Belt-tightening at defense firms isn’t the only reason developers have had difficulties. The Skypark Office Complex in Torrance, which had a diverse roster of tenants, was foreclosed in June after owner F.A.B. Industries Inc. could not come to an agreement to extend its loan with its lender, the Prudential Realty Group in Century City.
The nine-building complex, completed in 1986, never fully recovered after Epson America moved its headquarters to another site near the Torrance Civic Center almost three years ago. Rents at the 360,000-square-foot complex average about $1.40 to $1.50 per square foot, down from $1.65 to $1.85 at the market’s peak three years ago, said Biondi, the Grubb & Ellis executive.
“What happened there has happened to many people,” he said. “The (F.A.B.) loan was much larger than rents could justify. The underwriters were much more bullish in the 1980s. They expected rents to increase. That isn’t happening.”
Of 274 buildings in the South Bay with more than 20,000 square feet, 37 have been foreclosed or handed back to the lender, he said.
“There are very few buildings with loans on them (from the 1980s) that aren’t underwater,” Biondi said.
The same problems also are hitting owners of industrial space, which is used for factory production or warehouse storage and now has a vacancy rate of about 14%, according to the Seeley Co.
“Landlords aren’t finding new tenants for 18 to 24 months, and even then they are getting 50% to 60% of the rates that they used to get,” said Jim Sullivan, an industrial real estate broker at the Klabin Co. in Inglewood.
Sullivan’s best example of the market: On a stretch of Maple Street in El Segundo, five of eight buildings have been vacated by aerospace firms.
“Long term, the outlook is good,” he said. “This area is close to the freeway, the airport, the Green Line. But try to explain that to a family who is now dependent on rental income.”
